Commentary by Joel Harris
The great John Wooden once said, “It’s the little details that are vital. Little things make big things happen.” John Wooden was arguably the best basketball coach to ever grace the hardwoods. He emphasized to his players the importance of focusing on the small details to achieve success. By focusing on the little details, he guided the UCLA basketball team to a profound 10 NCAA national championships in the 1960s and 1970s.
Focusing on small details will give you a greater opportunity to achieve success in your own financial planning. Here is a list of nine simple truths that each of us can focus on every day in our quest to become more financially fit.
1. The fastest way to build long term wealth is to pay yourself first. – You work extremely hard to provide food and shelter for yourself and your family. Like most Americans, you probably have a mortgage, car payments, utility bills, a large grocery bill (I know I do), and the occasional Starbucks splurge. Before you pay any of these bills, do yourself a favor and pay “you” first! You deserve it. The day you start paying yourself first is the day you give your hard earned money the opportunity to compound and grow for your future.
2. Live within your means. – One of the simplest ways to become more financially fit is through the use of a budget. Yet statistics show that less than 40 percent of American households utilize a working budget on a monthly basis. If you’re perplexed at the end of the month because your bank account is low, take the time to track your expenses for the next three months. If you’re married, set up regular “budget meetings” with your spouse to track your progress. Who knows … maybe your marriage will even strengthen because of it.
3. Eliminate debt. – If you’re in a situation where you’re looking to max out your Roth IRA contribution vs. paying off your credit card, 100 times out 100 you should pay off the card. It is a simple as that. If you have several debts and feel overwhelmed with how to tackle them, simply list them in order and pay off the smallest one first. We all like to win and love feeling a sense of accomplishment. After you pay off your first debt, take the money you were allocating towards it and attack the next debt. Eliminating debt can be an extremely painful process, but if you make it fun and embrace the little victories, you will be have huge sense of accomplishment when it’s all said and done.
4. Murphy will visit often. Have a plan to get rid of him as soon as possible. – We’re all too aware of Murphy as someone who loves to cause chaos in our lives. Secondly, Murphy always seems to have the worst timing when he pays his unwelcome visits. Part of a complete financial plan is having the means to boot Murphy out the door without him inflicting pain that can last for years. Try your best to set aside at least three months’ worth of living expenses to pay Murphy off in cash vs. paying him on credit.
5. Inflation is the silent killer of money. Plan in terms of “tomorrow’s” dollars vs. “today’s” dollars. – When people start thinking about how much money they will need in retirement, most will plan based on the value of a dollar today vs. the value of a dollar in 15 to 20 years. Inflation is the silent killer of money; especially for those who live on fixed incomes. To put inflation into perspective, a gallon of regular gas was around $1.16 in 1990. Fast forward to today and gas averages around $3.50 per gallon. That is an average cost increase of 4.7 percent per year. It is imperative to factor inflation into your financial and retirement planning because food, energy, and health care costs will continue to rise in the future.
6. Tax is like acid rain. – As the old saying goes, there are two certainties we all will face in life, death and taxes. We definitely have no control on when our last day will be on this great earth. Contrary to popular belief, we do have the ability to focus on little things that can help with the amount of taxes we pay. Work closely with your financial professionals to identify areas that might help reduce the acid rain effect that taxes have on the growth of your hard earned money.
7. You might live longer than you expect. Plan accordingly so you can achieve your goals. – Statistics show that Americans are living longer, more energetic lives than our forefathers. Part of a complete financial plan is making sure you’re taking the small steps that give you the best opportunity to let you realize your goals and dreams. Little details like educating yourself about Social Security claiming strategies can make a world of difference in your financial plan.
8. Avoid the temptation of using your retirement accounts as a piggy bank. – For most of us, our largest source of investable assets outside of our home is usually in our 401k and IRA retirement accounts. When Murphy comes knocking on the door, or feel the urge to buy that new boat or pay off a high interest loan, please don’t dip into your retirement accounts. Not only will you be subject to regular federal and state taxes on the distribution, but you will also be subject to an additional 10 percent penalty if you’re under the sage of 59 1/2. Secondly, if you take a “loan” out of your 401k, you will need to pay back every penny, plus interest, before you start investing your money in the choices inside your plan. Lastly, and probably the most important and overlooked aspect is the potential compounding effect that is lost when you remove money from a retirement plan.
9. You can’t get to a destination unless you have a roadmap to get there. – Financial planning is long journey that stems over decades of events that impact our lives. This journey can include your education, first job, the purchase of your first home, children, job promotions, job losses, death of a loved one, saving for your kids’ college education, saving for your retirement, grandchildren, and the countless hobbies and memories along the way. Focusing on the small details can potentially mean greater wealth and protection for you and your loved ones along the way. Having a roadmap that guides you as go through this journey can help you stay on track along the way.
As John Wooden eloquently states, “It’s the little things that are vital. Little things make big things happen.” Enjoy your journey to a more financially fit life.