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Saturday, August 30, 2014

Most People Just Don’t Know

Posted by Tim Stobbs on February 7, 2013

I’m currently doing some financial coaching for a couple I know and it became very obviously to me that while they were in a great position in a number of ways (no debt other than mortgage, spend less than they earn, one of them has a defined benefit pension), they just really didn’t understand some fairly basic things about their money.

It wasn’t like they didn’t have a the capacity to understand their money situation, it was merely they have never really put the time and effort into having a basic financial plan.  The idea of making that many decisions on their insurance, savings and investing felt overwhelming to them so the just never did it.  From their point of view their weren’t getting into debt, they had some savings, so it wasn’t like they were doing that bad.  Even from a net worth point of view they were about average given their age.

So what struck me during all this was the fact how little difference there was between their situation and mine.  That the only things separating us was the fact I had plan and was actively awareness of my money.  That is it. The line between doing ok with your money and good or great is very thin indeed.  So while I’ve never put a tonne of time into writing  articles on basic personal finance on this site, I know understand why there are so many of them on the web.  Most people just don’t know the basics, so hence the endless attempts to educate people.

For example, here are a few things that strike me as obvious that some people just don’t do:

1) Put a limit on your spending. When you get paid move the money you mean to save out at once.  That way when you look at your chequing balance you feel poor than you really are and naturally don’t spend all your money.

2) Use automatic transfers. Plan to be lazy, dumb or just forgetful.  Make your saving automatic so you never have to think about it.

3) Make investing easy. Don’t go complex, just keep it simple.  Use low fee index funds and rebalance once a year. Google “couch potato portfolio”.  Just by keeping your fees low, a diversified portfolio and taking some of the emotion out of investing you will do better than most people.

4) Don’t feel guilty about your spending. Comparing yourself to others is the road to unhappiness.  Instead ask the questions, what do you wish you spent more on?  Then ask, how can I spend less on what I don’t care about?  That way you can do more with what you already have.

So do you ever try to help people around you do better with their money?  If so, any advise on what approaches seem to work?