Formula for Financial Success?
Posted on October 16, 2005 No Comments
I’m back from vacation! I had a magnificent time hiking among enormous green trees, misty clouds and the angry ocean in Oregon – I only wish I had more time there. The opportunity to travel is definitely one of the goals I save for year-round. All the cashmere sweaters in J.Crew couldn’t provide me with the peace of mind I get from one great trip.
While I attempt to write some new articles for the site, here is a great piece by Humberto Cruz (courtesy of the Chicago Tribune’s Your Money section) to remind us all about the importance of finanacial knowledge and goal-setting. I think you’ll find it inspiring.
Saving strategy takes work, not a magic formula
Tribune Media Services columnist
Posted October 16, 2005
Q. I catch your column in the paper every now and then, but not always. So I don’t miss it, please e-mail me the formula for figuring out how much to save and how to invest.
A. I am sorry I can’t e-mail you any formula because I address reader questions only through this column–and, more important, because no simplistic formula can provide a satisfactory answer. But I am glad you asked, because your question is representative of literally thousands I’ve received in 10 years of writing this column.
Largely, I have found that most readers long for formulas and sound-bite type answers to financial questions. They want a quick thumbs-up or thumbs-down to a financial strategy or product rather than the almost always more appropriate answer, “It depends.”
And I am afraid I agree with Jonathan Clements, personal finance columnist of The Wall Street Journal, who wrote a couple of months ago that most people aren’t really interested in educating themselves about financial matters but want to be told precisely what to do.
That’s too bad, because the business of financial writers is to explain and educate as well as we can, to present facts and lay out the pros and cons so readers can make better-informed decisions. Only you can decide what’s best for you, either on your own or with the guidance of a competent financial adviser who spends the time needed to get to know you and help you prioritize your goals.
That brings me to another point. Many people who ask questions or seek financial advice do so without a clear understanding of what they want to accomplish or what their most important goals are. If you don’t know what you are saving or investing for, how much it is going to cost you, and when you will need the money, how can any formula be of any help?
“My experience shows that the vast majority of people do not know where they are trying to go or what to focus on,” said Larry Frank Sr., a certified financial planner in Roseville, Calif., and author of the book “Wealth Odyssey: The Essential Road Map For Your Financial Journey.”
One of his main points: Financial planning is a process rather than a collection of separate products or issues. “People are conditioned to think about the products that solve their concerns, yet they have not adequately determined what their concerns are, or what their priorities are among those concerns,” Frank said.
In practical terms, that means most financial products–different types of investments or retirement accounts or insurance policies or annuities, for example–are not “good” or “bad” in themselves but rather appropriate or inappropriate in the context of your goals.
Another problem is that even when people say they have clear goals, their actions belie their words. “People make decisions that undermine their goals every day,” said Mari Adam, a certified financial planner in Boca Raton, Fla. For example, they may say their goal is to retire at age 55, and then they stretch their budgets and spend $50,000 on home improvements they are unlikely to recoup if and when they sell.
That doesn’t mean the expenditure was necessarily “bad.” Perhaps the home improvements will bring more satisfaction than retiring at 55 would. But you have to know that.
“If your mind is clear as to what you are trying to do, if you can say what you want out of life and make your money moves in that direction, you will be happy,” said Adam, a self-described saver whose own priorities include protecting her children financially, providing for their college education, and having a reasonably comfortable (but not extravagant) lifestyle, now and in retirement.
On the other hand, “you need to know what motivates you,” Adam said. “If buying a Porsche is going to make you incredibly happy, maybe that’s the right decision.” (Of course, you need to make sure you can really afford it.)
“It is OK to spend money” Frank said. “That is the purpose of money. However, it is not OK to spend money if there is nagging concern about not accomplishing” goals that are more important than the immediate purchase at hand.
So here is my “formula:” Know yourself. Know your goals, and prioritize them. And spend, save and invest accordingly. If saving for retirement is indeed your most important financial goal, for example, contribute to a retirement account first, then budget for current expenditures with the money that is left.
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