How to manage your money? “It’s not rocket science,” I claimed in one article a while back. Maybe not. But when it comes to jargon, complexity, and high stakes, it runs a pretty close second.
Actually, building wealth is more like building health than building rockets. It is less about precision, and more about consistently executing well on a few simple principles.
What are those principles? In both arenas, there’s been a lot of disagreement, confusion, and consternation about that. On the health side, the conversation shifted in 2017 when author Michael Pollan weighed in.
Eat food. Not too much. Mostly plants.
“That, more or less, is the short answer to the supposedly incredibly complicated and confusing question of what we humans should eat in order to be maximally healthy,” he wrote in his groundbreaking New York Times article.
If there were a 3-part, 7-word answer to the equally vexing question of what to do in order to maximize wealth, it would go something like this.
Save money. Not too little. Mostly purposefully.
Like the turn of phrase that inspired it, it is simple, but laden with meaning. Let’s explore these bite-size chunks of advice...
1. Save money.
In the first part of his acclaimed catchphrase, Pollan exhorts consumers to “Eat food.” What he means is “Eat real food.” i.e. not the highly processed stuff that currently masquerades as food. If your great-great-grandmother wouldn’t recognize it, don’t eat it.
In the personal finance realm, it starts with “Save money.” – as in “Save money now.” Not someday when money isn’t so tight. As many have learned, “someday” may never come.
But you’ve got 20 or 30 years until retirement, and many other demands on your hard-earned dollars today. What’s the hurry? The impetus is a little magic called compound interest, whereby a penny saved now can add up to much more than a penny saved in the future.
Actually, there’s no magic about it; it’s all math. But who cares? And the sooner you start, the more “magic” happens. As discussed here, waiting until you’re 40 instead of 25 to start saving means you’ll have to set aside almost three times as high a percentage of your income.
Likewise, adding a serving of veggies to your daily diet now will make a bigger impact on your health than shifting from Cheetos to chard in 2029. But amount counts, too, which brings us to our next point…
2. Not too little.
Where prior generations faced scarcity, today food is readily available, cheap, and supersized. No surprise then that an obesity epidemic and all its resultant health problems have ensued. Or that part two of Pollan’s blurb encourages us to eat “Not too much.” – “the most unwelcome advice of all,” he says.
The financial planning equivalent – to save “Not too little.” – is likely to be equally unwelcome. But when it comes to saving, most err on the side of underdoing it. Fewer than 40% of pre-retirees think their retirement is on track, according to a 2018 federal report. One-quarter have no retirement savings at all.
Clearly, that’s too little. How much is enough? CNNMoney’s guide to retirement cites "as much as you can" as the standard, albeit not so helpful, recommendation. Financial planners typically advise 10% to 15% of income. Some in the Financial Independence/Early Retirement (FIRE) movement claim to save 80%+ of their income! Just like with eating, the right answer depends on your goals, timeframe, burn rate, and personal situation.
If you have stable finances and goals, it’s a good idea to run planning projections to get a personalized savings target. On the other hand, for the 80% of Americans living paycheck to paycheck, eking out any amount is a step in the right direction. Experts recommend starting with a really, really small habit – so small there’s no way to fail. The trick is to grow that habit, making periodic improvements until they become the financial equivalent of a snowball rolling downhill. Kind of like the habit of eating better feeds on itself, so to speak, by making you look and feel better.
But there’s another piece to the health/wealth puzzle…
3. Mostly purposefully.
Pollan urges us to eat “Mostly plants.” “Plants” because they’ve been shown to confer outsize health benefits. “Mostly” because evidence suggests that those who eat modest amounts of meat are as healthy as vegetarians.
When it comes to how to manage your money, here too there are ways to reap outsize benefits. Typically, they depend on knowing what goals you’re trying to achieve. Hence, the third tenet: “Mostly purposefully.”
Saving to buy a house next year? A liquid savings account is the safe choice. Building a retirement nest egg? Tax savings from a 401k or an IRA will get you there faster. Other tax-advantaged tools can accelerate your medical, child care, or college savings. These accounts can take you further still if the investments they hold match your goals and risk tolerance.
But what if you don’t know what you want or how best to get it? Like health-building, wealth-building is an iterative process. Just because you ate a few Twinkies along the way doesn’t mean you can’t come out a winner in the end. Just be sure to get started building your money fitness sooner rather than later.
Summary: Put Your Money on the Table
When it comes to financial health, there’s a lot to learn from the realm of physical health. In both, the stakes are high. Expert opinions conflict. The prevailing wisdom is in a constant state of flux. It’s enough to make you want to live on Soylent and stash your cash under the mattress.
But that probably won’t make you healthy, wealthy, or wise. Instead, whether you’re planning dinner or retirement, you’d do better to let a 3-part, 7-word dose of simplicity be your guide.