If I Could Only Teach Two Financial Lessons
By Joe Gross, CDFA®
Have you ever had that “why didn’t someone teach me this” feeling? After more than two decades in the financial services industry, I’ve heard many clients express things they wish they had known about money when they were younger.
While there is plenty of valuable financial advice that you would do well to follow, such as the importance of living within your means, managing risk, and investing for the future, if I could give just two pieces of financial wisdom, it would be to pay yourself first and to take emotion out of your financial plan.
Pay Yourself First
In practice, paying yourself first means depositing into your own savings and investment accounts before you divvy up your paychecks amongst your living expenses and wants. The reason this is so important has to do with two of the most powerful words in the financial world: compound interest.
The Power of Compound Interest
One of the most significant benefits of saving early and often is the power of compound interest. Compound interest helps the money you put away grow faster due to interest building upon itself. It means that not only do you earn interest on your principal, but on the interest you’ve already earned as well, so you are earning interest on interest. You can make your money work smarter rather than harder to pursue your goals.
If you procrastinate and don’t prioritize saving, you not only lose out on your money working for you, but you’ll also have less time on your side. For every year you delay in saving, you’ll have to contribute exponentially more to reach your savings goals because of compound interest. If you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a hypothetical 7% annual investment return). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65. No matter how much money you earn, if you aren’t saving, you are missing out on growth!
Trust Your Plan, Not Your Feelings
Have you ever been unable to make a decision because you were paralyzed with worry and anxiety about the future? Have you ever wreaked havoc on your budget for the momentary high of acquiring something you really wanted? These are all examples of how we let our emotions rule our daily decisions.
And unlike decisions about where to go for dinner, what we do with our money can have long-term consequences. For example, you are tempted by the “next greatest investment” that you can only be a part of if you rush to get on board. Or you panic during a market downturn and sell off stocks only to lose when the market eventually rebounds, throwing off your entire retirement plan.
Sticking to a long-term plan is a good way to help keep your emotions in check. A plan can ground you during times of stress and remind you of what’s really important when you’re not sure what to do. When creating a plan, keep your long-term goals in mind. What are your savings goals and how have you been working toward them? What is your investment plan and ideal asset allocation of your portfolio?
The answers to questions like these can provide long-term clarity during periods of short-term volatility and distress. The important thing is to stick to the plan when times get hard. Even though a plunging stock market is undoubtedly nerve-wracking, your plan will prevent you from making rash, emotionally based decisions. Don’t sell when markets get rocky, and remember that your long-term plan will last longer than a crisis-driven market.
Start Now
Creating strong money habits early on is going to put you in your best financial position in the long run. Do your future self a favor: save your money and focus on disciplined financial practices and you will give yourself financial confidence for the rest of your life.
Whether you have been saving for years or are just starting now, our team at JGP Wealth Management would love to help make your money grow, keep you on track toward your goals, and come up with creative ways to save more. If you’d like to partner with a financial planner who understands your unique needs and inspires you to be more confident in your financial decisions, contact Joe today at 503-446-6450 or jgross@jgpwealth.com.
About Joe
Joe Gross is first vice president and senior financial advisor at JGP Wealth Management, an independent, fee-based financial advisory firm in Portland, Oregon. With over 25 years of experience under his belt, Joe is passionate about putting his clients first and helping them stay focused on their financial goals, inspiring confidence in their future. As a Certified Divorce Financial Analyst® professional, he specializes in addressing the unique financial issues of divorce. Joe is known for his tenacity to keep clients on track toward their dreams and for his attention to detail, which is second to none! His clients know that nothing will slip through the cracks when working with Joe!
Joe graduated from the University of Arizona with a bachelor’s degree in finance. Outside of work, he enjoys being involved in the community and is actively involved with organizations close to his heart. Joe is a former president and current board member of the ALS Association of Oregon and Southwest Washington and a long-time member of The Multnomah Athletic Club. In his free time, he enjoys fly fishing, spending time with his family, and cheering on his alma mater, the University of Arizona. To learn more about Joe, connect with him on LinkedIn. You can also watch his latest webinar on How To Pick Up The Financial Pieces After Divorce.