John Hall

There could be a master course on all things credit cards. In terms of personal financial advice, credit card articles are all over the map. There’s everything from why they should be avoided at all costs to why they should be used for 90%+ of purchases to how to play the points and rewards game. The best practices, however, can’t be whittled down to a simple one-size-fits-all approach. The best way to use (or not use) these tools, much like other personal finance decisions, is specific to the person(s) asking the question.

When You Should Avoid Using Credit Cards

• If you cannot and do not pay the balance to $0.00 every month on every card, you should stop using credit cards and not use them until the answer to this question changes. (continuing to use credit cards in this way is a sure way to deplete your wealth)
• If you find yourself spending more than you otherwise would because you have a credit card then you should stop using and not use credit cards until the answer to this question changes.
• If there’s a merchant-added transaction fee to use the credit card (and that fee is more than the value of any rewards you may receive for using the card) you should not use a credit card for that transaction.
• If there’s an annual fee associated with a credit card, and that fee is more than the value of any rewards or benefits you may receive(and take advantage of) for using the card, you should opt not to have that card.

If all of those hurdles are passed, credit cards can be a useful tool. They can aid in identity protection, building credit, tracking expenses, and fun ways for paying for life’s goals by way of built-in rewards. It’s important, though, not to focus on these rewards or rely upon credit card use if the answers to the above questions mean you’d be better off without the card in the first place!

Have you ever been to a football game where your team barely lost and you blamed it on a missed 50-yard Hail Mary in the fourth quarter? I’ve certainly been guilty of that. Now, ask yourself, suppose instead of focusing on that split second, your team had simply converted one or two more third downs, or stopped the opposing side from doing so?  Yep, that may have changed the game as well.  What if they’d progressed a half yard further on every play?  Also effective. We know when our team comes up short there are any number of things the team actually could have done better all along that would’ve led to a better outcome. It’s the easy way out to place more importance on a dramatic few seconds.  Our financial lives are no different.

When it comes to building wealth, the tried and true way is to keep advancing down the field. How do we advance? By making more money than we spend and putting that money to work through saving and investing. Building wealth is rarely based on calling the next market crash or finding the next high flying stock. Yet, that’s what so many novice  and “pro” investors alike focus on.

What should we focus on to build wealth and financial security?

Consistent Advances
(starting in the first quarter!)
We’ve all seen (and ignored) the examples.  Who ends up with more money, a 30 year old who invests a modest amount each month or a 50 year old who invests substantially more to catch up?  That’s right. The 30 year old. The beginning, as Plato said, is the most important part of the work. If you haven’t yet begun to save and invest in order to build your wealth then the time to do that is today. It’s not tomorrow. It’s not when you have time or when you make more or after you achieve x. It’s today. Waiting until the fourth quarter to turn on your offense usually just doesn’t pan out. You don’t have to start big, but you should start.

Defense
The best offense is a good defense, right? In our financial lives, defense is about being smart. It’s about avoiding unnecessary debt, particularly interest-only debt like home equity lines and credit card balances. These products, by design, don’t help us get where we need to be.  They’re the financial equivalent of 20 yard lateral run.  A lot of effort and nothing to show for it. Another defensive money move is having adequate emergency cash. When life comes at us hard, this gives us the ability to withstand it. Put another way, we’ve taken the liberty of banking a few field goals to build up a healthy cushion against the occasional interception.

Watching the Clock
Time. It’s the one thing we know we can’t have more of. For that reason, it’s important to realize that we have to plan for the time we’re likely to have. Living like there’s no tomorrow can quickly leave our finances in ruin when there’s still three quarters of life left. Likewise, not preparing for the important time markers in life, like childbirth, education, retirement and even death can make it seem like their respective play clocks simply ran out before we’d put together a game-plan. Being aware of the clock and putting the time we have to good use helps a good plan turn into a win.

Are you focused on the fundamentals or on the Hail Marys?

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.