Three Steps to Financial Success
“I wish I would have started earlier.” My clients, friends, relatives, and just about everyone says the same thing to me. Nobody becomes a millionaire and says to themselves, “I started saving too early!” I am proud that I started saving right out of college, but I still remember this $100 Power Ranger toy that I bought when I was a kid. What a fool! Why didn’t I just get started then and invest that with some other birthday money? C’est la vie. We can’t change our financial decisions of the past, but we can all control our decisions of the future.
Let me tell you about Lou. Lou spent his college years living his best life. He bought what he wanted and let his credit cards fund his lifestyle. When prompted about his plan to pay for these items, he responded “Future Lou can deal with that.” This is the mantra of the average American. Give me something now and I’ll deal with it later. The entire credit card system is built on this idea. This is the cycle I want you to break. Let’s cover some things you can start doing that your future self will thank you for doing.
Start Paying Attention
The first step in financial success is to become aware. How much do you have in the bank? How much debt do you have? How much do you spend on restaurants and bars each month? These are all questions you need to be able to answer. You cannot develop a proper plan without knowing where you stand. Imagine trying to develop a game plan to beat LeBron James without knowing who you have on your team.
When you get an idea of how much you have, how much you owe, how much you make, and how much you spend, then you can move forward. Develop financial goals that align with your lifestyle. Is your money working to achieve those goals? If you love to travel, would you rather buy a new car or take two extra vacations next year? Financial success is not defined by a dollar amount. It is when your money aligns with your values and you can spend your time doing what you love. As painful as this process may be, you will feel a sense of relief when you finish.
The study of behavioral finance has taught us an important thing about humans. We are flawed! We do not act rationally when it comes to making financial decisions. The solution? Make things easier. Set up automated processes that allow you to achieve your financial goals without having to think about it or do any work.
Let me give you an example. Companies have started offering a service called “Save More Tomorrow” that allows automatic 401(k) contribution increases. This program will let you increase it by 1 percent each year. If you receive a raise of 2-3 percent each year, your paycheck will increase, and you will be putting more towards retirement without realizing it. This concept works because we don’t want to commit to saving more today, but next year sounds great!
Use automation as much as possible. Set up automatic payments on your credit cards to pay off the full amount each month. Automate your retirement and savings contributions. It can be $5 or $500 each month. Just start saving something now and increase it a little bit over time.
The best time to start was yesterday. The second-best time is today. The earlier that you get started, the longer that you will have compound interest on your side. Compound interest occurs when your money earns interest and you continue to reinvest the earnings. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.”
Allow me to help you understand the power of compound interest. Two men, Patrick and Andrew, graduate college together. Patrick doesn’t think about retirement. He is excited to finally have a steady paycheck! Andrew is more responsible. He decides to open a Roth IRA and contributes the maximum allowed of $5,500 per year. They meet up at their 10-year reunion. Andrew talks some sense into Patrick. He goes and opens a Roth IRA and contribute $5,500 per year until retirement. However, Andrew now has a family and is struggling financially. He stops his annual contribution. Each account earns an average of 9 percent.
Where do they end up 40 years after graduation? Patrick’s IRA is now worth about $817,000. Meanwhile, Andrew only saved for the first 10 years. He saved one-third ($55k vs. $165k) of the amount that Patrick saved. However, his account is worth about $1.2 Million. This is what happens when you start early.
Financial success is built over time. It looks different for every person. Figure out what is important to you and make sure your money is helping you achieve that. Do it now! Future you will look back and say thanks someday.
Michael Zeiter, CPA/PFS
A graduate with honors of the University of Missouri, Mike holds a Bachelor's and Master's degree in Accounting as well as a Tax Certificate. His endeavors post-graduation - which involved work in both state and federal tax groups for a Big-4 accounting firm, and finance for a major financial advising company - have allowed him to accrue a deep knowledge of many personal finance areas.