Written by: Corey Janoff
Financial Planning Made Easy
There are tens of thousands of books about personal financial planning. There are zillions of blog posts about the topic. If you talk to a dozen financial advisors about the best ways to achieve your financial goals, you will likely get a dozen different recommendations. As I wrote a couple of months ago, there are many different paths you can take to reach your final destination. However, financial planning really boils down to four concepts that everyone can agree on:
- Work hard.
- Spend less than you earn.
- Invest the difference.
- Insure against catastrophes.
Implementing these concepts requires discipline and may be more difficult in practice, but let’s explore each one further.
When I graduated from college, the actor, former Mr. Universe, and governor of California at the time, Arnold Schwarzenegger, was our commencement speaker. He talked about his six rules for success. His most important rule and the one he stressed the most was, Work Your Butt Off.
You can watch is speech here, or below:
You can choose to coast through life. There is nothing wrong with that. But if you are aspirational and want to get ahead in life and want to experience financial independence one day, you are going to have to work hard.
Who are the best athletes in the world? The ones who work the hardest at their craft. Instead of showering after practice and heading home, they stick around until they make 200 extra shots, or catch 100 balls, or get in some extra conditioning. Then they watch film for another two hours to learn more about their upcoming opponent.
Who are the wealthiest people in the world? Generally the ones who work the hardest and keep at it until they succeed. And they don’t stop there. They usually weren’t the smartest students in school. But they have tenacity, drive, and work ethic.
Every time you are out socializing with friends, or binge-watching a TV series on Netflix, someone else is working. That someone else is getting ahead financially.
Now, you need to have some balance in life to maintain your sanity and live a healthy lifestyle. If you spend 18 hours a day, seven days a week at the office, you’ll end up the richest person in the graveyard. But if you want to get ahead in your career and accelerate your path to financial freedom, you’ll have to put in more than 40 hours a week. At least early on you will.
40 hours a week is how much you work if you want to be average. And let me reiterate, THERE IS NOTHING WRONG WITH AVERAGE. If that is what you want, then that is absolutely fine. But if you want an above-average lifestyle, with an above average net worth, you are going to have to put in an above-average effort.
The people who work the hardest are usually the ones who get paid the most, get promoted faster, and have the most job security. If you are starting at the bottom of the totem pole, it might take a while before you get to where you ultimately want to be, but the quickest way to get there is to work your butt off.
Spend Less Than You Earn
Financial progress can be measured by a simple, elementary school level math formula:
(Money In) – (Money Out) = (Net Progress)
If you earn more than you spend, you will see an addition to your net worth. If you spend more than you earn, you will experience negative progress. You can improve the results by earning more, spending less, or a combination of both.
It is really no different than weight gain/loss. Dieticians, doctors, and personal trainers can argue all day long about the healthiest foods and most productive exercise routines. At the end of the day though, it all boils down to a simple math formula.
(Calories in) – (Calories out) = (Change in Weight)
If you consume more calories than you burn, you will gain weight. If you burn more calories than you consume, you will lose weight. Simple as that.
I understand every person is different. Depending on age, gender, hormones, genetics, etc., you may metabolize foods differently than the next person and it may be easier or harder for you to gain or lose weight. Totally get it. But it still amounts to the simple formula. If you burn more than you take in, weight goes down. If you take in more than you burn, weight goes up.
It will be easier for a dual-income earning household with no children to make forward financial progress than a single parent of four children. But money doesn’t discriminate. If the single parent of four children makes an effort to save a portion of each paycheck, she will make more progress than the dual-earners who spend all of their paychecks.
Money In. Money Out. Simple math.
From my experience helping people with their finances, budgeting doesn’t work, unless you watch your daily expenses like a hawk. You literally have to shred your credit cards and pay cash for everything.
You budget $300 for groceries this month? Put $300 in a jar labeled “Groceries” that you can take with you to the grocery store. Make sure you are adding up the cost of items as you put them in your cart. There will be times when you have to put things back on the shelf in order to stay under budget.
If you’re not willing to do that, my advice is to set goals and pay yourself first before spending anything. Set up automatic deposits into savings/investment accounts earmarked for your various goals. And by golly you will not withdraw a penny from those accounts until your goals have been reached. It still helps to keep a close eye on your spending though.
Treat the amount you save each month like a regular bill. It is as important as paying your mortgage/rent on time. Whatever is left over after your monthly savings has been deposited is what you can spend.
This is a nice transition into the next concept…
Invest the Difference
Once you have found a way to spend less than you earn, the next step is to invest the difference towards your goals.
Sure, you could stick the money under your mattress where it is all but guaranteed to lose value over time due to inflation. Even sticking it in an online high interest savings account getting 2.0-2.5% interest will make it difficult to grow the money to reach your goals.
Based on historical inflation, cost of living doubles every 25 years. Unless you can save 50% or more of each paycheck, you need to invest in assets that give you the opportunity for long-term growth. Being diversified also helps in case one or some of your investments don’t pan out as expected.
I don’t really care where or how you invest your money. There are plenty of investments out there that are likely suitable for your needs. Depending on your goals, time horizon, psychological makeup, and tolerance for risk, I might recommend certain types of investments over others. But all I really care about is that you are investing a portion of each paycheck towards your goals.
Set aside money for retirement. Set aside some money for children’s college, if that’s a goal. If you want to buy a new house or a vacation home one day, save some money for a future down payment. Whatever your goals are, make regular deposits earmarked towards those goals.
I have found automation works best. If you can automate recurring deposits and have them pull directly from your checking account or paycheck each month, that will increase the probability you will meet your savings goals each year.
Insure Against Catastrophes
Lastly, everyone’s least favorite topic. Insurance. You may be adamantly opposed to insurance, but the biggest risk to your financial strategy is an unexpected catastrophe devastating your finances.
There is a reason banks will not lend you money for a mortgage unless you purchase homeowner’s insurance. Although the risk is small, if your house burns down, the bank wants to make sure they get their money back. As long as you have a home loan, if you cancel your homeowner’s insurance, the bank will take your house from you and evict you. After your mortgage is paid off, you can do as you wish, but I would bet most of you will continue to keep your homeowner’s insurance policy in force.
The biggest risks that can derail people’s finances are medical expenses, death, disability, and lawsuits. I have covered these before and probably will cover them again in future posts, so I simply highlight each today.
If you incur an injury or illness that requires expensive medical treatment and lengthy hospital stays, very few of you would be able to afford it without medical insurance.
If you die and leave behind a family who depends on you financially, if you don’t have adequate life insurance, then your family is up the river without a paddle. And their raft has a hole in it. And there aren’t any life jackets on board. And nobody knows how to swim, because they relied on you for everything and assumed you would always be there to take care of them, so they never bothered to take swimming lessons. If there is anything you remember from this post today, make your kids take swimming lessons.
If you incur an injury or illness that renders you unable to do your job, your income will shut off. And without sufficient disability insurance to replace your income, your hopes and dreams will shut off too.
A permanent disability is arguably financially worse than death, because you are still alive. It costs money to be alive. At least if you die without life insurance, you don’t have to worry about supporting yourself financially…because you are dead. Supporting your family is another issue.
Lastly, lawsuits. You get in a car accident in which you are at fault and the person you hit sues you. Someone gets injured on your property and sues you. We have all seen that Allstate commercial where Mr. Mayhem is the cleaning lady and falls down the stairs. So make sure you have adequate limits on your home and auto insurance policies and tack on additional umbrella liability insurance for additional protection. If you own rental properties and businesses, consider consulting an estate planning attorney for additional asset protection strategies.
Nothing can screw up a financial plan more than an untimely and unexpected natural disaster, accident, or illness.
Spend Less Than You Earn
Invest the Difference
Insure Against Catastrophes
There is no substitute for hard work. If you work hard, good things will likely come to you.
Making sure to save a portion of each paycheck will do wonders for your long-term financial success. You might make some poor financial decisions or bad investments over your lifetime, but diligent savings will help you overcome that. If you are skating on thin ice and only saving a tiny fraction of your earnings, you are going to have to get very lucky with your investments in order to achieve your financial goals.
Investing your savings over time into a diversified portfolio of assets is far from the worst strategy you could take. Giving your investment the opportunity to grow over time can help you achieve your long-term goals.
Lastly, insure against the risks that could potentially devastate you or your family’s finances.
Simple as that. I’m not trying to discredit all the other information and advice out there. But if you read between the lines, pretty much all financial planning recommendations boil down to this. Work. Save. Invest. Insure.
Nothing is guaranteed in life, even if you work hard. All investments bear the risk of loss including total loss of principal. Diversifying investments does not insulate from loss. Consult with a financial advisor before implementing a financial strategy or investment plan. Consult with an attorney for legal advice.