Organizing your approach to money and personal finances starts with some basic principles that have proved true over time. I call them Savage Truths. And I find it helps to keep them in mind, whether you’re talking about daily spending habits or major investment decisions.
Here are just a few that can point us in the right direction:
Incentives matter: People tend to respond to incentives. A great example is the thousands of people who lined up to prepay their real estate taxes before the end of the year, knowing that the deduction wouldn’t be worth as much in 2018.
These people merely added up their property taxes and the amount they paid in state income tax during the year. If the total was more than $10,000, they knew their deduction would be limited in 2018. So they decided to take as much as possible on their 2017 return.
People are smart enough to act in their own best interests. And the same principle applies to tax rates, only it might not be so immediately visible. Incentives matter. Whether you’re a corporate boss or an hourly worker, lower income tax rates just might incent you to work harder and invest more in order to earn more after taxes. And just that little nudge, at the margin, might be enough to grow the economy.
Automatic decisions are easiest: It’s difficult to make the same decision over and over. That’s why diets don’t work so well. You just denied yourself dessert at lunch, and now you have to make the same decision over a snack — and again at dinner. But if your decision were made automatically, it would be so much easier. Thus the appeal of diet meals, drinks and points.
The same principle applies to saving and investing. If money is taken out of your paycheck or checking account on an automatic basis, there’s less temptation to spend it.
This is the time to increase your 401(k) contribution — at least to get the full match. Or, sign up for an IRA at a mutual fund company like Fidelity or Vanguard. The money will be removed from your reach automatically each month and invested to grow over the long run.
Time is money: When you’re young, you think that money is a scarce resource. But when you get older, you realize time is the rare commodity. And a small amount of money can be leveraged into wealth over time. By the time you learn this, it’s too late to profit from the lesson.
For example, if you started with just $40 per week, invested in your IRA in the S&P 500 stock index, and if the index returned its historical average of about 10 percent with dividends reinvested for the next 50 years, your account would be worth nearly $2.5 million.
The incentives are clear to act in your own best interests. That’s just common sense — and it’s something you already have. That’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” She responds to questions on her blog at TerrySavage.com.