Five more things that are more important than rate of return

The most common question I get as a financial planner is “What kind of rate of return can you get for me?”

This question implies that the most important thing to your financial future is the rate of return that you get. A good rate of return is important, but I believe that there are things that are even more important to your financial future than the rate of return you get on your investments.

In yesterday’s blog, I addressed five things that are more important to your financial future than rate of return. Today I will talk about five more things. This is based on a list originally created by Bert Whitehead.

Much is made of the rate of return we receive on our investments. But how important is the rate of return in the context of our overall financial life? Not as important as we might think. Here are my Top Ten Factors Affecting Our Financial Futures, beginning with the most important.

6 – The stability of your relationships. Studies have concluded that there is a correlation between strong interpersonal relationships and financial quality of life.

7 – Making the most of the investment in your house. For most people, their house is one of the most important “investments” they ever make. The tax benefits, the leveraged growth opportunities and the diversification a home provides should be well managed and carefully thought out.

8 – Living within your means. To me, his is one of the most important factors in your future financial success. Everyone should learn to live within their means and take on no “bad” debt. In addition to the financial health benefits of this, there are great mental health and peace-of-mind benefits.

9 – Bad habits and horrible mistakes. Bad investing habits like chasing returns and trying to time the market create poor results for those who practice them. Just remember: if it sounds too good to be true, it probably is.

10 – Protecting yourself from devastating risks. If you are doing everything else right, you can still be devastated by loss of job, significant health issues, untimely death, disabiltiy, liability or legal issues. It is important to protect yourself from these signifcant risks through good insurance programs and having the proper estate planning docuemnts in place.

Five Things More Important to your Retirement than Rate of Return

My friend, Bert Whitehead, author of Why Smart People Do Stupid Things with Money: Overcoming Financial Dysfunction , is one of the best financial planners I know. His experience and perspective help me keep myself and my clients on the things that are really important to achieving their financial goals.

Much is made of the rate of return we receive on our investments. But how important is the rate of return in the context of our overall financial life?

Not as important as we might think. Here are five of Bert’s “Top Ten Factors Affecting Our Financial Futures”, beginning with the most important. I will address the other five tomorrow.

1, How much you earn This the single most important factor that determines your financial future. You need to have an income that will support the current life style you want and that will allow you save the amount necessary to live the future life style you desire.

2. Wise shopping and spending. Making good decisions about how much you spend allows you to need less in the future and to save more. These decisions include decisions about what type of car you drive, how frequently you buy a new car, the type of house you live in, where and how often you dine out, etc.

3. How much you save in permanent savings (not “in and out” savings). The amount of money you are able to put away for retirement each month will determine if you are able to retire when you want to.

4. Your tax burden. There are things that you can do to reduce your overall tax load. Good tax management can usually save you significant money – that will allow you a better life and a higher savings rate.

5. The diversity of your investment portfolio across asset classes. Proper diversification of you investment portfolio allows you the appropriate return for minimal risk for your investments.

Benjamin Franklin on Debt

Benjamin Franklin is one of the most remarkable and influential Americans of any generation. His wisdom touched many areas and his basic financial advice was superb.

At one point in his life, as he returned from a stint in Paris, he wrote a four point plan of conduct. As the first part of that plan, he addressed debt. He wrote:

“Let me, therefore, make some resolutions, and form some scheme of action, that, henceforth, I may live in all respects like a rational creature.

1. It is necessary for me to be extremely frugal for some time, till I have paid what I owe.

This advice still is good today. Debt is one of the biggest problems Americans face. We are encouraged on a daily basis to accumulate debt – to buy bigger houses than we can afford, to buy a new car because we can get 0% interest, to utilize our Mastercards, Visa cards and Discover cards and to go out and buy things to help the economy.

This is NOT good advice. Each of us has a responsibility to ourselves to live debt free and to live within our income.

If paying off our debt requires “extreme frugality” so be it. Pay off that debt – and you’ll find that life is better and less stressful.