Smart Couples Finish Rich

1. Align Your Values with Financial Goals for a Fulfilling Life

The fact is, if you don't put a fair amount of effort into all of your top values, your life can become unbalanced.

Define your values. Start by identifying your top five values using the Value Circle exercise. These could include security, family, health, freedom, or personal growth. Once you've clarified your values, align your financial goals with them to ensure your money serves your life's purpose.

Create a Purpose-Focused Financial Plan. Based on your values, set specific, measurable goals for the next 12 months. Write them down and include action steps to take within 48 hours. This approach ensures your financial decisions reflect what truly matters to you and your partner.

• Example values: Security, Family, Health, Freedom, Personal Growth
  Goal-setting steps:
  1. List your top five values
  2. Set specific, measurable goals based on these values
  3. Write down action steps to take within 48 hours
  4. Review and adjust your plan regularly

2. Pay Yourself First: The Foundation of Financial Success

If you don't want to have to struggle to keep your head above water when you retire, you should be saving at least 10 percent of your pretax income each year. Period.

Prioritize savings. Commit to saving at least 10% of your pretax income, ideally increasing to 15-20% over time. This money should go into tax-advantaged retirement accounts like 401(k)s or IRAs before you pay any other expenses.

Automate your savings. Set up automatic transfers from your paycheck to your retirement accounts. This ensures you consistently save without having to make a conscious decision each month. Remember, it's not about how much you earn, but how much you keep and invest that determines your financial future.

Savings targets:

• Minimum: 10% of pretax income
• Ideal: 15-20% of pretax income
  Tax-advantaged accounts to consider:
• 401(k) plans (especially if your employer offers matching contributions)
• Traditional or Roth IRAs
• SEP-IRAs or Solo 401(k)s for self-employed individuals

3. Harness the Power of Compound Interest Through Smart Investing

Over time money compounds. Over a lot of time money compounds dramatically!

Start early and invest consistently. The earlier you start investing, the more time your money has to grow through compound interest. Even small amounts invested regularly can lead to significant wealth over time.

Understand the impact of time and returns. Use the "Rule of 72" to estimate how long it will take your money to double. Simply divide 72 by your expected annual return rate. For example, at a 7% annual return, your money would double approximately every 10 years (72 ÷ 7 = 10.3).

Power of compound interest example:

• $10 per day invested at 10% annual return:
  • After 34 years: $1 million
  • After 40 years: $1.8 million
    Factors affecting compound growth:
• Initial investment amount
• Regular contribution amount
• Time horizon
• Rate of return

4. Build a Diversified Portfolio with Low-Cost Index Funds

Index funds are simple, inexpensive, easy to set up, and they work. What more could you ask?

Choose low-cost index funds. These funds offer broad market exposure, low fees, and historically strong performance. They're an excellent choice for both beginners and experienced investors.

Diversify your portfolio. Spread your investments across different asset classes to reduce risk. A simple portfolio might include a mix of U.S. stock market index funds, international stock funds, and bond funds. Adjust the allocation based on your risk tolerance and time horizon.

Types of index funds to consider:

• S&P 500 index fund
• Total U.S. stock market fund
• International stock fund
• Bond market fund
  Asset allocation example:
• 60% stocks (40% U.S., 20% international)
• 40% bonds

• Adjust based on age and risk tolerance

5. Protect Your Wealth with a Comprehensive Security Basket

Assuming your company does have a 401(k) plan, the second thing you need to do is make sure you're signed up for it.

Build an emergency fund. Set aside 3-6 months of living expenses in a readily accessible account. This provides a financial cushion for unexpected events or job loss.

Secure appropriate insurance coverage. Protect yourself and your family with adequate health, life, disability, and long-term care insurance. Review your coverage regularly to ensure it meets your changing needs.

Emergency fund targets:

• Minimum: 3 months of expenses
• Ideal: 6-24 months of expenses
  Essential insurance types:
• Health insurance
• Term life insurance (if you have dependents)
• Disability insurance
• Long-term care insurance (consider in your 50s or 60s)

6. Invest in Your Dream Basket for Long-Term Aspirations

Dreaming big is the key to happiness. Dreaming big is energizing. Dreaming big is fun.

Identify your dreams. Work with your partner to create a list of your top five dreams. These could include travel, starting a business, or buying a vacation home.

Create a systematic investment plan. Allocate a portion of your income, ideally 3% or more, to fund your dream basket. Invest this money in a diversified portfolio of mutual funds or ETFs, tailored to your time horizon and risk tolerance.

Steps to fund your dream basket:

1. List your top five dreams
2. Estimate the cost and time frame for each dream
3. Set up automatic investments (start with 3% of income)
4. Choose appropriate investments based on your time horizon
   Investment options for different time horizons:

• Short-term (< 2 years): Money market funds
• Mid-term (2-4 years): Short-term bond funds or balanced funds
• Long-term (> 4 years): Stock-based mutual funds or ETFs

7. Avoid Common Financial Mistakes to Preserve Your Wealth

Trying to time the market DOES NOT WORK.

Avoid market timing. Instead of trying to predict market movements, focus on consistent, long-term investing. Stay invested through market ups and downs to benefit from long-term growth.

Be cautious with debt. Avoid high-interest credit card debt and consider paying off your mortgage early. Use the "pay yourself first" strategy to allocate extra funds towards debt reduction and wealth building.

Common financial mistakes to avoid:

• Trying to time the market
• Carrying high-interest credit card debt
• Neglecting to max out retirement accounts
• Buying stocks on margin
• Not having a prenuptial agreement (if applicable)
  Strategies for debt reduction:
• Pay more than the minimum on credit cards
• Consider biweekly mortgage payments
• Refinance high-interest debt when possible

8. Communicate Openly About Money to Strengthen Your Relationship

People will do more to protect their values than just about anything else in life.

Have regular money talks. Schedule regular "money dates" with your partner to discuss your finances, goals, and concerns. Open communication helps prevent misunderstandings and aligns your financial efforts.

Divide financial responsibilities. Clearly define who's responsible for various financial tasks, such as bill paying and investment management. This prevents confusion and ensures all important tasks are handled.

Topics for money dates:

• Review current financial situation
• Discuss progress towards goals
• Address any concerns or changes in circumstances
• Plan for upcoming expenses or investments
  Financial responsibility division example:
• Partner A: Bill paying, tracking expenses
• Partner B: Investment management, insurance reviews
• Both: Major financial decisions, annual goal setting

9. Educate Your Children About Financial Literacy

Education has always been the great American equalizer. We've always preached that anyone can become anything they want if they get a good education.

Start early. Begin teaching your children about money from a young age. Use everyday situations to illustrate financial concepts and involve them in age-appropriate financial decisions.

Lead by example. Demonstrate good financial habits in your own life. Discuss your family's financial goals and values openly, showing how you make financial decisions aligned with these principles.

Age-appropriate financial lessons:

• Young children: Saving in a piggy bank, basic budgeting
• Pre-teens: Opening a savings account, earning money through chores
• Teenagers: Investing basics, responsible credit card use
  Resources for financial education:
• Online games and apps designed for financial literacy
• Books on money management for kids and teens
• Involve children in family financial discussions (as appropriate)

Last updated: October 3, 2024