The Ten Commandments of Financial Planning
A few key principles guide me
What’s my financial planning philosophy? Here’s my approach when guiding others (and myself).
Editor’s note: First, here are some previous notes that offer some context to this discussion:
With that background, here’s how I approach financial planning:
1. Keep it simple.
Complex account structures and investment strategies have little benefit but real costs. They’re hard to understand, track, or even remember why you did them. This is especially true as your life becomes more complicated, as you age, or if someone else is overseeing your finances.
Keep it simple and close/consolidate all unnecessary accounts. Your older self — and your kids — will be grateful.
2. Minimize investment expenses.
There’s no benefit to paying top dollar for financial advisors or expensive mutual funds. Quite the opposite, actually. I’m fond of quoting John Bogle, the founder of Vanguard who famously quipped, “In investing, you get what you don’t pay for.”
It’s hard to beat a low-cost, diversified, and tax-efficient (next point) index fund.
3. Be tax-efficient.
When it comes to taxes, pay what you owe but nothing more. There can be lots of small tax-efficiency moves that won’t be life-changing but over a lifetime can significantly increase one’s overall wealth accumulation.
These include all the things I’ve mentioned over the years: Roth IRAs, HSAs, 529s, tax loss harvesting, Roth conversions, asset placement, etc.
4. Keep a long-term horizon.
We humans are short-term focused for good evolutionary reasons. However, this short-term bias leave us unprepared in the long-run and then it’s too late to fully recover from that short-sighted past behavior.
Don’t assume you’ll figure it out later or count on dying young. Instead, use saving strategies that hide you from what you’re doing — mental accounting buckets, 401K payroll deductions, Roth IRAs, HSAs, and delaying Social Security are examples of ways to consistently save with little friction, effort, or even awareness.
5. Know three numbers.
When it comes to personal finances, you can get a nearly complete picture of your financial circumstances from three key numbers:
income
spending
net worth
When you have a good sense of those, you have visibility into your financial trajectory. There’s no need to track them every day, nor account for every dollar but be in touch with these values on a regular basis.
6. Don’t time the market or pick stocks.
Investment markets may not be fully efficient, but neither you nor I have any ability to look into the future and know which stocks will be winners tomorrow or if markets are headed up or down. No one else does either.
I’m reasonably confident that the stock market will average ~10% per year returns over the long run (just because it has for the past 100 years) but I have no view about next week, or even next year. As I and others have said, the best time to invest is when you have the money.
7. Minimize catastrophic risks.
We can’t eliminate all risk of catastrophic loss but we should minimize it. Generous liability insurance coverage is one way to do so and avoiding foolish investments is another.
One reason I like lifetime annuities is that they reduce the risk of running out of one’s money late in life, when the result would be most painful. Similarly, one reason to include bonds in one’s portfolio is not because they’re such great investments (they’re not), it’s because they provide some ballast when sailing through turbulent seas.
8. Don’t be financially over-exposed to your employer.
If you’re lucky enough to receive equity grants or have an employee stock purchase program through your employer, always sell the stock. Your career is already over-invested in your employer so don’t take unnecessary risk by holding on to this undiversified stock. Sell it all when you can and invest the proceeds in an index fund.
9. Recognize money Illusions.
Most of us have misapprehensions about our personal finances. The most common ones I see are that we:
spend more money than we realize (or should).
overstate the value of our net worth because we don’t factor in the future tax liability of our retirement accounts.
think our home equity is available to be spent as needed.
Track #1 over time, adjust #2 for the future taxes, and accept that one’s home is not an on-demand piggy bank.
10. Psychology matters.
I often quote my daughter that, “When it comes to personal finances, it’s more about the personal than the financial.” She’s wise beyond her years. We are emotional animals, get bored and anxious when we think about our money, and are full of regret about past poor decisions we made — or didn’t make.
Given those psychodynamics, focus on:
Looking forward, not back.
Creating positive and sustainable financial behaviors.
Managing one’s money is an important life skill. While it may be an unnatural act for many of us, get a minimum level of comfort with your personal finances.