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Rock-solid wisdom from the best of the best
No matter your age, you can benefit from a few simple rules — laws, in fact — that will ensure a satisfying life and retirement.
But whose advice should you follow? Which approach is the best, and more importantly, which is the best for you? “Follow the experts” is a good approach, but even they don’t agree on everything. So, I’ve taken the time to comb through the best advice of the experts and distilled it down to four simple rules.
Building a successful future is like building a solid house. You’ll always want to rely on the experts for the foundation, plumbing, and walls, but it’s your house, and you’ll tailor it to fit your personal tastes and lifestyle. Your home is unique, just like you are. And when done right, it’s built on a solid foundation, designed to last a lifetime.
Your financial life should be the same.
The Experts
Here are a few of the experts in finance and retirement planning that I’ve researched for this article. Each is well-respected, and I’ve considered their work carefully when distilling it down to these four golden rules.
- Warren Buffett at https://www.berkshirehathaway.com
- Ben Le Fort at https://benjaminlefort.medium.com
- Dave Ramsey at https://www.daveramsey.com
- Suze Orman at http://www.suzeorman.com
- Chris Hogan at https://www.chrishogan360.com
1. Talk
Talk to your spouse or partner about finances, retirement, and even end of life matters.
I read about a newly retired couple the other day where the husband was enjoying his puttering around while his wife was planning to travel the world. He had no desire to leave his workshop and spend all that money, and she was livid. Her anger was boiling because she knows they have the money, and there’s only so much time left in life to travel. What went wrong there?
“When it comes to money fights in marriage, there’s often a surface issue and an underlying issue. And the only way to find the root cause of the argument is to stop and talk about it.”
-Chris Hogan
A conversation about money should never be an argument; it should be an honest comparison of experiences, emotions, and preferences. Drop your defensive bias and listen for the difference between the two of you.
Start an easy conversation tonight: Share a dream or a hobby and discuss how it could fit into your collective future. Ask your partner to share one too.
Someday you’ll retire — I guarantee it. Before you do, discuss your expectations for quality of life, activities, and how to manage finances. How much money do you want to have when you retire and why? Identify and acknowledge the differences because there will be differences. No arguing or insistence, though, just talking.
Before you die, talk about what you’ll do when one of you becomes ill. Discuss what you want to leave for the kids, grandkids, or charities. These are uncomfortable conversations, but important. Take it slowly and gently.
You won’t agree on everything, but you can agree to listen, keep an open mind, and talk regularly. When you do, you’ll have laid a solid foundation for your future.
2. Pay off your debt
When you pay with credit, you’re paying with the currency of an uncertain future.
Get a loan for a house, sure. Buy one you can afford with a decent down payment. The collapse of the housing bubble of 2008 taught us to put at least 20% into a down payment.
Never use long-term credit for shoes, groceries, cars, clothing, toys. Pay with cash or don’t buy it. Many credit cards will give you money back on your purchases but beware of the trap you can get into — and if you do pay that way, pay it off in full every month.
“Don’t let debt linger! Debt is bondage”
-Suze Orman
Debt is the brick wall that blocks you from saving; it’s the anchor that holds back your potential, it’s the iron rod that keeps your life inflexible.
But what if you have some debt? What should you do?
Common financial advice is to pay them off, starting with the highest interest loans (not including your mortgage). That will save you the most money in the long run.
But there’s another approach that seems to work well psychologically: The “Snowball Method.”
“The debt snowball method is a debt reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.”
-Dave Ramsey
Regardless of which method you choose, you need to pay off your debt. The fastest way is to reduce your spending and redirect the windfall to your debt.
But don’t stop saving!
3. Save and invest
Financial independence is freedom — freedom to do as you like without the need to earn money. You can still work, sure, but if you don’t need to, you have control and freedom of your future.
Nobody can support a long-term strategy of spending more money than they make. You need to spend less than you earn — a lot less than you earn — and you need to invest the difference.
“If you truly want to obtain Financial Freedom, don’t think of the cost of things as a unit of money, but as a unit of time. Every dollar invested moves you closer to being able to achieve Financial Freedom.”
-Ben Le Fort
Right now, we’re struggling in the throes of a horrific pandemic. One of the few positive aspects is that we’re spending less. Travel, entertainment, automotive, and more — your cost of living has dropped significantly. Now is a perfect time to invest the difference. You’ll get used to living with a smaller financial footprint and be better positioned to keep your savings high and avoid lifestyle creep when everything returns to normal.
Investing that extra money now gives you the power of compounding interest. A single investment of $500 at age 20 grows to $11,000 at age 65. $500 invested every month grows to $1,908,516.69. How’s that for good motivation to save!
Where to invest?
“A low-cost index fund is the most sensible equity investment for the great majority of investors…”
-Warren Buffett
Set up a free consultation with eTrade, Charles Schwab, Fidelity — there are plenty of low-cost brokerages where you can buy a low-cost index fund as Warren Buffett suggests (try SPY, QQQ, or DIA).
Create two funds. One for long term investments with an aggressive posture and an emergency fund that you can live on for at least 6 months if you lose your income (less aggressive).
When you’re comfortable with it, diversify into income-generating investments like real estate or small business. These should never be your only investments; the best strategy is diversification.
Don’t forget to take advantage of your company 401k match if available. It’s a no-brainer — it’s literally free money. And when you get a raise, increase your savings by at least half of that. If you get a bonus, put half of it into your savings. Resist lifestyle creep.
4. Plan your retirement
So, you’ve talked with your partner, paid off your debt, and built a decent nest egg. Now you’ve decided to retire. Are you ready? Do you just quit your job, and you’re there?
You can, but about half of all retirees end up back in an undesirable job because they didn’t plan. They don’t know what to do with their time; they get bored, lonely, depressed, and despondent.
The financial aspect is comparatively simple. With good savings habits, successful retirees will flourish.
“They put money in their retirement accounts every single month, year after year. They’re responsible spenders and intentional savers.”
-Chris Hogan
Quality-of-life considerations, however, can be more difficult to structure and measure. Exercise, social engagement, romance, and intellectual stimulation are examples. Without those, no amount of money will make you happy. Before you retire, make sure you have a solid idea for how you’ll fill those extra 40+ hours of the week. Without a clear plan of meaningful activities to fill your time, you’ll go nuts.
Start today
You can see it’s not so hard — just four things: Talk, Retire debt, Save, and Plan.
The experts agree that if you follow these Four Rules, your financial future will be as beautiful as the home you tailored to your personal tastes. Financial Independence and forethought will give you the confidence and freedom you need for an outstanding life and retirement.
Start on the path today. Make your life and your retirement the best they can be.