Simple Principles for Your Financial Journey

6 years ago

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A blog post by Daniel Snover

April is Financial Literacy Month and a great time to bring awareness to your financial well-being. Many of us wait until major life events like buying a house, changing jobs, or even nearing retirement to begin thinking about financial commitments, but it takes time and conscientious planning to attain financial freedom.

The good news is that a few simple principles can put you on the right path to saving and investing. The bad news is that simple does not always mean easy.

Think of these tips as cairns, or guideposts, to follow along your financial journey.

Pay yourself first.

You cannot invest without first saving, but why does it seem so difficult to build savings?

The breakthrough is a mental shift from including savings in your budget to “paying yourself first”. Don’t wait until the end of the month to see what is left over – that’s paying yourself last. Set aside a portion of your income before spending on discretionary items.

You’ll be amazed at how quickly your savings account will begin to grow.

Consistency is everything.

What is the opportunity cost?

Should you invest in the stock market or pay off that credit card debt? Should you make extra mortgage payments to reduce the principal balance?

Think in terms of opportunity cost to improve your decision-making and to avoid emotional mistakes.

Your stock account is not likely to average more than the 16% your credit card is charging you in interest. The wise thing would be to pay down the credit card debt before investing in the market, effectively guaranteeing a 16% rate of return since you’re not paying that interest to the credit card company.

On the other hand, if your mortgage interest rate is 4% and is tax deductible, then you’re probably better off investing than paying down the mortgage principal.

Try not to overthink it.

The miracle of compound interest

Compound interest is the greatest builder of wealth and “the most powerful force in the universe” according to Einstein. Compound interest is the addition of interest to the principal sum of a loan or deposit.

Let the Rule of 72 put the miracle of compounding interest into perspective. So, how long will it take an account earning 10% a year to double? (Hint: it’s not 10 years)

Here’s the rule: Take 72, divide it by your annual return (10%) and it will tell you the number of years to double your money (7.2 years). While unlikely to achieve, a 20% annual return would double your money every 3.6 years. However, if your money is sitting in the bank earning a 1% annual return, you will effectively never double your money.

Building wealth requires taking risks along the way. You’ll be grateful you did.

Stay aware

Are you scared to look at your credit score? Or total up how much you spent on restaurants last month?

Don’t be. Fear and denial are likely holding you back from addressing the obstacles to success. Make things easier by downloading a free financial planning app, such as Mint, to track your account balances, credit score, and spending habits. Awareness will help prevent the “where did all my money go?” and “how did I get in this position?” moments.

Financial freedom is a journey, not a destination. Learn to enjoy the process.

Don’t get discouraged when life seems to knock you off the path. Think long term to soothe anxieties about the journey ahead. Don’t compare yourself to others – we all start in different positions and encounter different circumstances.

Bon voyage!

Disclaimers:

Cabana LLC (dba “Cabana Asset Management” and “Cabana Retirement Solutions”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at https://www.adviserinfo.sec.gov/.

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Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

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Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.

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Commonly used index/benchmark definitions:

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Morningstar’s Moderate Target Risk index follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis.

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market.

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq