In her farewell column in April, Diane Harris, editor of Money Magazine and a long-time colleague and friend, concluded with a thought that I have long espoused. “At its core, this stuff isn’t that hard,” she wrote of managing personal money affairs and achieving long-term financial security.
Harris offered three tips, and wrote, “Honestly, if you do nothing but this, you’ll be okay.” Here are her tips:
Keep three months of living expenses in a safe, easily accessed account for use when life throws you a curveball.
Automate retirement savings and boost contributions by one percentage point every time you get a raise.
Weigh every purchase against your financial goals, and favor spending on experiences (which bring more joy) over things.
These are large baskets. You still would have to decide which curveballs are so tough that they justify dipping into the emergency fund. Even when you automate saving you must decide where to invest the money. And weighing purchases against savings goals is almost by definition a moving target. Sometimes the same purchase will make sense to you and other times it won’t.
But I can’t argue with the simplicity of this approach. In teaching students to understand or helping employees to reach the best outcomes Harris’s three-step process is a good starting point. No less a light than Warren Buffett counsels to keep it simple in the financial world—and he has done pretty well for himself. And as Einstein observed, simple formulas sometimes pack the most punch.
Precise formulas are too narrow to apply to everyone. Individuals need to be able to sort things out, and that’s where financial education has most impact. It gives people the ability to make smart money decisions, guided by simple principles. To that end, I’d add a few more simple guidelines:
Spend less than you earn every month of the year until you are done earning. Exceptions will be investments in yourself, like education, or wealth builders like a home.
Save 15% of every dime that comes your way via paycheck, bonus, gift, raffle or lotto drawing—from your first lawn cutting or babysitting jobs to the day you retire. Live on what’s left—the 85%. This is also known as paying yourself first.
Always contribute enough to get the full company match in an employer savings plan, and stick to low-cost index funds, ETFs, or target-date mutual funds for worry-free growth.
These simple steps are about as foolproof as the money world offers, and assuming a gainful career can by themselves deliver long-term financial security to your students or workers.