A Money State of Mind

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This article originally appeared in the December 2017 edition of Lynchburg Business Magazine.  To see the original article, click here.

When I’m asked how to accumulate wealth, most people expect a mathematically-themed answer.  The math of personal finance is important, but in my opinion it is very much secondary to what’s really important—having a money state of mind.

Having a money state of mind means understanding and putting into practice certain concepts that help shape all of our financial decisions. It’s a firm grasp of these concepts, not the intricacies of financial math, that allow us to accumulate, grow, and maintain wealth. My favorite of these are below:

Opportunity Cost and Unintended Consequences
Sometimes, the true cost of our actions is not the cost of what we do, but, rather, the cost of what we don’t do instead. Consider this: you’ve recently received a year-end bonus of $20,000. With it, you decide to purchase a new vehicle costing $20,000. The way most people would look at the cost of this transaction is that it came at no extra cost, since the vehicle was paid for with “bonus” money. A better way to think about this transaction is to take into account what you didn’t do with the money. You didn’t, for example, use it to pay down your 4% mortgage. The cost of not doing that was roughly $800 this year in interest, not to mention interest on those same borrowed monies you’ll pay every year until your mortgage debt is gone. The cost was also the fact that your mortgage payments would last that many more months—in future years when you may no longer be employed. Another potential cost of this transaction is the cost of not investing the bonus. Suppose you’d invested the $20,000 in an investment account for the next 20 years. If that account averaged a 5% annual return, then the value at the end of 20 years would be over $50,000. Thinking about the opportunity cost of your vehicle purchase, you could say that it cost you $50,000 in future cash.

People easily see the immediate consequences of their actions but seldom consider the unintended consequences of those same actions. One of the keys to building wealth is considering the unintended consequences and the opportunity costs of financial decisions both large and small.

Time and Compound Interest
Time never stands still. This can be a blessing, or it can be a curse. It’s a curse if time is counting the days that we could have been saving, investing, and earning—but weren’t. It’s an even more detrimental curse if it’s counting the days that debt is piling up. It’s a blessing, on the other hand, if it’s counting every single day that we have saved, earned interest, and that interest earns interest, until the money-minded librarian retires with an account balance to rival that of her attorney brother. I absolutely love to point this out to my younger clients. The more time you have, the more magical compound interest can truly become. It’s how our $20,000 bonus example turned into $50,000 years later.  I encourage you to do a simple internet search for “compound interest calculator” or visit investor.gov and find one there. See for yourself how saving even a little bit, over time, can potentially become quite a bit more.

Automation
From Henry Ford to Ray Kroc, those who have been successful have learned that automation is often a key factor of that success. Personal finance is no different. In this realm, automation serves two purposes: 1)It sets up discipline ahead of time, requiring effort only once; and 2)It helps us deceive ourselves (in a good way) into not missing money because we never see it.

Many workplace retirement plans allow for this type of automation. Automatic saving, investing, and rebalancing lead to the potential for automatic wealth accumulation. We can also self-automate. It takes just minutes to set up a monthly draft from a paycheck or checking account into a savings or investment account. Saving on the same day as our payday allows us to act as if that money never existed. It exits the day it comes and we’re never tempted to spend it. Not only does it never get spent, it can go on to bigger and better things. That is the power of automation. Out of sight, out of mind, until that special future day when it’s suddenly a huge part of our nest egg.

Risk vs. Reward
Not all returns are created equal.  There is a difference between an FDIC-insured account earning 2% and the stock of an unprofitable start-up that’s appreciated 300% in three months.  In my experience, people love to compare returns, but rarely do so through the lens of the risk that was taken to achieve those returns.  A “one-size-fits-all” mentality is incorrectly used to determine where to invest.  In reality, one size does not fit all.  Some monies are better left safe, and some monies are better used to take on more risk.  It’s only through evaluating the specific needs for your money that you’re able to know which is which.  Being aware of the risk of our decisions, not simply the potential reward, helps our financial transactions become informed ones.

Putting it All Together
I chose to highlight the above concepts because they work so well together. First, understanding the opportunity cost of not saving and investing can help us be more cognizant of it when making all kinds of financial decisions. This can lead to the decision to automate our savings. Understanding the power of time and compound interest can lead us to automate sooner, rather than later. Understanding risk and return can help us choose an appropriate level of risk for monies designated for different purposes. All of these concepts combined contribute to a truly powerful wealth-building life.

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Taking Control of Our Financial Fears

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*This article was originally published in the February 1, 2018 edition of Lynchburg Business Magazine.  Find it here.

If you’ve ever taken an economics course you may have learned that people are rational.  If you’ve ever met another person or simply looked in the mirror you may have learned that that’s simply not always the case.  Sometimes our emotions, not our intellect, drive our decision making process. When it comes to our financial decisions, it can pay to be aware of these emotional tendencies.  Chief among them: fear.  Let’s look at three different types of fear that can affect our financial well-being:

Fear of Missing Out (aka FOMO)

You remember the dot-com bubble, don’t you?  Everyone you knew was making it big.  It was a can’t lose situation!  You had to get in too.  You “did your research” by reading a few articles and visiting the website and jumped into a great-sounding internet company.  After all, you couldn’t be the one idiot who didn’t make gobs of money.  You do remember that, right?

In our now acronym-laden vernacular, what you experienced would be referred to as FOMO (fear of missing out.) FOMO can make us take undue risk.  When that next great opportunity comes along, ask yourself three questions to help keep your FOMO in check:

  1. What is the downside risk of pursuing this opportunity, and can I afford that risk?
  2. Could my resources be put to more proven productive use elsewhere?
  3. If I’d never heard about this potential opportunity would my life be perfectly fine without it?

Fear of Losing it All

Fear doesn’t always push us to take too much risk.  Sometimes it pushes us to not take enough.  Nearly every day there’s at least one talking head on one of the financial channels warning of an impending market or economic crash.  This constant fear-mongering causes many to hoard cash, gold, or other so-called “safe” assets.  There may be a place for these in your portfolio, but I would argue you’re doing yourself a disservice if that place is always 100%.  Our money is best allocated according to our financial goals, not our financial fears.  Long-term goals should be matched with long-term investments.  Letting short-term fears override this risk matching has the potential to limit the growth of our money to the point where those long-term goals aren’t as attainable as they could’ve been.

Fear of the Unknown

I don’t know what inflation will be this coming year or the year after that.  I don’t know where the stock market will be in six months.  I also don’t know who’ll win the next presidential election or what the next congress might do to my taxes.  What I do know, though, is that I cannot control any of these and so they likewise shouldn’t control me or my financial decisions.  Fear of the unknown can sometimes cause us to sit on the sidelines and “wait.”  Wait for what?  The certainty that doesn’t come.  Every month we hesitate because of our fear of the unknown is a month that we could’ve been benefiting from the results of an informed, albeit imperfect, financial decision.

Take Control of Your Fears

Fear is part of who we are, and we are all occasionally afraid.  Sometimes that fear is justified and sometimes it isn’t.  We can benefit from recognizing our own fear and how it affects us.  Fear of the unknown, fear of losing it all and fear of missing out all have the potential to negatively affect our finances, but they don’t have to.  The next time you’re making a financial or investing decision, ask yourself what’s informing, and what’s influencing, your decision-making.  Observe your fears.  Take note of of them.  Then decide what’s truly best for you.

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Where to Find Good Reads

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In my monthly email to friends of Lynchburg Wealth Management, articles of interest in the financial world are often highlighted.  They’re so popular that I thought I’d share some of the websites I comb through in the hopes that you too will find them useful:

  • Real Clear Markets is updated twice daily with finance and market-themed articles from varying points of view. You may not always agree with the authors of the day, but you will learn something.  I do.
  • Investopedia is a great go-to when you’re looking up an unfamiliar financial term, concept, or situation.  Here you’ll find easy-to-read explanations to help bring you up-to-speed.
  • A Wealth of Common Sense is maintained by blogger turned financial advisor Ben Carlson.  Yes, technically he’s a competitor, but he puts out good material that is often worth the read.

As you’re exploring on your own, please feel free to share your finds and your thoughts with me.  I look forward to discussing them with you.

-John

Helpful Financial Columns

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Did you know Lynchburg Wealth’s President, John Hall, is a regular contributor to the finance column of Lynchburg Business Magazine?  If you haven’t already, check out some of these more recent columns:

Be sure to pick up your copy of Lynchburg Business Magazine for more informative content from right here in the Hill City!

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Announcing Our Summer Intern

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We’re very pleased to announce that today is the first day of our new summer intern, Jacob Ranson.  Jacob is a native of Appomattox and is a rising senior at Hampden-Sydney College studying business and economics.  In addition to his interest in finance, Jacob enjoys traveling, playing guitar, and fishing.  Please join us in welcoming Jacob to Lynchburg Wealth Management.

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A New Face at Lynchburg Wealth Management

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We’re thrilled to announce that Raymond “Ray” Doot has joined the Lynchburg Wealth team.  Ray is a senior at Liberty University studying financial planning and will be interning at Lynchburg Wealth as a hands-on compliment to his classroom education.  His goal is to pursue a career in the financial services industry and obtain the CFP® designation.  Please welcome Ray to the team the next time you call or come by the office.  We look forward to having him onboard.