Almost everyone wants to improve their lifein some way, but most of the time theresolve to do what's right slips and youend up right back in the same mode youwere in before. What gives? Obviously, the day-to-dayrealities are much tougher to execute than the endgoal is to wish for. Adrenaline doesn't pump withquite the same intensity when faced with a choicebetween carrot sticks or Krispy Kremes or having thatnew iPod now or waiting until you can pay cash forit. But the only way to change the wish into a goalthat you are actually working on is to successfullymaster, one by one, those daily financial hurdles.While your personal trainer will give you the tools forworking through your healthier lifestyle issues, whatfollows are a few key points to help you structureyour money management mindset.
Save Before Spending
Sounds basic, but the statistics show that thenational savings rate has plunged to multidecade lowsand we regularly use credit to spend more than weearn. It can be tough to fight the constant pull of anadvertising establishment geared toward insisting thatwe spend now to fix some previously unknown flawor fulfill some want we didn't realize we had. But theonly way to reliably build your long-term nest egg isto save first and spend later. The most natural place tostart is participating in your employer's 401(k) plan.It's one of the few ways where you can pay yourselfbefore even Uncle Sam gets to take his bite. Further, ifyour employer matches your investment, it's about theonly place you can legally come by free money.
Develop a Long-term Plan
The best athletes expend a lot of time and energymentally preparing for the game or the race and visualizinga positive outcome. Similarly, in managingyour financial affairs, it is a lot easier to resist thetemptation of near-term spending if you have a firmgrip on what you want your long term to look like.Do you want to retire early? Pay off your mortgage by2010? Fund your kids' college educations? Be as specificas you can about what your plans are and thedate by which you hope to achieve them. Softwareprograms such as Quicken or Microsoft Money canhelp you analyze your current spending priorities. Arethey aligned with your long-term goals?
Have Realistic Expectations
Once you have laid out your goals and the amountof time you have to get there, you can figure out howbest to accomplish them. To do that, you need to havea cursory understanding of what basic asset classesâ€”stocks, bonds, cash, and real estateâ€”can and cannot do.The buckets in which you choose to place your investmentswill have a bigger impact on your long-term networth than almost any other decision you make.
Identify Your Risk Profile
In balancing which asset classes make the mostsense for you to achieve your personal goals, it is vitalto keep a few caveats in mind:
Over the long haul, there is no free lunch. Youcan't achieve excess return without accepting some sort of elevated risk. Day-to-day price volatility is not the only investmentrisk. Long term, it's not even an important factor. The ravages of inflation, for example, are muchmore potent since they erode the value of your dollars every second of every day. There is no such thing as a hot tip or a sure thing. The balance between being able to sleep atnight and prudent stewardship of assets is different for everyone. If the investment and expected return seems toogood to be true, then it probably is. Don't let your gut's desire for growth overwhelmyour common sense. For example, don't be tempted to park funds you are saving for a housedown payment in the stock market, hoping that you can generate a higher short-term return. Stock marketsgo down as well as up.
Use Compound Growth
The old adage that it takes money to make moneyis true. But the sooner you get started, the less moneyyou'll need to put forth, thanks to the miracle of compoundgrowth. For example, setting aside $100 permonth, assuming a 10% annual return, produces a nestegg of $20,500 after 10 years. Of that, $12,000 ismoney you put in, while the remaining $8500 is profit.If you could save $100 per month for 50 years, youwould put up $60,000 of your own money and achieve$1,672,400 in profit, for an ending pot of $1,732,400.
Avoid Market Timing
There's a common fallacy that it is possible tojump into markets at the bottom and out at the top,thereby participating in only the upswings. For thistheory to work, however, you would have needed tobe selling everything in late 1999 when the press wasfilled with news of the "New Economy" and unbelievablybuoyant economic reports. Similarly, youwould have been jumping in with both feet in Marchof last year, even as the economy had ground to a halt,pessimism ran rampant, and the United States wasmarching toward a controversial war. Aside from theunlikely scenario that you will be able to consistentlymake investment decisions diametrically opposed toprevailing wisdom, there can be significant transactionaland other costs related to frequently changingyour investment mind. Numerous studies have shownthat the more active investors are in altering theirportfolios, the lower their performance. A long-termplan and realistic expectations can help keep yoursights focused on what you are trying to achieve,rather than allowing you to make knee-jerk decisionsbased on the last tidbits you read or heard.
Define Financial Success
Coverage of financial issues by the popular media hasexploded over the past 10 years. While a lot of informationis being spewed out by an increased number of stationsand magazines, there has been no commensurateincrease in the wisdom needed to interpret it. One of themost misleading trends has been the intense focus placedon ranking various investments. If you are not attuned toit, this constant beauty ranking can perpetuate a vaguesense of unease if you did not happen to own last month'sor last quarter's top performer.
If your investments are allowing you to do the thingsthat you have deemed are importantâ€”such as payingdown your debt and watching the balance in your kids'college fund growâ€”and you are still able to get a goodnight's sleep, don't worry how your portfolio's balancecompares with other more imprecise measures.
Carol Clark is an investment principal with LowryHill, a private wealth management firm. Currently,she manages in excess of $425 million of assetsfor 35 client families. She also authored a monthlycolumn for the award-winning regional businesspublication Twin Cities Business Monthly.She welcomes questions or comments at email@example.com. For more information, visit www.lowryhill.com.