Using folk wisdom to inform your investment strategy sounds frankly silly. Far better to use time- and research-tested factors like low cost, proper allocation and tax-efficiency, right? There’s no doubt about that.
But there is wisdom in using plain old common sense too. After all, many of Warren Buffett’s famous quotes, like “Someone’s sitting in the shade today because someone planted a tree a long time ago,” are just that — common sense.
But as we all know, investors don’t always act with common sense, so it helps to have a little reminder. There’s hidden investment wisdom in several other common sayings you may have heard.
Look before you leap. Act now before this offer’s gone! Doorbuster sale this weekend only! Special promotional financing! When you hear these terms, be wary. Respect your hard earned money enough not to throw it away without due diligence first.
[See: 10 Ways You Can Invest Like Warren Buffett.]
Don’t jump into a business venture, or a beach condo purchase, or a spur-of-the-moment vacation without figuring out how (and if) such a venture could work with your financial situation. (You’d be surprised how often people “leap first, look later” with really major financial moves.) Even research smaller purchases, like impulse buys online, to make sure you’re getting the best price. Sometimes just letting an item you want to buy sit in your virtual shopping cart for a day or two is enough to determine whether you really want it — and sometimes can result in savings.
A fish rots from the head down. No, it’s not technically true (we’ll spare you the gory details), but the idea behind this saying is that mismanagement comes from the top. If a business owner is corrupt, the employees will be too. If you’re making bad decisions in a major area of your financial life, chances are it will spread to the rest of your finances too. A great example is taking a loan from your 401(k). It’s a “less bad” option than using a credit card, but it is a sign that something else in your financial picture doesn’t smell right.
Make hay while the sun shines. Take advantage of high income periods of your life to sock away savings in the most efficient way possible. According to Payscale, women hit their peak earnings at age 40, on average, and men at age 49. Defer as much from taxes by maximizing all sources of pre-tax retirement savings, and even consider contributing to a Roth if possible during these higher-income times. Don’t assume it will last indefinitely!
Another side to “make hay while the sun shines” is to enjoy the good times while they last. Celebrate your accomplishments — it doesn’t have to be all scrimping and saving. Just make sure to save an amount proportional to your income.
The grass is always greener on the other side. A major aspect of financial success is consistency and sticking to a plan. Of course, everyone and their neighbor has an idea of how you could do things differently — but if you’re constantly jumping the fence to check out some other type of grass, your own will wilt. Learn how to tune out things like your golfing buddy who constantly tells you about the “sure thing” stock pick his broker shared, or the temptation to buy the high-end car your neighbor has, but you can’t really afford.
The early bird gets the worm. Albert Einstein is said to have called the power of compound interest “the most powerful force in the universe.” Compounding is especially powerful when you start early in life, and allow plenty of time for your savings to grow. For example — if your goal was to save $1 million by age 65, and you started at age 25, you would need to put away $49,367 less than someone who started saving at age 30 (Note that this example assumes 7 percent annual growth in a tax-deferred account, rather than one that is taxed annually).
[Read: 4 Tips That Make Investing in Retirement Easy.]
Also, establishing the habit of saving early in life (when your income is likely lower than it will be in the future) establishes a wonderful framework to supercharge your savings when your income is higher.
Actions speak louder than words. Making a plan is a very important first step, but you need action to make it happen. Just DO IT! Make a plan, and take steps in the direction of your financial goals. It’s true, financial tasks like updating account beneficiaries and setting up auto-savings are often kind of boring and administrative. But their impact can be immensely positive for your future.
Every cloud has a silver lining. For example, market dips can result in an opportunity to buy at a discount. Whenever one asset class underperforms, that may mean a more beneficial environment for a different type of asset (hopefully one you own as part of a diversified strategy). While inflation may make gas more expensive, it may mean an increase in your pay as well. Remember this when it seems like the sky is falling in the financial world — it may be difficult to see immediately, but there is typically at least some positive to any market event.
The proof of the pudding is in the eating. In other words, results matter. Find evidence-based investing strategies, backed by studies and proven by time. Use tax-efficient strategies to effectively increase your return. A low cost, index-based approach is tried and tried again — and has proven to be a supremely effective investment strategy for the long term.
A stopped clock is right twice a day. There are some people who will always be full of doom and gloom about the markets. Be optimistic. If you believe that U.S. and international companies will continue to want to make money, and thus will provide value to their shareholders and bondholders, then it pays to be an investor. Just as it always has for the long term.
As a little bonus — there is also a piece of folk wisdom you should not follow in the markets:
We’ll cross that bridge when we come to it. This advice may have some value in some life situations, but not when it comes to your finances. Compound interest can work for you or against you. Debts can compound with time, or assets can grow with time.
[See: 11 Steps to Make a Million With Your 401(k).]
If you “cross that bridge when you come to it,” you may find it a lot harder to achieve your financial goals because you won’t have as much time on your side. This is why it is so valuable to take action sooner rather than later to improve your net worth, by decreasing debts and increasing assets (savings and investments).
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Folk Wisdom for Your Financial Life originally appeared on usnews.com
