A recent comment on a Bogleheads thread has me reflecting on what it means to identify and get the “big rocks” correct when it comes to personal finance. But first some context:
Bogleheads, as many of you probably know, is the message board where personal finance fanatics and John Bogle acolytes get together to discuss everything from backdoor Roth IRA conversions to frugal vacations and best-tasting IPAs. I found it when I was trying to decide whether to invest with Ameriprise (and I’m glad I didn’t – more on that in a future post.) And if you’re not a regular reader there, and care as much about your finances as I do, then you should be!
But, in any event, the point of this particular thread that I recently came across was that if you don’t get the “big rocks” in your life correct, then nothing else – from your asset allocation to choice of investments – will move the needle when it comes to your finances. So what do I consider those “big rocks” to be in my life? Here are my top five:
Divorce is expensive, and living with somebody that you see eye-to-eye with over spending, savings goals, and lifestyle choices is not fun. I’m lucky that my wife and I are on the same page about everything we are doing, from raising and educating our children to prioritizing savings and living below our means. But many couples are not. In my view, this is the most important pillar to getting your personal finances in order. Happy wife/spouse, happy life!
Housing costs are typically a family’s largest monthly expense, so make sure you aren’t overextending yourself by buying (or renting) a house that you can’t afford. Easier said than done in most parts of the country right now, but leaving float in your monthly budget is critical for meeting your other savings goals. That being said, purchasing home is almost universally considered the essential underpinning for building wealth. Rents in most major metropolitan areas have surged, and the forced savings and tax benefits of home ownership can’t and shouldn’t be ignored. The conventional wisdom is that you should spend no more than 25 percent of your gross income on housing; my goal is to spend no more than that as a function of my net income (and less if I can).
If you’re here, and you’re a lawyer, you’ve probably got this one right. You went to college and then graduate school and you’ve turbocharged your earning potential. Yes, there are plenty of stories out there of janitors and other public servants retiring as millionaires. But by giving yourself the opportunity to access higher paying jobs – if you can avoid the personal finance pitfalls they can throw your way – you’ve given yourself the ability to save more aggressively. I believe strongly that education is the key to moving up in the world, provided you do it responsibly. So don’t take out $300,000 in debt to go to law school, but be smart and realistic about the value your degrees can provide you in the job market.
Find a job that you like, and then work really hard at it. Also easier said than done, but I read an article once describing a retired Harvard Business School alum’s advice for a modern-day graduating class and one thing he said stuck with me: “pick an industry, and you’ll find the right job.” I agree with this approach and, in general, I think sticking to a straight path in terms of an industry will increase the opportunities available to you, give you credibility in the industry you’re focused on, and in general lead to good outcomes. Although I am guilty of not following that advice at times, for the majority of my career, both prior to law school and as an attorney, I have worked in one industry, and I plan to stick with it even if I do change employers in the future.
Your Savings Rate (as a percentage of your income)
I think I saved the most important of these rocks for last. Although I do have an asset allocation, my overarching investing philosophy right now (with decades to go before retirement) is that how much I save is more important than where I save. Of course, putting all of my savings in cash wouldn’t be a great idea, but whether my asset allocation is 75/25 or 70/30 is less critical to me than automating my monthly savings, maxing out my tax-advantaged savings accounts, and generally trying to save as many dollars as possible per month.
I am by no means perfect, by any stretch of the imagination, but I think I have done a good job identifying what I believe are the “big rocks” in my life and, hopefully, staying true to them, taking care of them, and having faith that they will bring me and my family long-term success, financially and otherwise.
What are your “big rocks?” Are they similar to mine? If not, why?