Lately I’ve been re-reading all the articles I wrote while I was Director of Financial Planning at Morningstar. This is fifteen years old, but still a classic.
Successful personal finance is not about “get rich quick” schemes, picking the right “hot” stock or impressing your friends with the latest high-tech toys. It is all about finding a sense of security, giving your children a head-start in life, providing for your family both during life and after death, making intelligent choices and realizing some of your life’s dreams.
Successful financial planning is not just for the rich. Anybody can follow some common sense principles that will put you on the path towards greater financial freedom. All it takes is your time, a commitment to educating yourself, following through on your decisions and perhaps a bit of luck.
To get you started on this personal journey, we’ve developed some guiding principles that we’ll come back to again and again. Keep these principles in mind each time you have to make a financial decision, and you’ll start to see true progress towards your goals.
- Take the time to define what “success” means for you. At the end of your life, if you looked back, what do you want to see? It’s probably not going to be a pile of money in a bank account somewhere. It probably will be a comfortable home, a sense of security, a nurturing environment to raise a family in, and some meaningful adventures that make great memories.
- Successful financial planning is all about balance and trade-offs. Recognize that you have the power to choose among varying trade-offs. If life sends you set-backs, there may be creative solutions that allow you to realize a portion of your goals. That’s why it’s important to consider the pros and cons of any financial decision.
- Educate yourself. In order to make intelligent choices, you’ll need to do some basic research into the topic at hand. That means understanding terminology, applying the concepts to your own personal situation and coming to a realistic conclusion.
- Diversification is not just an investment strategy. You can also use diversification in your approach to taxes, college planning and many other topics.
- Financial planning is dynamic. What works today may not work down the road due to changes in tax policy, regulatory parameters or your own personal circumstances. You won’t be able to rely on a financial solution just because it’s always worked in the past.
- Use common sense. If you can’t understand it, you’ll never be successful executing it. Investing and other aspects of personal finance don’t have to be intimidating. Don’t let anybody sell you something that doesn’t pass the “smell test”.
- Keep it practical. If you’re like most people, you need down-to-earth advice on how to get things done. Focus on the nuts & bolts of taking action once you’ve made a decision.
- No magic tricks. Throughout time people have been looking for an instant solution to life’s problems. It’s just not that easy. Solid financial planning takes time, commitment and long-term follow through.
- “Idiot-proof” your financial decisions. We are all just human. Once you’ve made a good financial decision, take advantage of tools that can make ongoing implementation a snap. Set up automatic contributions or withdrawals for investing, college funding or retirement. The less you have to rely on remembering to do something, the better.
- Don’t panic. I guarantee you that there will be times when you’re tempted to act impulsively—that’s almost always a mistake.
- Do be defensive. Get your ducks in a row to protect your family and your finances. Topics like estate planning and insurance may not be very appealing, but without them you may be jeopardizing your entire financial future.
- Avoid costly errors. If you watch any kinds of sports, you’ll know that the surest way of winning is by avoiding costly errors. The same principles apply to personal finance.
- There is no one “right” answer. When you make a financial decision, it’s going to come down to choosing what’s most appropriate for your situation and what you can live with over time.
- The right answer for you will be part psychological, part number crunching. The reason it’s called “personal” finance is that your decisions will be influenced by your psychological make-up as well as what the numbers tell you.
- The right answer for you may not be based on conventional wisdom. The right answer for you may not be what everyone else is doing or what’s been done in the past.
- Don’t be greedy. You’re setting yourself up for a fall. Remember your goal and celebrate when you reach it.
- Control what you can. You’ll find many things are out of your control, but you can manage variables like investment costs, savings levels and spending patterns.
- Don’t forget the risk side of the equation. Most of the investment hype is about getting great returns. You don’t hear nearly as much about managing risk. When the market is going up, it’s easy to take on more risk than you can successfully tolerate.
- Learn from your mistakes. Everyone makes mistakes—learn from them, don’t repeat them over and over
- You are not alone. Whatever is scaring you or causing you to lose sleep is probably something others are experiencing too. We can help each other by talking about these concerns and finding solutions to move you closer to your goals.
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