We know, all this personal finance stuff can be daunting! And who can really think 10, 20, 30 years ahead? Most folks I talk with day to day, if I ask them questions about their preparedness for financial freedom or retirement, their brains shut down, I can just tell. And it is not their fault. Our brains are simply not wired for that kind of advanced thinking and planning. Yes, we all have some advanced planning and thinking, but it is much more immediate to the day and the moment. Psychologists call this “present moment bias”. Which made a lot of sense for our ancient ancestors who were simply trying to survive in a very hostile world. We pretty much are good at focusing on the task at hand. Our ancient ancestors seemed to have developed a dual focused brain, one that did a great job of survival in the moment at all costs, but tempered with some forethought and planning and ability to build tools.
We really do not spend a lot of time anymore warding off saber tooth tigers or invaders, so we may have the luxury of thinking a bit more about investing in our futures. But even in this environment, this can be challenging. There is stuff to do now: deadlines at work, children to raise, homework to complete, meals to prepare, meetings to attend, traffic to contend with, office politics, what is our next meal, etc. etc. This can make thinking about building wealth very distant and too abstract. And for most people this is not their idea of fun. It is a small handful of us money nerds and FI bloggers that really enjoy diving into the numbers, investment vehicles, etc.
So, for the majority of us that do not want to think about this stuff, here are 3 basic steps to ensure one is on a wealth building path. The beauty of these 3 easy steps is that once in place, you probably do not need to think about financial stuff very much:
1. Assess the situation
Do you even know your numbers? Do you know your debt levels? Do you know how much is in your investment accounts? Believe it or not, I have met many many people that do not know their numbers. They do not have a sense of what their debt level is. They have no idea what their net worth is? Some do not even know how much is in their 401k!
The first thing a doctor does is run tests and ask questions in order to assess the situation. We need to assess our financial situations in a similar manner. The reason is because we need to address different problems in different ways. Some people might have large debt levels but perhaps they had religiously been saving in their 401k? Other folks might have no debt, but also have no savings or investments. Different strategies would be deployed in these various scenarios.
BOTTOM LINE: The point here is to add up the simple numbers. What is a listing of your assets (401ks, properties, bonds, savings accounts, etc.) and what is a listing of your debts (car loans, home loans, student loans, etc.) Once you know these numbers you can determine if you are on the right path or need to add or subtract in different areas.
2. Stop the bleeding
After a person has assessed the situation, the next step is to stop any major hemorrhaging of money. Auto loans, school loans, credit card bills need to be addressed head on and eliminated as soon as possible. Also, any poor daily financial habits need to be dealt with right away. Are we going to buy expensive coffee drinks every morning? Is our car payment $500 with a long gas guzzling commute, etc.?
BOTTOM LINE: If the numbers look real bad, which they may, the best thing to do may be to stop the damage. Whatever was not working that got you into a hole, stop it and address it.
3. Set up automation
If your employer offers a 401k or other retirement account and a match, make sure to sign up for it. 2/3 of Americans with access to a 401k are not contributing to it. This is crazy! Just sign up and have a percentage of the paycheck automatically deposited and invested each month.
BOTTOM LINE: The main way people will build wealth over time is to have as much as possible automated. Make sure you are contributing as much as possible to your 401k and at least receiving any match. If your employer does not offer a 401k, then set up your own IRA through your credit union or bank. This money will be automatically removed from the paycheck and deposited most likely in an S&P 500 like index fund and some bond funds.
The 3 simple steps above could take someone from an F in personal finance to a B very quickly! Keep them in mind if you do not enjoy this stuff, but want to ensure you are on some kind of healthy path forward. You might wake up one day and be quite pleased with the amount in your investments and the fact that you took the time to truly look at your numbers.
- This is not individual investment advice. All investing carries some level of risk. Seek the guidance of a financial fiduciary professional.