This article offers brief descriptions of money management advice offered at this site that is generally not offered elsewhere. Please use the Site Search tool at the bottom of the page to locate articles that offer more detailed discussions of these 20 insights.
New Money Management Advice — Insight #1: Paying yourself first is not always a good idea.
The “Pay Yourself First” strategy does produce results for many who employ it. But the “Pay Yourself First” approach to saving is a “Just Do It!” approach to saving. Force yourself to save and you will never come to love saving with the intensity of most Passion Savers. The more effective approach in the long-term is to pay yourself last, after comparing the value propositions offered by spending and saving and electing to save only in those circumstances in which saving offers you a better opportunity to achieve your most important life goals.
New Money Management Advice — Insight #2: You cannot achieve the full benefits of budgeting by writing a single budget.
The benefits of budgeting come from the enhanced understanding it provides of the trade-offs involved in electing to spend or save. After living with a budget for six months or so, you will be ready to craft a revised budget, one calling for better-informed trade-offs. Each new budget will permit you to obtain greater value from the dollars you earn.
New Money Management Advice — Insight #3: The purpose of your money management project is to accumulate an amount of wealth that is 25 times greater than the amount of annual spending you need to live your version of The Good Life.
The “Multiply-by-25 Rule” assumes that you can earn an average real return of 4 percent on your investments. The rule can be applied to individual budget categories, permitting you to calculate how much you need to save to have a fund large enough to cover a lifetime of spending on magazine subscriptions, or electricity, or car repairs.
New Money Management Advice — Insight #4: The compounding returns phenomenon applies not just to saving, but to spending as well.
A young person generally obtains a greater benefit from spending on education or physical fitness or travel than does an older person. This is an important reason why young people find it hard to save. The benefits of saving are greater for the young. But so is the cost associated with cutting back on spending.
New Money Management Advice — Insight #5: The world’s most effective savers generally are motivated by some goal other than the desire to finance an old-age retirement.
Human beings respond better to goals that can be realized within five years than they do to goals that cannot be realized for two or three or even four decades. Break your quest for financial freedom into parts, and focus your energies on a goal that can be achieved within a short amount of time, and you will feel more enthusiasm for the saving project.
New Money Management Advice — Insight #6: Planning is the key to winning financial freedom early in life.
Our Retire Early boards are comprised of young savers and middle-aged savers. We have white-collar workers and blue-collar workers. There are men who seek financial freedom early in life and there are women who seek financial freedom early in life. Some successful savers have large incomes, and some have modest incomes. The common denominator is that successful savers plan their financial affairs. The benefits of planning cannot be overstated.
New Money Management Advice — Insight #7: The old rules of money management don’t make sense anymore.
The conventional advice was developed for a time when middle-class workers earned less and when job security was greater. The exciting but dangerous New Economy requires a new approach to most money management questions.
New Money Management Advice — Insight #8: Workers often become more dependent on their paychecks as their pay increases.
The reason is that they use each pay increase as justification to spend more. Workers trying to maximize the life enhancement they obtain from each dollar they earn often save large percentages of their pay increases.
New Money Management Advice — Insight #9: It is often easier to save 20 percent of income than it is to save 10 percent of income.
Why? Because saving 20 percent allows the saver to make quicker progress on realization of her financial freedom goals. Each step forward adds to her enthusiasm for the saving project. Those saving 10 percent do not see tangible rewards for saving for a long time.
New Money Management Advice — Insight #10: Our concept of “retirement” needs to be reconstructed.
Most middle-class workers enjoy the sense of fulfillment they obtain from doing productive work. Rather than leave the world of work altogether at an early age, many would prefer to save enough to be able to continue to enjoy a middle-class lifestyle while doing work that pays less than their current employment but which provides a greater sense of personal satisfaction.
New Money Management Advice — Insight #11: Effective saving provides many benefits aside from the financing of an old-age retirement.
Effective savers sleep easier at night, not worrying about economic recessions or corporate restructurings. They have more options available to them. For example, the can leave the world of work for a time to stay at home with their children when they are young or start their own businesses without needing to worry about bringing in a big income in the early years. They feel more confidence when negotiating with their employers over pay raises and conditions of employment.
New Money Management Advice — Insight #12: A desire for job change is a regular feature of middle-class life.
There is no such thing as a perfect job. The reason is that middle-class workers are always seeking new challenges. Once mastered, a job that was once perfect is no longer perfect.
New Money Management Advice — Insight #13: Many effective savers owe their success to a bad employment experience suffered early in life.
Most of us earn enough to win our financial freedom early in life. What we lack is the motivation needed to do the planning it takes to pull it off.
New Money Management Advice — Insight #14: Paying off the mortgage is often a good idea.
Once you pay off the mortgage, you will likely so enjoy the feeling of financial freedom that follows from doing so that the thought of taking on a large amount of debt will become distasteful. Paying off the mortgage changes how you think about money and about the freedom obtained through saving.
New Money Management Advice — Insight #15: The discussions that effective savers have with their spouses when putting together their plans lead to a greater level of intimacy.
Learn what your spouse wants to spend money on and save money for, and you will likely learn things about her (or him) that you did not know before. Work with your spouse to achieve an important financial freedom goal, and your love for her (or him) will deepen.
New Money Management Advice — Insight #16: The value proposition of stocks changes dramatically from times of low valuation to times of high valuation.
Whatever your stock allocation is at times of moderate valuation, it should be something less than that at times of high valuation. If you fail to adjust your stock allocation to reflect changes in valuation, you are taking on more risk that what you thought was acceptable at the time you decided on your stock allocation percentage.
New Money Management Advice — Insight #17: Stock prices are highly predictable in the long term.
It is possible to identify a range of likely stock returns that you will obtain a range of likely stock returns that you will obtain in 10 years, 20 years, or 30 years from investing in an index fund. It is also possible to assign rough probabilities to various points on the spectrum of possibilities.
New Money Management Advice — Insight #18: Today’s retirement planning tools are terribly flawed.
Millions of retirements have been put at risk because of grave flaws in conventional-methodology studies of safe withdrawal rates.
New Money Management Advice — Insight #19: Valuations likely will not rise as high in future bull markets as they have in past ones. Similarly, future bear markets may not bring prices as low as they have before.
New analytical tools that permit us to predict future stock returns are making stock investing an increasingly rational (and less emotional) endeavor.
New Money Management Advice — Insight #20: As of today, stock investing is primarily an emotional endeavor.
A good number of the statistical studies published during the recent bull market can more fairly be characterized as exercises in rationalization than as exercises in objective research. Even top-name researchers and top-name investing analysts are influenced by the emotions that drive bull markets (and bear markets too, of course).