5 Secrets You Can Use to Achieve Long-Term Success - Part 2

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In the first part of this article, we looked at how acknowledging our emotional/cognitive limitations is a crucial, if perhaps non-intuitive part of your long-term financial success. I also explained why I disagree with financial “gurus” and much of their advice on buying homes and prepaying mortgages. In this part, we start with another non-intuitive but compelling factor to your success, follow with a system/process “secret,” and conclude with how and why opening your own practice can be a critical part of your roadmap to success.

3. Stay Healthy

The financial experts’ view:

This is a non-intuitive financial “secret,” which may be why I couldn’t find much about it from Orman or Ramsey. However, that lack of attention from these “gurus” belies its importance.

My view:

Your health is perhaps the single most important basis for long-term financial success, though possibly the most overlooked. Sudden catastrophic medical expenses bankrupt many Americans each year. In addition, imagine being wealthy but having an incurable debilitating disease. Wouldn’t you trade your entire fortune for perfect health? You can’t avoid all risk of severe illness or accidents, but you can improve your odds. Research shows that moderate physical activity can help even someone in her 50s have the heart of someone in her 30s.

What you shouldn’t do:

  • Don’t always park as close as possible to where you’re going (unless it’s an unsafe area)
  • Don’t use the elevator to go up 1, 2, or 3 floors (unless you have a medical condition that requires it)

Do this instead:

  • Eat as healthy as you can
  • Embrace physical effort rather than avoiding it; e.g. park at the far edge of the lot, use stairs, etc.
  • Make a habit of walking, running, and/or working out

4. Systematize, Automate, and Minimize Fees

The financial experts’ view:

One thing financial gurus get right is the old saw, “Pay yourself first.” Automatic deductions from your checking account into low-fee investments like index-based mutual funds as soon as your paycheck comes in force you to live on less than you make. Even better, you only need to make a single “set and forget” decision to do this.

Dave Ramsey suggests you first create a $1000 cushion for emergencies, then pay off all your debt, then set aside 15% of your pay for retirement. Suze Orman says to build a cash cushion of 8-12 months of your income, then pay off debt, then save 10-15% of your income for retirement.

My view:

I agree with the “gurus” that you should build up an emergency fund, but disagree that a one-size-fits-all number exists for its size. If you’re a self-employed single parent, with a huge responsibility and not much of a safety net, target at least 12 months’ worth of spending. I say “spending” rather than income, because if your income goes away, so do taxes and investing. If you have no dependents and/or your spouse gets a salary, 8 months may be enough. If you’re married without dependents and you both get salaries, you could get away with as little as 4 months’ spending.

How about the 10-15% recommendation for retirement savings? If you’re in your 20s, that may be enough for a reasonable retirement, assuming nothing really bad happens to your investments. I’d suggest 20-25% is much better, unless you’re in your 40s or later and have next to nothing saved. In that scenario, talk with a financial planner and expect to hear you need to increase your savings rate to 30-40%, or delay your retirement and reduce your expectations.

The above may sound undoable (unless you started straight out of college and never stopped). That’s ok. Whatever your current savings rate, even 0%, add 3% each year. In addition, each time you score a big raise or make a much higher profit, divert half your newfound income to investments. A few years of doing this will put you on track.

What you shouldn’t do:

  • Don’t put your entire emergency fund in cash, checking or savings accounts, or even money-market funds earning little or no interest
  • Don’t put off investing money for the future until you’ve built up your full emergency cushion and paid off all your debt
  • Unless you’re incapable of setting up and sticking with an automated investing plan, don’t pay down mortgages faster than required
  • Don’t put off saving for retirement

Do this instead:

  • Invest money in reasonably low-risk taxable investments that return more than inflation; use this for emergencies (e.g., mortgage payments if you lose your income), house down-payment, etc.
  • Pay down credit-card debt (see also my article on getting out of debt)
  • Put enough into retirement savings to score any employer match
  • Fund a Roth IRA (you can access your contributions once the account is 5 years old without penalty or taxes, but don’t do that unless you absolutely have to)
  • Let inflation eat away at the value of the mortgage you owe the bank by not paying any more than your minimum required payments
  • Increase your retirement savings as aggressively as possible without being miserable in the present
  • Wherever you spend significant amounts over time, research the best choice, and then systematize it; e.g., want to buy lunch daily? Find a service that sells healthy pre-made meals for a reasonable price (we use www.TerritoryFoods.com)

5. Open Your Own Business – Like a Therapy Practice

The financial experts’ view:

Dave Ramsey says you should only open a business if you have a passion for it, not just for the higher income. He also says you should start your business part-time, and only quit your day job once your business profit is a large fraction of your salary and is not dependent on a single big client. Suze Orman says that before opening a business you need impeccable credit, experience in the field, basic knowledge operating a business, and enough money to cover a year of business expenses. She also says that the money needs to be above and beyond your personal emergency fund and should not come out of your retirement accounts or home equity.

My view:

Opening your own business means taking reasonable risks. Not everyone is psychologically able and willing to do this. Many prefer the (perceived) safety of a paycheck. There’s nothing wrong with that, but you have to accept that risk and reward go hand in hand. If you won’t take the risk of opening your own business, expect to get smaller rewards. If you prefer the perceived safety of a paycheck, you can stop reading here.

Still with me? Great! The (highly recommended) book, “The Millionaire Next Door” discusses what millionaires have in common. The authors find that first-generation wealth is highly correlated with business ownership. This could be a larger business or a solo (e.g., therapy) practice. The point is to gain control over your financial results, nearly impossible as an employee.

My personal experience matches this. When I finished my PhD in 1992, I owed more than I owned. Sixteen years of employment later, my net worth was in the six figures, but the increase traced back entirely to cash gifts from my parents and my first home unexpectedly doubling in value during the five years I owned it. In comparison, 10 years in business resulted in my net worth rising nearly 10-fold.

So, does being in private practice guarantee financial success? Of course not. Even when you succeed, there will be downturns, sometimes severe. When the federal sequester hit, my income dropped by 80% for nearly a year! However, being your own boss gives you more control. You decide how many hours you’ll work, what services you’ll provide, to what clients, and for what fees. You also keep much more of the value you create than if you have to share it with an employer.

What you shouldn’t do:

  • Don’t open a practice if you’re not willing to take on reasonable risks (read, you have to be ok with and prepare for inevitable slow periods, especially during the build-up phase)
  • Don’t open a practice unless you have enough savings (or income from e.g. a part-time job) to cover your expenses until you build up a sufficient case load
  • Don’t buy into the false duality that you can’t help others and yourself at the same time

Do this instead:

  • Learn as much as you can about how to open and run a practice before actually opening one (but don’t use this as an excuse to put it off forever)
  • Keep expenses as lean as possible, but be willing to invest in things that help you build up the practice and avoid major mistakes (such as business coaching, courses on building a practice, etc.)

The Bottom Line

Long-term financial success is achievable, especially if you’re willing to take reasonable risks and invest in learning how to build a practice and how to run your business and personal finances. If you’re considering hiring a business coach, I’d be honored if you’d reach out to see if we’d be a good fit.

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