The Question That Will Determine Your Financial Success
December 19, 2013I recently read this article about how the real question in life isn’t what you want. It’s what pain you want. We all have unlimited wants, but what are you willing to struggle for? What price are you willing to pay?
For example, if you want to burn fat and gain muscle, you have to be willing to consistently eat right and exercise with enough intensity. You have to be willing to put in the time, endure the pain, and avoid the temptations that can get you off track. It’s not necessarily complicated but that doesn’t mean it’s easy. Otherwise, everyone would be in great shape.
The same is true for many other areas of our lives, including the financial aspect. We all want to provide for our families, be debt free, have some cash set aside for emergencies, own our dream home, retire early, send our kids to college without student loans, and have something to pass on to them. But what are you willing to do to make those goals happen? Here are some “pains” you must be able to endure:
1) Living below your means. This is the first step and the foundation that all other financial success is built on. You might think it’s all about making lots of money but we’ve all heard of the professional athletes and even lottery winners who go bankrupt. It’s not what you make but what you keep. Keep in mind that no matter how little money you earn, lots of people are living on less (probably a lot less) than you.
Track your expenses and see where your money is going. Ask yourself if each expense is really worth more to you than your financial goals. Yes, cutting some expenses can hurt in the short run, although you might be surprised by how much you can save relatively painlessly. (It may even make you happier.) Compare that to the longer term financial stress that can be caused by not living within your means or having to work longer because you can’t afford to retire.
2) Tolerating market volatility. Once you’re able to save some money, you’re eventually going to want to earn a higher rate of return for your longer term goals than what you can get in a savings account. That means investing it in things that go up and yes, down. We all want the investment with guaranteed high returns but that only existed in the minds of Bernie Madoff’s clients. The price of higher returns is being able to stomach volatility like what we saw in 2008. The good news is that investors who are able to stay the course have consistently been rewarded with higher returns in the long run.
3) Going against the crowd. Want to give your returns a boost? Research shows that unpopular value stocks tend to earn higher long term returns than “glamour” stocks. That’s how value investors like Warren Buffet made their money. So what’s the catch? Value stocks are selling at a value because they’re unpopular. They’re the stocks that no one wants to own. They don’t provide the “emotional return” of investing in “the next Apple” or an alternative energy startup that can save the planet and they’re unlikely to soar during a bull market. In other words, they’re pretty boring. They just tend to earn a little more on average over time than their most exciting counterparts. (I’ve found that this principle of boring over exciting tends to be true in other investing areas like real estate too. The few exciting investments that are successful just get more attention.) In contrast, investors in more exciting and popular “glamour” stocks are being partly compensated emotionally rather than financially. Think of it as a less extreme form of gambling, the ultimate “exciting investment.”
Everyone wants to be financially successful. But as they say, there’s no such thing as a free lunch. The question is are you willing to pay the price?