Reaching Your Goals
Gregory Karp, in his “Spending Smart” column “Money maxims: What dads can tell grads”, June 1, 2014 Chicago Tribune is the incentive for this blog.
Money can be saved or spent. How you handle money will have a significant impact on happiness and future financial well being. Studies relating to finances have increased in the last 15 years. Each year there seem to be more studies. Studies on happiness conclude that people are happier when they spend money on experiences rather than things. Other studies find that most people’s happiness increase as their income increases, up to about $70,000. Studies about retirement have found that the most important thing that anyone can do to reach their retirement living expenses is to save.
Saving is hard to do. Spending must be limited to available income. For most people, living within their income does not mean complete denial. It does require selectivity in the timing and amount of splurges.
Good daily spending habits are important. We have more control over daily spending habits than large items. Minimizing unnecessary and/or unwise expenditures will reduce many items that reduce the amount that can be saved on a regular basis. Most people give larger expenditures, such as homes and cars, significant thought and deliberation. They should also do the same for daily expenditures.
There are also studies that show that we should imagine ourselves in retirement. Aging Booth is an app that will show what you might look like when you age. You may have more incentive to save for that person. Contributing to a 401(k) plans and capturing any employer match may seem more important. Having part of your pay direct deposited to an investment account may also seem like a good way to be kind to the older you.
Necessities and a reserve fund come first. The reserve fund provides a cushion for the frequent unexpected expenditures. Preretirement six months of living expenses is generally recommended. After retirement, a minimum of living expenses after reoccurring income (like social security) for a year is recommended.
The sooner a saving program is started the less required on a periodic basis. To determine how much to save, you need to set financial goals. Your progress should be monitored, at least monthly; more frequently is better. Without knowing the future, your circumstance will change from what you originally projected.
“Studies show how to be a better consumer”
Gregory Karp’s article in the June 30th Chicago Tribune discusses some of the many studies about consumer behavior.
“There’s a whole area of academic study about consumer behavior that examines not what we buy, but why.” Most of us can learn how to make better decision from some of these studies. He discusses how some of our actions impact our choices.
“…participating in online social networks can raise your self-esteem. “ Heightened feelings of self-worth “…can lead to impulsive and indulgent behavior, poor traits.” “…greater social network use was associated with a higher body mass index, increased binge eating, lower credit scores and higher levels of credit card debt…” “The self-esteem and self-control effects did not seem to affect those with weak ties to their network.
“…for people trying to spend less and save more” they should consolidated their accounts rather than have multiple accounts for different purposes. Some examples of multiple accounts include: vacation, new car, special celebrations and vacation homes. “Individuals will save more and spend less when they have a single account. “ “Multiple accounts create vagueness about how much money you really have, making it easier to justify expenditures you shouldn’t make.…” Mr Karp suggests that if you must use multiple accounts, use financial software. This will provide a consolidated view of all your accounts.
“Physical acts of completion can provide consumers with a sense of closure that makes them happier with their purchases…” “That’s as opposed to revisiting the decision and continually reassessing the options.” “Consumers are less likely to be satisfied with a purchase when they compare it to other options.” “Physical acts of closure enable consumers to perceive a difficult decision as complete and limit their tendency to compare their selection with the options they have rejected.”
“Simple Ways to Stop Doing Dumb Things with Money”
Carl Richards spoke at a conference I attended this year. I decided to read his book, “The Behavior Gap – Simple Ways to Stop Doing Dumb Things with Money”.
The book does not attempt to provide a simple way for people to achieve their financial goals. It provides observations to show how to avoid doing dumb financial things. Start by taking “… a deep breath and reflect on past decisions.” Identify actions you took or did not take that did not turn out as you expected. Identify how you can make better decisions in the future.
You need to recognize that not every decision will be perfect. Recognize where you are and where you want to be. Stay “…in tune with reality, with your goals, and with your values.” You will need to move forward and recognize what changes are needed to reach your goals.
Following is a small sampling of key points he makes in the book:
“We can stop chasing fantasies. We are not going to get what we want by beating the market or picking the perfect investment or designing the perfect bulletproof financial plan.”
‘Our assumptions about the future are almost always wrong.” “…we can take sensible steps to protect ourselves from life’s inevitable surprises.”
“Your financial decisions should align with what you know about yourself and the world”.
“The process of financial planning is vital” not the financial plan.
“Our objective is “…to do the best we can and move forward. “
The author does not claim that his ideas are original. His goals are to clarify or simplify to give the reader the confidence to improve their financial decisions.
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What about Happines?
Most of us do not reflect about what is most important to us. I was surprised to see this discussed in an article by Jason Hsu, Chief Investment Officer of Research Affiliates. The last paragraph of the article raises issues we all should consider. The following is from the last paragraph of the article:
“… We spend our lives working and hoping for a few good, healthy years in retirement. The experts seem to want to tell us that demographics and other economic forces are likely to surprise even those of us who save religiously with a rather austere retirement if not one that is characterized outright by lacks and insufficiencies. I can’t help but think that all this talk about optimizing output and consumption disregards the most important question: What about happiness? There is wisdom in the ancient prescription that happiness is not having what you want but wanting what you have. So love your parents, and love your friends’ parents, too. Love them for their wisdom; love them for their driving-you-mad-by-treating-you-like-a-five-year-old; love them for the free babysitting and house sitting; love them for their frailty, which teaches all of us some humility and humanity. They will live a good long time and lean heavily on us for support and, most of all, for love. And, in turn, we and our children will also be surrounded by love. In that world, there is no rationing but only abundance.”
Past performance
The Securities and Exchange Commission (SEC) requires a disclaimer “past performance does not guarantee future results” on when mutual performance is advertised. The SEC notes that the long-term investment performance of a fund will depend on factors such as: fund costs (charges, fees and expenses), your tax consequences, the fund’s risk, and operational changes.
Carl Richard equates “Investing based on past performance” with “Driving while looking in the rear view mirror”. Both “cause a lot of accidents”.
“Despite the SEC warning and pretty conclusive evidence that past performance has very little predictive value, most of us still use performance as the predominate factor in choosing our investments.
This is one of those times in investing when our experience in other areas of life works against us. “
“When it comes to mutual funds, however, the past has almost no predictive value. “ “It turns out that fees are the only factor that reliably predicts a fund’s performance. The higher the expense ratio –the cost of owning the fund-the worse the performance for shareholders. This is a case where you actually get what you don’t pay for.”
“Trying to figure out which fund will lead the pack…is a fool’s game. Focus instead on finding a low-cost investment that you can stick with over the long haul.”
The volume of articles and research studies showing that past performance promises nothing about future performance continues to grow. Understanding how an investment fits into your portfolio should be based on other factors, including those noted by the SEC. Understanding the investment’s characteristics and how they relate to the other investments in your portfolio are critical to building wealth.
