This is the Year I Put My Financial Life in Order

1. Financial Literacy is Key, But Overconfidence is a Trap

Half of us don’t think we know what we’re doing. We’re right: most Americans really don’t know that much about money.

Knowledge Gap. Many Americans lack basic financial literacy, leading to poor decisions about saving, investing, and debt management. This lack of knowledge is compounded by overconfidence, with many people believing they are more financially savvy than they actually are. The FINRA quiz, with an average of just over 3 correct answers out of 5, highlights this gap.

Dunning-Kruger Effect. This phenomenon, where incompetent individuals overestimate their abilities, is prevalent in personal finance. People who are not financially literate often believe they are, leading to risky behaviors and poor outcomes. This can manifest in expensive credit card mistakes, overdrawing accounts, and making ill-informed investment decisions.

Continuous Learning. Overcoming financial illiteracy requires a commitment to continuous learning and self-assessment. Resources like books, websites, and financial advisors can help individuals gain the knowledge and skills needed to make informed decisions. Humility and a willingness to admit what you don't know are essential for avoiding the pitfalls of overconfidence.

2. Start Saving Early and Often, No Matter the Amount

Jumping from $26,000 a year to $40,000 a year let me make the move without feeling a pinch.

Power of Compounding. The earlier you begin saving, the more time your money has to grow through the power of compounding. Even small contributions made consistently over time can accumulate into a substantial nest egg. This is especially true for retirement savings, where tax advantages can further accelerate growth.

Automatic Savings. Setting up automatic transfers from your paycheck to a savings or investment account is a simple yet effective way to ensure consistent saving. This approach removes the need for willpower and makes saving a seamless part of your financial routine. Consider options like 401(k)s, IRAs, or even a basic savings account.

Prioritize Saving. Even when finances are tight, prioritize saving something, even if it's just a small amount. Treat saving as a non-negotiable expense, like rent or utilities. As your income increases, gradually increase your savings rate. The author's experience of consistently contributing 10% of his income to a 401(k), even during financially challenging times, demonstrates the long-term benefits of this approach.

3. Embrace Low-Cost Index Funds for Long-Term Growth

The way to wealth for those in the business is to persuade their clients, “Don’t just stand there. Do something.” But the way to wealth for their clients in the aggregate is to follow the opposite maxim: “Don’t do something. Stand there.”

Index Funds vs. Managed Funds. Actively managed funds, where fund managers try to beat the market, often come with higher fees and don't consistently outperform index funds over the long term. Index funds, which track a specific market index like the S&P 500, offer a low-cost, diversified approach to investing.

John Bogle's Revolution. John Bogle, the founder of Vanguard, revolutionized investing by creating low-cost index funds. His philosophy emphasizes simplicity, diversification, and minimizing fees. Bogle's approach has been widely embraced by investors seeking long-term growth without the risks and costs associated with active management.

Warren Buffett's Endorsement. Even legendary investor Warren Buffett recommends index funds for most investors. He argues that the average investor is better off investing in a low-cost index fund than trying to pick individual stocks or relying on professional money managers. This endorsement further validates the effectiveness of index investing for long-term wealth accumulation.

4. Know Your Risk Tolerance and Adjust Your Portfolio Accordingly

Too many people don’t know their tolerance well enough and take on too much risk.

Risk Assessment. Understanding your risk tolerance is crucial for making informed investment decisions. Risk tolerance quizzes and assessments can help you gauge your comfort level with market volatility and potential losses. However, these assessments should be used as a starting point, not a definitive guide.

Age-Based Allocation. A common strategy is to adjust your portfolio's asset allocation based on your age. Younger investors typically have a higher risk tolerance and can allocate a larger portion of their portfolio to stocks, which offer higher potential returns but also carry greater risk. As you approach retirement, gradually shift your portfolio towards more conservative investments like bonds.

Personal Circumstances. Your risk tolerance should also reflect your personal circumstances, such as your financial goals, time horizon, and overall financial situation. If you have a shorter time horizon or a lower tolerance for risk, you may want to allocate a larger portion of your portfolio to bonds and other conservative investments. The author's decision to delay rebalancing his portfolio towards more bonds, based on his health and expected working years, illustrates the importance of considering individual factors.

5. Seek Financial Advice Wisely, Avoiding Conflicts of Interest

You thought you would be here tonight and somebody was going to try to sell you some kind of annuity,” he said, but “there’s not going to be any selling here tonight.”

Fiduciary Duty. When seeking financial advice, it's essential to work with a financial advisor who has a fiduciary duty to act in your best interest. This means the advisor is legally obligated to prioritize your needs over their own financial gain. Fee-only financial advisors, who charge a flat fee or hourly rate, are generally considered to have fewer conflicts of interest than brokers who earn commissions on the products they sell.

Question Everything. Don't be afraid to ask tough questions of any financial advisor you're considering working with. Ask about their fees, their investment philosophy, and any potential conflicts of interest. Be wary of advisors who pressure you to buy specific products or make quick decisions.

Second Opinions. Just as you would seek a second opinion from a doctor, it's wise to get a second opinion on any major financial decisions. Talking to multiple advisors can help you gain a broader perspective and identify potential red flags. The author's experience of consulting with different types of financial professionals highlights the importance of seeking diverse perspectives.

6. Homeownership: A Blessing and a Burden

My house is me and I am it. My house is where I like to be and it looks like all of my dreams.

Financial and Emotional Investment. A home is often the largest financial investment most people make, but it's also an emotional one. Homeownership can provide stability, security, and a sense of belonging. However, it also comes with significant responsibilities and financial risks.

Beyond the Mortgage. The true cost of homeownership extends beyond the mortgage payment. Property taxes, insurance, maintenance, and repairs can add up quickly. It's essential to factor in these additional expenses when determining whether you can afford a home.

Real Estate Ponzi Scheme. The author's experience with his first home purchase in New York City serves as a cautionary tale. He fell for what amounted to a real estate Ponzi scheme, where early buyers relied on convincing others to buy in to recoup their losses. This highlights the importance of doing your own research and not relying solely on the advice of others.

7. Medical Disasters Can Devastate Finances; Insurance is Crucial

Most people in this country are one health crisis away from financial ruin.

Healthcare Costs. Medical bills are a leading cause of bankruptcy in the United States. Even with health insurance, unexpected illnesses and injuries can lead to significant out-of-pocket expenses. The Affordable Care Act has helped to reduce medical debt, but many Americans remain vulnerable to financial ruin due to healthcare costs.

Importance of Insurance. Having adequate health insurance is crucial for protecting yourself and your family from financial devastation in the event of a medical emergency. Consider factors like premiums, deductibles, copays, and coverage limits when choosing a health insurance plan.

Beyond Health Insurance. In addition to health insurance, consider other types of insurance, such as disability insurance and long-term care insurance. Disability insurance can provide income replacement if you're unable to work due to illness or injury, while long-term care insurance can help cover the costs of nursing home care or assisted living. The author's friend, Jolie, experienced the financial devastation that can result from a lack of adequate insurance.

8. Debt is a Trap; Avoid It and Prioritize Paying It Down

Debt is the enemy. Get out of debt.

Debt's Impact. Debt can be a major drag on your financial well-being, limiting your ability to save, invest, and achieve your financial goals. High-interest debt, such as credit card debt, can be particularly damaging.

Debt Snowball. Dave Ramsey's "Debt Snowball" method involves paying off debts from smallest to largest, regardless of interest rate. This approach provides psychological wins that can help you stay motivated. While economists may recommend paying off the highest-interest debt first, the Debt Snowball can be effective for those who need a boost in morale.

Productive vs. Consumptive Debt. Differentiate between productive debt, which can help you build wealth (e.g., a mortgage), and consumptive debt, which is used to finance non-essential purchases (e.g., a vacation). Prioritize paying down consumptive debt and be cautious about taking on new debt. The author's experience with credit cards and home equity loans highlights the dangers of relying too heavily on debt.

9. Plan for the Inevitable: Wills, Advance Directives, and Long-Term Care

In case I die in this mess I leave all to the wife.

Estate Planning. Creating a will is essential for ensuring that your assets are distributed according to your wishes after your death. A will can also name guardians for minor children and help avoid potential tax pitfalls.

Advance Directives. In addition to a will, it's important to have advance directives in place, such as a living will and a durable power of attorney for healthcare. These documents outline your wishes regarding medical treatment and designate someone to make healthcare decisions on your behalf if you're unable to do so. The Terri Schiavo case highlights the importance of having these documents in place.

Long-Term Care. Plan for the possibility of needing long-term care in your later years. Long-term care can be expensive, and Medicare doesn't cover all of the costs. Consider options like long-term care insurance or exploring assisted living facilities. The author's experience of touring an assisted living facility highlights the high costs associated with long-term care.

10. Money Isn't Everything, But It Matters: Balance Financial Security with Life's Joys

Yes, but I have something he’ll never have . . . enough.

Beyond Materialism. While financial security is important, it's essential to remember that money isn't everything. Focus on building meaningful relationships, pursuing your passions, and finding joy in everyday experiences.

Mindful Spending. Be mindful of your spending habits and avoid impulsive purchases. Ask yourself whether a purchase is truly necessary or whether it's simply a way to fill an emotional void. The author's experience of buying a case of wine, despite not getting a discount, illustrates the importance of balancing frugality with enjoyment.

Balance and Perspective. Strive for a balance between financial security and enjoying life's pleasures. Don't let the pursuit of wealth consume you or prevent you from experiencing the joys of life. The story of Kurt Vonnegut and Joseph Heller at a billionaire's party reminds us that true wealth lies in having "enough," not in accumulating endless riches.

Last updated: March 16, 2025