We invest for our future and our family’s future, but why? We are building wealth for a greater purpose, to buy ourselves financial freedom, but to what point?
Some obsess about money while others are oblivious to it. We try to live a calm and relaxed life without focusing on money too much while still looking at our finances enough to optimize it properly. Just like with anything, there is a balance to be found.
If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed. – Edmund Burke
Being completely blind when it comes to your finances, might get you to miss a few payments, pay interest you could avoid, and miss out on proper investment returns. On the other hand, if you are obsessed with your financials, you might make bad investments decisions, or miss out on more productive opportunities because of all the time you spend looking at your finances.
The financially blind might:
- Overpay almost everything he buys since he is never price-shopping.
- Be late on credit card payments, or worse, keep a balance and pay interest.
- Invest in products most marketed to him such as actively-managed mutual funds and end up paying high management fees on his investments.
- Overpay his taxes.
On the other hand, the financially obsessed might:
- Spend hours couponing to save $1 on a product he does not need.
- Get emotional with his investments since he is following news and looking at price movements every day and end up making bad decisions.
- Spend hours looking at his investments instead of enjoying life.
- Spend sleepless nights and stress about small corrections in the markets.
The secret here is to find a balance. Even if finances are not your favorite subject, you do not want to completely close your eyes to them. And on the other hand, if you cannot get enough of it, you do not want to obsess about your finances to a point where it takes away from your quality of life. In the end, it’s just money.
Italian economist Vilfredo Pareto introduced the Pareto’s Principle back in 1906, better known as the 80/20 Rule. The 80/20 Rule means that in any situation, 20 percent of the inputs or activities are responsible for 80 percent of the outcomes or results. This is a great way to organize your life and dedicate your energy to the most productive tasks at hand.
This can be applied to so many things in personal finances. For example, you can get 80% of the rewards focusing on only the top 20% credit card offers. Travel hacking does not need to be complicated if you focus on what is really worth your time. You can also get 80% of the savings with 20% of the price-shopping efforts, and so on… Trying to optimize every single aspect of your life can be tiring (if not impossible) so focusing on what is most important is crucial.
In a given month, our time can be allocated to various “tasks” like looking up the current credit card offers or reviewing your investments. We structure these tasks to optimize our own time, stay efficient and avoid going crazy over finances.
Credit card offers
These activities should not take more than an evening. We check deals sites and a few bank websites to compare current credit card offers less than once a month and apply for the best ones. We also follow a few travel blogs and track our current cards but do not spend more than an hour per month on travel hacking.
When it comes to shopping, we shop for our groceries once a week and buy most items on sale. We do not use coupons but rather use credit cards to maximize our rewards and lookout for in-store promotions. We try to avoid the convenient, higher-margin, grocers and rather shop at discount stores for most of our basics. Time-wise, we are pretty efficient in a grocery store and know where the good stuff is located.
The secret is to only shop outside the aisles. You can quickly get all your produce, milk, meats, fish, bread, and get all your shopping done relatively quickly. Most grocery stores are configured that way. All the processed food is in the aisles, shopping the outside will keep you healthier and the save you a lot of money.
The other shopping we do is done online or at particular stores when we know exactly what we are looking for. In both scenarios, we price-shop quickly online to make sure we are getting the best deal. Clothes or everyday essentials can always be found on sale.
Once a month, we check our investments, review our contributions, and adjust our asset allocation in an hour or so. Whenever we have some investment play we want to do with a small portion of our portfolio, we might spend a few extra hours researching a certain stock but this is not part of our 80/20, that is just for fun.
Most of our gains come from boring investments which never need additional research or even frequent price checks; index funds. Our 20 is mainly to keep our portfolio at our desired asset allocation and make sure we contribute enough to reach our goals. Since we want to reach financial freedom in less than 10 years, we are trying to invest at least 50% of our income.
We also keep an eye on all our bills to make sure everything is in order. With apps like Mint or Personal Capital, we verify all our expenses to make sure we did not overpay anything. We review our bills to make sure everything is up to date and call any provider that might have overcharged us.
We end up saving a lot on our cell phone, internet, and other recurring bills simply by being aware of what they charge us every month.
Credit card payments
Finally, we set up all our credit card bill payments to pay the full balances and never pay a cent in interest. This is a crucial step in our financial plan. There are no rewards worth paying 20% interest on credit cards.
The minimum payment is not the required payment to avoid interest charges. By the end of each month, we pay our bills in full and on time by electronic bill payment through our bank.
Stay organized and once everything is in place, it should not take much of your time to optimize your finances and spend more of your time doing things you truly enjoy. Financial freedom is attainable, you simply need the right mindset for it.