Underlying success in any field is adherence to the fundamentals, and the financial arena is no exception. It is virtually impossible to achieve success, financial or otherwise, without first mastering the basics.
Vince Lombardi started each year’s opening camp by holding up a football and saying “Gentlemen, this is a football.” The legendary basketball coach John Wooden started each year by explaining to his players how to wear their socks and tie their shoes so as to not get blisters. If these things sound ridiculously simplistic to you, consider the amount of success each man achieved.
Today I will discuss three fundamental cornerstones for success in the personal financial arena. There are more, but these are three of the most basic ones.
The first one is as basic as it gets, as there can be no success without it, and that is to live on less than one’s income. Again, sounds ridiculously simplistic, but there is, unfortunately, a large segment of the population that spends more than they earn. That obviously can’t continue indefinitely and when it ends, it isn’t pretty.
The second principle is to pay oneself first. The reason so few people have adequate savings is they spend first and save what’s left, which often isn’t much. That small select minority that pays themselves first and spends what’s left is much more likely to enjoy financial success than the other group.
That can be difficult (but not impossible) to implement mid-stream, so the easiest way is to start upon entry into the workforce. The advent of direct deposit and electronic bill payment makes this easier than ever. The paycheck is direct deposited into a checking account and the desired savings amount is electronically transferred to the savings vehicle of choice.
The last principle I will discuss is don’t lose money. Now of course any investment program is almost certain to have down years. Even Berkshire Hathaway has had years when the stock closed lower than the previous year (although not many!). But limiting losses is extremely important in the wealth accumulation process.
Sure, it’s tempting (and exciting) when cousin Vinny gives you the hot tip at the family barbeque, but the odds of it paying off are quite small (unless it’s insider information, in which case you’ll need another cousin Vinny to defend you).
Which brings us to life insurance, which I didn’t include as one of the fundamentals, but for those with dependents, it certainly is. And the nice thing (well, one of the nice things) about whole life products is that they always go up, never down.
To summarize, following a set of fundamental principles in any endeavor will greatly enhance the probability of success. In personal finance, those principles include 1) living on less than you earn, 2) paying yourself first, and 3) limiting losses. And whole life insurance helps with number three.