3 Critical “Personal Finance” Mistakes I have made
As we approach the end of 2006, I want to share some financial mistakes I have made. Three years ago, I sat down and thought long and hard about the financial decisions I have made and thought about what I should be doing going forward. I am glad I did that 3 years ago because I am now better off because of some decisions I made. Here is what I have learnt about the do’s and don’ts of your finance.
Mistake 1 : Procrastinating on taking care of the basics
1. Paying our bills – let’s face it, paying your bills suck. Having said that, you still have to pay them. Many of us have faced a situation where we misplaced a mail, and missed a payment. Paying your bills is a necessary but low value task that we all dread and tend to procastinate. The solution to this is to automate your payments with autopay functions. For example, you can use your credit card to automatically pay for your wireless, utilities and cable bills. If you have a reward credit card, you will earn points from paying these bills with your credit card. To ensure that you pay your credit card bills on time, enroll in automatic payment where payments will be made automatically to your bank. You can set it to pay the minimum balance or the full amount.
2. Regular investing – Yes, I was guilty of this. But paying yourself first is one of the keys to financial success. But how many of us have enrolled in automatic investment plans? If you have not, start right now.
3. Taking care of your insurance needs – another one of those things which we tend to put off. I took care of this one a long time ago and have a peace of mind since then. But many friends of mine have not!
4. Doing your wills and estate planning – Like insurance, this can be considered defence strategy in the big scheme of personal finances. It has to be done. It is easy to put off doing this. Many leave it till it is too late. I did mine 5 years ago, but have yet to have a “review”. This will be the next task.
Mistake 2 : Wasting time on Personal Finance Matters
Personal finance matters are very important, but wasting too much time on time is another mistake that I made. As I look back at myself, I realize that I fall under the “need to do everything yourself” or “who needs to pay fees to financial planners” category. To give you a perspective, I used to work for major Wall Street firms in trading and I thought I knew a lot (not everything but more than most folks) about the markets. Truth is that working on Wall Street or a hedge fund does not equate to being a good money manager especially when it comes to your own money. I was involved very early in the dot com companies, made a lot of money with AOL, Ebay and Yahoo. I gave some gains back and was still ahead.
But when I looked at my actual returns over the last 10 years, I realize that I would have been better off putting my money with a few good managers (not index funds though). I still cannot believe the amount of time I spent on researching companies and doing my own thing only to realize that I could have spent that time more productively.
Are you spending too much time reading about finance matters? or even dare I say spending too much time debating the index funds versus managed funds? Or doing your own stock investments? (yes – I will get flak for this). But the reality is this : If you are truly great at picking stocks or in investments, you should go to an investment bank, speak to someone who can raise funds for you, show your verified track record and raise money to start a hedge fund. You charge 2% management fee and 20% of the upside. Relocate to connecticut and soon your dream red ferrari is yours. Truth is that for 99.999% of the population, it is best that someone elses manages your money. Unless, you can achieve mid teens return with an acceptable diversification and low volalitility, you are better off spending your time on more important matters. Remember, anyone can “for a brief period” outperform massively by taking concentrated bets. But truely great investors make above market returns with a diversified portfolio without too much concentration risk. It is the ability to consistently come up with great investments that is the undoing of many manager and worse still for the individual without a technology and research infrastructure.
Mistake 3: Not spending enough time on self development and money generation activities
I am not talking about investing your own money here. I am refering to investing your time in your career or business. Most of the time, mistake number 2 leads to mistake number 3. As a do-it-yourselfer, I thought I can do it all. I read a lot, thought I knew a lot and spend too much time on my finances. But on hindsight, I could have spent more time on improving myself in certain areas. If you are a salesperson, it is better to invest your time in improving your sales skills. If you are a manager, wouldn’t it be better to spend your time learning to be a better manager? or networking. Increases in bonuses or salary will more often than not outpace any 15% returns you get on your portfolio! If not, then you are set to retire.
Achieving your financial goals require both offense and defense. Defense includes things like making your you have adequate insurance, have done your wills and estate, having a system in place to pay your credit card bills and other stuff on time.
Offence includes optimal portfolio allocation and investments. And it also includes career advancement, or for some building a successful business. You can have all the optimal portfolio allocation, but what good is it if you do not get a raise often? Someone who works on wall street can have no financial planning, but would still be better off because she or he makes so much more money. This is often the missing link in achieving your financial goals. Your financial goals are tied to your career or business goals.
Cures for the 3 ills
After recognizing these mistakes I have made, I made a few changes that have helped me so much.
1. Automate Manual task
I have now automated as much of my financial stuff as I can. I do not waste time with things that do not make you money any more. I have set up automatic bill payments for my credit cards and other accounts. (you will never be late on your payments if you do this). I have set up automatic reinvestment for your mutual funds (pay yourself first). Get Mircrosoft Money or Quicken to automate your budget and spreadsheet. Hire a bookkeeper if you can afford one. I did these things 3 years ago and it has worked wonders.
2. Outsource your financial management
This is going to cause some controversy. But for most people, hiring a reliable and competent financial advisor is best thing to do. Choose someone you are comfortable with, having regular meetings with your advisor (once a month – if not at least once a quarter). Yes, you have to pay them fees, but a good financial advisor will be worth it. A good advisor will be able to take care of your insurance, investments and other financial issues. I really think you should spend time making money, not managing money. Let others manage it for you.
3. Spend more time on “money producing activity”.
For most people, it means not managing your own money. If your networth is $500,000, a 10% return means you will make $50,000. If you have have a networth of $500,000, chances are that you will be making a decent salary and have a good career. Enhancing your career or growing your own business is more productive than spending all your time “managing your own money”. Even if you had to pay a 1% fee to your financial planner ($5,000), spending your time that you would have spent on your “financial matters” will more often than not yield more than $5,000. Surely a promotion or stock option grant is easily worth more than $5,000? Surely a great business idea is worth more than this? Instead of researching the next big idea, I now spend my time on creating and growing my business and career. For me, that meant improving my sales skills, learning direct marketing techniques, learning about building websites/blogs like this one! For you, that may mean learning to manage better, improving your presentation and sales skills, taking time to network, taking time with a mentor. If you are a business owner, that means thinking strategically about your business, hiring people to do task you should not be doing.
To sum up, I made 3 crucial mistakes in my opinion. I did not automate routine task, spent too much time managing my own money and not enough time in my self development and career development. Make no mistake, you have to spend time on your finances. But once you have a financial plan, you should put it on auto-pilot (and hire a pilot – aka financial planner). To improve your personal finances, get your basics right, have a financial plan and spend your precious time on things that make you money and improve yourself.
I found that as I spend less time on my personal finances have actually improved (because I focused more on my business). Automate as many aspects of your financial life as possible, hire a good advisor and spend time improving your core competency.
P.S. – If you are not good enough to be a hedge fund manager, then forget about managing your own money. Outsource it. If you are good enough, chances are that you will not be reading this blog! You will be working in New York or Connecticut and driving a Red Ferrari!