Whenever you own something, you know you’re responsible for maintenance.
Whether it’s your car, your house, your pet or your body – maintenance is a necessary component but it also increases lifespan and quality of life.
Your money is the same way. It’s something you are responsible for.
Your financial system is something that requires maintenance and, at times, repair.
We realize this about tangible things but we rarely think about our money in the same way.
Your money is a system that requires attention but you need to build it in a way where you aren’t crushed by the work or you’re less likely to do it.
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What Is Your “Financial System?”
It’s everything you deal with when it comes to your money. A simple description is that it’s your assets and your liabilities – those line items you track in your net worth.
It’s also all the work you do to maintain that system – from paying your bills to rebalancing your portfolio. It’s making sure your paycheck is correctly deposited and that you stay within your budget.
Your financial system requires work.
And all this work is unpaid.
While unpaid, it is important and necessary work. If you didn’t do it, there would be dire consequences. If you don’t pay your loans, property will get seized. You don’t want to lose your house or car because you failed to make the payments.
The amount of work you have to do depends on how complicated your system is. This is why I’m a huge advocate of simplifying your finances and automating as much as possible.
Left unchecked, your systems will naturally get more complicated. We often lose sight of this as we age – our systems gain complexity and we simply just “do more.” But doing more isn’t the answer, you end up working for your money rather than your money working for you.
Let’s look at the two ways we “work for our money” and how we can fix that:
- You spend free time “maintaining” your system
- You spend free time chasing ways to make more
Time Wasted Maintaining Your Systems
This first way is very well understood – when we waste time, it’s because we are making one of the following three mistakes:
- We fail to automate tasks that should be automated
- Our financial system is too complex to remember easily
- We spend time fixing these mistakes
Automate As Much As Possible
I knew someone who would collect all his bills in a pile each month and then “pay” them on a specific day. Paying meant sitting down with a checkbook and writing a check for each bill. He’d put them in the envelope, put a stamp on it, and mail them out. Hours were dedicated to this task.
It’s also completely unnecessary.
We autopay all of our regular bills. This includes our mortgage, credit cards, utilities, and more. I haven’t written a check for a monthly bill in a decade. It’s all debited from our checking account or charged to a credit card.
What takes one person 2 hours a month takes me zero – saving me 240 hours over those ten years. 2 hours a month doesn’t seem like much but like compounding returns, it adds up over 10 years.
There are ways you are likely wasting time (and money) doing things manually. Look to automate as much as you can and trust the process.
😡 Things may go wrong as you automate. You may overdraft. You might pay a fee. But consider it a one-time fee you’re paying to save all that time. Plus you can always ask to get the fee refunded if you don’t do it often (or use a bank with overdraft protection).
Keep Your Finances Simple
A simpler system is easier to use. It’s easier to remember, it’s easier to maintain, and it won’t make you frustrated because you can’t remember something or do a repetitive task multiple times.
And in the case of investing, simple often outperforms. Actively managed funds can’t beat index funds.
The three fund portfolio has worked for thousands of people. Using Vanguard or Fidelity and their extremely low cost mutual funds has worked for thousands of people. Buy and hold, with some rebalancing, has worked for thousands of people.
You don’t need a dozen credit cards or more than a few bank accounts. You don’t need every fintech app.
When you draw your financial map, does it look organized and easy to understand? Can you draw it from memory? Complicated systems are difficult to maintain. Accounts can be forgotten (this is how it ends up on Missing Money).
I make it a point each month, as I track my net worth, to consider what I can do to simplify my finances. There’s always something you can do to tidy things up. Sometimes those tasks take a few minutes, sometimes it takes a little bit longer, but it’s always worth it.
I always do a little something to make things simpler. Like releasing pressure from the system.
Mistakes Happen, But Only Once
Mistakes are bound to happen, especially if you still have a complicated financial system. They happen less frequently in a simpler system.
But if you are simplifying your system, expect mistakes in that transition period. If you go from handwriting checks to autopay, you’re bound to make a mistake. Perhaps you miss a bill or you pay the wrong amount.
Whenever possible, put in safeguards. If you fear an overdraft, get an account with overdraft protection. I use Ally Bank and they have free overdraft protection. If we draw too much from checking, they just transfer money out of savings. If there isn’t enough in savings, they actually offer a short term loan to cover you up to $250 (it’s called CoverDraft).
If you find yourself making the same mistakes frequently (as in more than once a year), review what you’re doing and what you need to set up so it never happens again.
Mistakes can and will happen, but ensure they only happen once.
Time Wasted Chasing “More”
This one is the harder of the two “time wasters” to identify. It’s because our default state is that more is better, especially when it comes to money.
For eons, people believed they could behave badly if it was in the pursuit of more money. And they did.
And when we are young, we had no money. We couldn’t buy anything. We couldn’t invest in anything. We simply needed to work to earn more so that we could control our future.
There is a turning point when you are doing well and pushing for more doesn’t yield significantly more happiness. While I don’t buy the argument that happiness doesn’t increase after a certain point (especially when that point is determined to be a single number, like $75,000 a year, for everyone in every situation), I don’t think it increases as quickly as you’d expect.
How do we avoid chasing more?
Avoid “Shiny Object” Distractions
The world exists to distract you from your goals.
The world does this not because it hates you but because it has selfish motives. It wants you to achieve its goals.
The news shares sensational and volatile news because it wants you to pay attention. Your attention sells advertising.
You don’t notice when a car uses its blinker and merges without incident. But people will slow down to watch an accident, despite not knowing a single person involved!
The same is true for the stock market. The stock market needs activity – it’s how people get paid. If you buy and hold stock for decades, you are invisible and not profitable.
Activity generates commissions. Even with no commission brokers, the order flow is valuable and can be monetized. They need action and people who are scared or excited, any kind of emotion away from baseline, will take action. And that activity generates commissions.
There will always be something enticing you to put your money in. A new investment idea, an angel investment, new get rich quick scheme, cryptocurrencies, a friend’s new business venture, a multi-level marketing scheme — something.
Avoid them at all costs. They will only steal your time and likely some of your money as well.
Your Money Is Best Left Mostly Ignored
Money is like air. When you don’t have enough, you feel suffocated. When you have enough, you are at peace. When you get more than enough, it can be oppressive pressure.
Yes – too much money, especially too quickly, can be oppressive. Winning a lump sum without the financial and emotional skills to manage it is very dangerous. Think of the tragic story of so many lottery winners.
But if you manage your money right, you will reach a point where your finances will outpace your emotional skills. If you amass just a $500,000 portfolio and the stock market falls 2%, that’s a $10,000 paper loss. And that’ll happen a lot each year!
If the market is down 20% in a year, that’s $100,000. That will make you feel physically ill.
But that happens routinely when you’re older. Those fluctuations are part of the process (here is how I cope with massive stock swings like that) but looking at it can push you to making bad decisions.
That’s what I mean by ignoring it – ignore the swings. Ignore the news. Don’t panic.
Instead, you should have a plan, stick to the plan, and don’t take action emotionally. This means potentially ignoring it so you don’t make moves you’ll regret later.
Don’t mess with it unless your plan calls for it.
Don’t Forget to Live Your Life
As Warren Buffett once said – “It’s insane to risk what you have for something you don’t need.”
This all goes back to the point of a simple automated system – you won’t waste your precious time on it.
When we focus on money, it’s easy to lose sight of the important things in our lives. It’s like The One Ring. Money is enchanting and intoxicated. Making it is fun and thrilling – the endorphins are fantastic.
But it comes at a cost.
The cost is the important parts of your life that will endure once you have enough money.
We see this often with people who are married to their work and don’t spend enough time with their family. They grow up not really knowing their kids and retire having money but no relationship.
They saw themselves as the primary breadwinner and threw themselves into that role… but that’s not how people, especially kids, think. People don’t remember what you’ve done for them, they only remember how you made them feel. (a paraphrase of a quote often attributed to Maya Angelou)
When I worked at Northrop Grumman, I was part of a leadership development program that had fifty-ish of us spend a weekend at Mt. Catoctin Park for a weekend retreat. On one of those days, a VP came to speak to us in the morning. He spoke about being a leader, how he left his daughter’s wedding (the previous night) to do something work related, how he was missing a brunch during his talk to us, but that’s why leadership is important – his commitment to the company and the mission was paramount.
The message he thought he was sending us was not the message I received. I was in my early 20s at the time and I only saw what I did not want to become. I’m not leaving my daughter’s wedding (or the brunch the next day) to give a talk about anything to anyone for “work.”
I’m glad there are people as devoted to their work as he is. We need those folks in the world and I respect him for it… but it wasn’t for me.
There will come a time when the money is enough and the time is not, what will you think of your choices then?
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Susan Gaffney Olivadoti says
You’re a very wise man, Jim Wang! We appreciate your insight!
Jim Wang says
Awww thank you Susan! 🙂
I don’t automate credit card bill payments. I think it’s worth the time to review expenditures for fraud, quickly see if I still want certain subscriptions and get a quick sense of whether our categories of expenses are getting out-of-whack. We primarily use one card (Fidelity with 2% back on any purchase autopaid to our sweep account) to keep things simple.
Jim Wang says
I agree with you, it’s important to review your statements but I argue that it’s not important to press the buttons to pay it. 🙂