After you have done any activity for several consecutive years, whether its a hobby, sport, etc., you begin to learn not only about the thing that you are doing, but about yourself. The same is true for investing. I’ve learned more about myself in the past nine months and what it takes for me to be a good investor than I have in the previous three years. As a result, there’s one simple lesson that took me years to learn that you can learn in under 10 minutes.
Investing is a long-term strategy (which is why you need to respond appropriate to the volatility in the stock market), and a big part of a successful wealth building strategy is contributing as much as possible. It’s great to focus on returns, but your future assets are going to be worth so much more if you can invest an extra $1,000 each year, or month. If you are looking for ways to maximize your future assets (which is what everyone should be seeking), there’s one simple thing that you can do – and it’s really easy to do.
Why it Took Me So Long to Realize this Simple Trick
Since I am a personal finance blogger, I learn a lot of personal finance information from my peers. I not only read other blogs for ideas, but chat with pf bloggers, meet up at conferences, and so on. You get the idea.
One unintended consequence is that I tend to have a high view of myself and my diligence to manage my money effectively.
I wouldn’t say that I’m arrogant, but when I look at myself with my financial lens, here’s what I see:
- 28 years old
- No student loans
- No recurring credit card debt (in other words, it gets paid off each month, which is the only way to use credit cards especially for young adults)
- dual income
- no kids (unless this little one counts)
- investing in retirement (here’s a look at my simple retirement plan)
- Appreciating asset (Condo) with a fixed rate mortgage (I love how much our home helps our wealth building skills)
Overall, our financial position looks pretty good, right? Any trained professional would agree.
Why You Shouldn’t Be Too Confident in Your Skills
The problem with this over-confident mindset is that it leads to several deviances from our goal – which is to maximize our wealth building, or increase our net worth. Instead of focusing on our end goal, because of my inflated ego, I convince myself of things that I normally wouldn’t agree to. I tell myself things like:
“I’ve already saved more than my friends who are older than me… I don’t need to max out my Roth IRA this year.”
“We just bought a house, and that is a big investment, it’d be too hard to invest more money right now.”
Because I was framing these money decisions within a context of confidence about our financial position, I was letting myself ask the wrong question when it comes to investing. I wasn’t asking how much can I contribute, but instead how much is enough.
Financial Position vs Activity
In my day job, I manage the finances for a $3 million nonprofit organization. By all standards, this is a medium-sized organization, if not small – but $3M is nothing to sneeze at. And any finance professional will tell you that there’s a handful of metrics to determine an organization or company’s financial stability or success. These metrics usually start with (1) financial activity (i.e. how much has the organization earned/raised and spent in this time period; another way of saying this is profit and loss) and (2) the balance sheet or financial position (i.e. what do the assets look like right now). The very fact that I defined the organization’s size by its operating budget should be confirmation that #1 is a defining metric.
In hindsight, the real reason for my deviance from my end goal is that I focused too much on my net worth (balance sheet) and ignored the activity statement. In other words, it’s not just how much money you’ve already saved or invested that is important, but also how much of your earnings you will continue to invest.Don't let a healthy balance sheet give you a big head. #BalanceSheetANDActivity #ThisYearMatters #StayDiligent Click To Tweet
The Resulting Problem: Not Investing Enough
The resulting problem from holding this inflated view of myself, which again stemmed out of focusing too much on what we’ve accomplished than what we are doing this year, is that we were not investing enough.
Let me say that again.
This mindset led us to invest not enough.
I used to be diligent about our investment strategy, which looked something like this:
- Contribute to our employer-sponsored retirement plans to receive the full max
- Max out our Roth IRAs
- If any extra, split between real estate investing, more money in employer-sponsored plan, or taxable account.
Instead, we haven’t maxed out our Roth IRAs since 2013 and it’s going to be really hard to do in 2015.
Lesson Learned: Why Automate Your Investments
Through all of this, I’ve learned one simple lesson: it’s much easier to stick to your plan when you automate your investments. Automating your investments is good for many reasons:
- It ensures that you do it – because, well, it’s automatic. There’s no forgetting about it or delaying it.
- It offers you dollar cost averaging – which is a good thing by any standard.
- It teaches you to live on the rest of your income. By having a certain amount automatically deducted (whether it’s from your paycheck or bank account), you don’t count on that money. Instead, you learn to budget and/or live off the rest of your money.
- It prioritizes investing.
By automating your contributions and teaching you to live off the rest, it ultimately re-prioritizes investing for you. It takes out all of the emotion or guess work and guarantees that you are on track for your financial goals.
Three Steps to Automate Your Investments
If you are unsure how to automate your investments, it’s really quite simple. The first thing you can do is to determine how much money you want to invest. Once you determine not only how much you can afford to live without, but also how much money you want to put to use to build your nest egg, you can then move on to steps two and three.
The second thing you can do is to sign up for your employer-sponsored retirement plan if you haven’t already. Every employer will offer you a form to designate how much you would like to withhold from your paycheck to put into your investment account. This is so easy. I’ve done it with my paycheck, and we’ll soon be setting up Mrs. 20s (now that she will be eligible for a match starting in October). Because of the tax advantages, this should be your first option.
The third thing you can do is to set up another investment account and enable automatic contributions (i.e. brokerage account). I guarantee you that every investment account will have an option to make automatic contributions from your bank account – and if they don’t, you shouldn’t invest there. You will also likely want to set up a Roth IRA in this investment account to take advantage of tax-free growth. You can do this at a number of different places. I use Fidelity, but for someone looking for a easy-to-manage and low-cost alternative, Betterment is a great option. You can control your portfolio with the slide of a bar. How simple is that!
And that’s the secret to speeding up your wealth building. It took me several years to learn, but I have finally learned that regardless of how diligent I think I am – I stick to my plan better when I automate my investments.