- I work with high income tech workers, and there are three financial tips they hate to hear.
- I always recommend watching your spending. Earning more should mean saving more.
- I recommend a simple investment strategy over a fad strategy, and get rich over time, not overnight.
- Read more stories from Personal Finance Insider.
After spending over a decade working with retirees who have accumulated more money than they will ever need in their lifetime, I have moved on to working with young professionals. Helping clients navigate their path to financial independence when they are starting from scratch comes with challenges, but it’s hugely rewarding.
I often tell clients that one of my jobs is to defend their and me future. Part of that job is telling them things they might not want to hear. Hate them or love them, here are my top three tips that get the most perspective. If you are serious about a path to financial independence, keep them in mind!
1. Watch your spending
My clients are high income tech employees who receive generous cash bonuses and stock compensation in addition to their base salary. They are often the first person in their family to make that much money, so they have to use their income to build wealth.
One of the first exercises I do with clients is to review their cash flow. We analyze their spending in detail so they can see where their money is going. We also calculate the percentage of their income they are saving and determine how much they need to save to meet their financial goals. Yes, that part gets personal (and maybe uncomfortable). Although I get a lot of resistance with this exercise, I feel like it is the most important step in the financial planning process.
It is essential to find a balance between enjoying your life today and saving for your future. There is a direct correlation between how much of your income you save and how long you can retire. The most effective way to close this gap is to monitor your spending.
Watching your spending doesn’t mean giving up everything you love. Take the time to think about what’s really important to you and see if your spending matches your values. Pay off your debts to reduce your fixed expenses. Anticipate non-recurring events or unforeseen expenses so they don’t ruin your budget. Get used to living on your base salary and use bonuses or stock compensation to accelerate progress towards your long-term goals.
2. Get rich slowly
You may have heard the expression “building wealth is a marathon, not a sprint”. Contrary to popular belief, an overwhelming the majority of millionaires are self-taught. You don’t need multiple six-figure incomes to become a millionaire.
In the absence of inheritance or luck in the lottery, the key to successfully building wealth lies in one word: discipline. Even if you are lucky enough to receive a life-changing windfall, a lack of discipline will quickly lead you down the road to bankruptcy.
Financial discipline, like any other type of discipline, requires consistent habits and behaviors over time. It is essential to set goals and have a plan to achieve those goals. Prioritize yourself first and save at least 20% of your income. Start saving early to take advantage of compound interest. Think about the small changes you can make over time to bridge the gap between where you are now and where you want to be. Finally, understand that there are no quick fixes when it comes to investing.
My high school orchestra teacher always said, “There is no shortcut to success. This phrase is true about many aspects of life, including your investments. A seemingly good investment decision in the short term will not make up for the lack of discipline in the long term, which brings me to my final tip.
3. Keep it simple
I have had countless clients asking me about out-of-the-box investing strategies in the hopes of generating quick and easy returns. Often, clients do not fully understand what they are getting into. They believe that these investment strategies will earn more than the stock market or compensate for the fact that they are not saving enough.
The idea that building or maintaining wealth requires investments in alternative or exotic investments is a myth. Ben Carlson, Warren Buffett and other investment experts compared the performance of simple or “lazy” wallets to some of the more complicated and expensive investment strategies and found that complex strategies have failed to beat low cost mutual funds or exchange traded funds over multiple time periods. A simple and diversified portfolio can be just as (if not more) effective in the long run when it comes to investing.
The keep-it-simple philosophy also applies to bank accounts, investment accounts and credit cards. I have worked with couples who have (and frequently use) dozens of bank accounts and credit cards. As the accounts pile up, it becomes more and more difficult to keep track of their spending and saving habits. It’s also easy to overdraft a checking account or forget about a credit card payment.
Some clients have investment accounts with more than one custodian. All of these accounts add unnecessary complexity to your life and make managing your finances even more difficult. While there is no one-size-fits-all solution for managing accounts, I recommend that you take a look at your accounts to see how you can consolidate and simplify your life. Also, think twice before opening a new account.
Initially, many of my clients don’t like to hear my top three tips. However, after following my advice and seeing the results over time, they become believers. The road to financial independence is not rocket science. Watching your spending, getting rich slowly, and keeping it simple can help you get there sooner than you think.