What Really Matters In Your Personal Finances

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The best sentence about personal finance that I’ve read this week is from Beware of Financial Alchemy by Adam Collins of Movement Capital.

There are only a few things you can control that have a big impact on your finances:

If you’re young, how much you save
If you’re retired, how much you spend
How you behave when markets panic
Your allocation between stocks and bonds
How much you pay in fees

Everything else is a rounding error. The issue is we tend to focus on the rounding errors.

That’s exactly right. I write a lot about rounding errors because otherwise I’d just be saying the above sentence over and over again. Writing about personal finance often boils down to a game where you have to talk about the same 5-10 topics but manage to put a different spin on them so it feels fresh.

However, I try to focus on rounding errors that have a very high probability of helping you out without harming you. A little higher yield on an FDIC-insured bank account. A little more cash back on your existing credit card purchases. A little higher net return through lower cost index funds and no-commission-fee brokerage firms (or those that pay you to move over some assets). Piling on a few more data points on market drops to keep you in the long-term mindset. But don’t get scammed by someone promising what is simply too good to be true:

The truth about investing in 2020 is there isn’t an easy fix for high stock valuations and low bond yields. No strategy can magically transform today’s low return opportunity set into a high return future. So what can you do? Focus on what you can control and don’t get tempted by someone promising they can turn lead into gold.

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  1. It would be interesting to have a more complete list of what you can and can’t control, along with what you can seriously influence, that have big impacts.

    Some things you can control that is missing:
    When and who you marry and stay married to.
    What property/appreciating assets you buy.

    Some things you can impact that is missing:
    How much you earn.
    Whether / When / How many children you have.
    How you mitigate tax costs.
    How you benefit from insurance purchases.

  2. Thanks Jonathan. Very good list.

    I just wanted to add that I’ve been reading your blog a long time, and doing so has really supplemented my education on all of those things over the years.

    I decided on my annual savings rate floor of 16.62% based on your Wade Pfau article years ago. (No, it probably wouldn’t have been a big deal if my floor were instead 15% like many finance books recommend, but the 16.62% made me feel good.) Having a well thought out asset allocation plan has helped me not panic through two crashes now, and your posts have contributed to my thoughts on that. And your blog has touched on fees as well.

    But I enjoy all the rounding error stuff too. 🙂

  3. A good piece this morning. It’s true, writing is often about saying the same things in a fresh way so people can hear it differently and maybe get it. Stay the course and have a great day!

  4. I’m retired and live by these financial points. A few comments.

    -If your young, learn the rule of 72, it will put things in more of a perspective
    -Keep track of your expenses a few years before retirement. Retirement is about cash flow
    -During the last 3 or 4 panics, I did nothing. It turned out to be the best strategy
    -If you don’t want to figure an allocation buy a life style fund.
    -Fees. There is no reason to pay anybody 1-2% for your investments.

  5. Similar topics addressed in Morgan Housel’s book released this year “Psychology of Money.” The best book I’ve read on mindset and big picture investing in years. I highly recommend it if you haven’t read it yet.

    The audio book is very good as well, took me about a week of commuting to listen to the whole thing. My 84 year old grandfather cannot stop promoting the book to everyone he comes into contact with. It’s just that good!

  6. For young people, I think it is more important to talk about how much you can make than how much you save. Making $200k+ and save 50% is very different from making 80k and save 50%.

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