Compound Interest and Habits

Eng-WEBHabits – both good and bad – are something we all have. They’re part of our everyday routines, something we often do without any thought. Yet, we can all benefit by giving our habits more thought. As a financial planner, I love the idea that there’s a correlation between compound interest and habits.

“Habits are the compound interest of self-improvement,” wrote James Clear in his best-selling book, Atomic Habits*.

This idea really resonates with me.

I understand the benefits  of how investments compound interest (we essentially earn interest on our interest). The opposite is also true. If we get into debt and owe interest on the interest that is owed, that negative compounding is a detriment.

Good and bad habits work the same way. Years ago, I was in the habit of eating a bag of chips every day at lunch. I love potato chips, but eating them daily wasn’t a great habit. A good friend knew I was trying to lose some weight, and he suggested I substitute the chips with a piece of fruit. It was a small change, but a significant one for me.

The success that came with that small adjustment led me to rethink my daily soda with lunch, as well. Each small change moved me closer to being the healthier person I wanted to become.

“Success is the product of daily habits, not once-in-a-lifetime transformations.” — James Clear

Consistency

Once you decide to make a change, how do you make it stick? Consistency. Making the change automatic and trying not to miss more than two times in a row are two things that can help.

Let’s use a savings example. I have a friend who had never invested in the stock market. When she began a new job years ago that offered a 401K plan, I encouraged her to have automatic contributions withdrawn from her paychecks. Fast forward about 20 years, and she’d accumulated more than $250,000. Even though she did take some money out of the account along the way, she had still managed to save a nice sum of money for retirement.

We’re all human. We all get off track from time to time. Sometimes we miss deadlines, avoid workouts, or skip saving contributions. Give yourself room to be human. Know that you will have setbacks, and know that you can rebound. Commit to getting back at it as soon as possible.

The biggest rewards come when you have been consistent over long periods of time and your habits compound.

*When you  purchase books from Bookshop.org, a portion of the proceeds supports the independent bookstores and authors listed on the site.
By |2021-08-16T12:43:20-07:00August 9th, 2021|Financial Planning|

Begin a Money Conversation

McCann-WEBTeaching children about money management will help set them on the right path to financial independence and success. Of course, it’s not as easy as it sounds to begin a money conversation. As a parent, I understand how challenging it can be to impart ideas and wisdom on your own kids. Let’s face it, most young people are inclined to take advice from anyone but their parents. Factor in that many people don’t feel qualified to teach financial topics, and the task becomes even more daunting.

The good news is there are many resources and people to assist in you.

As a long-time and active volunteer for Scouts BSA, one of my regular roles has been as a Personal Management Merit Badge counselor. This badge addresses elements like creating a budget, knowing the difference between saving and investing, and exploring and evaluating careers. The curriculum was developed by Brent Neiser, CFP® and Eagle Scout. It’s a challenging merit badge that takes several months to complete.

I’ve learned a couple of interesting things by teaching the course. First, young people are often eager to talk about money if you approach it in a way that is relatable. Second, they tend to pick up on key concepts more quickly than you might expect.

Here are a few tips to begin a money conversation with a child or young adult in your life.

  • Start with the basics. That means introducing the importance of living within your means. Earning a weekly or monthly allowance for completing chores is a great start. When a child manages an allowance, he or she begins to understand how to balance wants with cash flow.
  • Make budgeting real and personal, not theoretical. Help your child create a budget. Older children can use a simple spread sheet to track spending, saving, investing and charitable giving. Young ones can use labeled envelopes or jars for each category.
  • Show that money can grow over time. Use this simple chart to show how a person who invests $5,000 a year starting at age 25 can end up with nearly $825,000 by age 65, while one who waits until age 50 to invest $5,000 a year would have just $128,000. Then show them a picture of what they could buy with the $697,000 difference. (e.g, a new Tesla Roadster costs about $200,000; they could buy several.)

Our advisors often facilitate family discussions about money. It’s one of our Core Client Services. That’s the value of Perspective.

By |2021-07-15T10:32:04-07:00July 26th, 2021|Financial Planning|

Learning to Live with Uncertainty

Eng-WEBA good friend and client of mine used to live in Somalia. She recently shared a great story with me about a trip she took years ago with her baby daughter. It’s a fabulous lesson about learning to live with uncertainty.

They had boarded a flight in Somalia, and all the seats were already taken. Many more passengers were standing in the aisle. They were instructed to deplane and line up on the tarmac. Then, they were told the seats would be decided by a foot race.

Passengers had to run, and those who did not run fast enough were not allowed back on the plane. My client ran the race with her daughter on her back!

We all live with uncertainty. Every day, things happen that are beyond our control. This story illustrates one of the more extreme situations that most of us will never have to experience. In the United States, we have grown accustomed to getting a seat on the airplane if we book a flight. We generally have a car available to us if we reserve a rental. We enjoy a high degree of certainty that the meal we order at a restaurant will arrive the way we like it.

All this suits me. I’m a person who loves structure and routine. Learning to live with uncertainty isn’t something that comes naturally to me.

Yet, out of necessity, I have learned to embrace change and develop the ability to adapt. It’s inherent in the career I chose. Dealing with financial markets, as well as an ever-changing economic and political landscape, has forced me to learn to live with uncertainty.

Experience is a great teacher. The more experiences we have in life, the more comfortable we can become with uncertainty.

My friend has lived through many of the ups and downs of life and the financial markets. As a client of 20 years, she has adapted well, and it has been rewarding for her and her family. Just like when she adapted to that situation in Somalia and was awarded a seat on the airplane.

 

By |2021-04-15T11:49:07-07:00April 19th, 2021|Client Stories, Current Affairs, Financial Planning|

Embrace Good Habits Formed During Lockdown

Being locked down for a year, our habits changed dramatically. Some engrained habits were extinguished, and many new habits were formed. For me, going out for a nice dinner every weekend evolved into becoming a more adventurous cook and setting a nice table for dinner. I’ve enjoyed it, and I‘ve saved money. Going forward, I intend to embrace good habits formed during lockdown.

Lupe Camargo - embrace good habits formed during lockdown

Photo by Mark Skalny

What good habits did you develop during the COVID lockdown?

As we slowly return to our pre-COVID lives, let’s make a conscious decision to hold on to those good habits. Here are a few that many people experienced.

  • We found new ways to have fun without spending a lot of money. Vacations were cancelled, dining out decreased, and movie night moved to the couch. We found new ways to entertain ourselves; in many cases we rediscovered more simple, less expensive options to be just as satisfying.
  • We began or renewed a commitment to build an emergency reserve of savings. Few could have anticipated what hit us, including the devastating loss of lives and livelihoods. It was a stark reminder of why we all need a safety net in our unpredictable world. Those who were able began saving more of their income for emergencies.

Americans Save Money Like Never Before

By mid-year 2020, American households were putting a record 33.5 percent of monthly income into savings, according to Commerce Department figures. Before the pandemic, that figure was 7.5 percent. Let’s hope they embrace good habits formed during lockdown and continue to save.

  • We resolved to stay connected to the people in our lives, through whatever mode available. As social beings, we need other people to survive. The pandemic forced us to step out of our comfort zones to reach out. Many of us learned technology is a great way to connect with the essential people in our lives when we can’t do so in person.
  • We learned to focus on self-care. Paying attention to our own wellness is critical. Physical well-being through good nutrition and exercise is important. Protecting our mental and emotional health is vital, as well. Many of us spent more time outdoors, de-stressing and reflecting. Others realized the solace and personal empowerment that comes from reaching out for help during tough times.

Difficult times remind us that we can’t always control the direction life takes. Yet, if we pay attention, such times also help us rediscover what we can control. Embracing that knowledge can have a tremendous impact on our happiness and quality of life, no matter what obstacles arise.

By |2021-03-10T12:42:28-07:00March 15th, 2021|Current Affairs, Financial Planning|