By Michael Donahoe, CFP®
Many of us have learned how to manage our finances through trial and error, while many more have never quite gotten the hang of it. No matter where you are on the scale of financial success, wise money management is a journey that doesn’t happen overnight.
As a CERTIFIED FINANCIAL PLANNER™ professional with 10 years of industry experience, I’ve learned my fair share of financial lessons throughout my career—and many of them I wish I’d known sooner. Here are the top four financial lessons I wish I had learned when I was younger.
1. The Power of Autopilot
One of the biggest financial lessons I’ve learned over the years is the power of automating good financial habits. This includes things like automatic weekly transfers to savings or investment accounts and setting up full funding of 401(k) plans and other retirement contributions. By putting these habits on autopilot, they are much more likely to be implemented since you won’t have to constantly remind yourself to do it.
Over time, consistent saving and investing will add up significantly through the power of compound interest. And it all will happen in the background while you’re able to focus on other things.
2. Market Downturns Are Temporary
As scary as market downturns can be, they are temporary. Not only that, they are also normal economic events, with drops of 10% happening about once a year and drops of 20% happening every 6 years or so. (1)
Because of this, it’s important not to time the market when making investment decisions. The fact of the matter is that there is no way to predict short-term fluctuations with enough accuracy to consistently make the right decision about when to buy and when to sell. Staying in the market, even through downturns, is a much better choice when trying to build long-term wealth.
Historically, though it has had many ups and downs, the market has always rebounded over time. That’s why it’s so important to trust the market and avoid temptations to time it, instead letting time be your ally when growing your investments.
3. Avoid Stock Picking
Like picking the winning lottery numbers, the odds of picking a winning stock are pretty low, especially if you haven’t thoroughly researched your options.
In stock picking, a single stock is chosen with hopes that it’s the next big thing, like the meme-stock investments in AMC and GameStop. That’s a lot of faith to put into just one company or product. And like AMC and GameStop, there is a very high possibility that it will turn out to be a dud and your investment will lose a significant amount with no other investments to cushion the blow.
Investing in a properly diversified portfolio is a much better choice when it comes to building enduring wealth and making wise money management decisions. In a diversified approach, the volatility of one investment will not necessarily tank the performance of your overall portfolio. With diversification, you will have room to lose money on a single risky investment because other, stronger-performing assets can compensate for the loss.
4. Don’t Keep Up With the Joneses
Consumer culture is the enemy of long-term wealth development. It’s very common for people to buy things they don’t need to impress people they don’t like. This is the opposite of what it means to manage your money in a wise way. Instead, don’t feel pressure to keep up with the Joneses.
In today’s social-media-driven age, it can be tempting to compare yourself to your peers, feeling pressure to surround yourself with nice furniture, designer clothes, expensive cars, grand vacations, and the latest technology. But these items will only set you back in your quest for long-term affluence, especially if they were funded with credit you can’t afford to pay off.
Financial success is often built from doing the things that other people don’t want to do: tracking expenses, minimizing your spending, saving and investing regularly, etc. These small habits, when done consistently over time, will generate compounding growth and provide the framework you need for prosperity.
Take the Next Step
If you’re ready to take the next step in your journey toward wise money management and building long-term wealth, we would love to hear from you! At Harvest Asset Group, we strive to provide our clients with the tools and resources they need to create a confident financial future. To get started, call us at (207) 775-1151 or email us at info@harvestassetgroup.com.
About Michael
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.
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(1) https://www.capitalgroup.com/individual/planning/market-fluctuations/past-market-declines.html
