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3 Ways to Apply the 80/20 Rule to Your Financial Pursuits

Ever heard of the 80/20 rule? It suggests 80% of an outcome is often the result of just 20% of the effort you put into it. 

Often, by prioritizing the 20% of your efforts that make the biggest splash, you can reduce excess commotion. In that spirit, here are 3 financial best practices that pack a lot of value per “pound” of effort. 

1. Investing: Be There, and Stay There

You could do far worse than invest, according to a sentiment attributed to Woody Allen

“80% of success is showing up.”

Going back to 1926 and after adjusting for inflation, U.S. stocks have delivered about 7.3% annualized returns to investors who have simply been there, earning what the markets have to offer over the long haul. Those who instead fixate on dodging in and out of hot and cold markets are expected to reduce, rather than improve their end returns. That’s because, when markets recover from a downturn, they often more than make up for the stumble quickly, dramatically, and without warning. Instead of chasing trends, simply stay invested over time.  

2. Portfolio Management: Use Asset Allocation, and Don’t Monkey With the Mix

Asset allocation is about investing in appropriate percentages of security types, or asset classes, based on their risk/return “personality.” For example, given your financial goals and risk tolerances, what ratio of stocks versus bonds should you hold?

Both practical and academic analyses have found that asset allocation is responsible for a great deal of the return variability across and among different portfolios. So, to build an efficient portfolio, we advise paying the most attention to your overall asset allocation, rather than fussing over particular securities. Luckily, if you’re a client of ours we’ve already taken care of this for you. 

3. Financial Planning: Do It, But Don’t Overdo It

Also in 80/20 rule fashion, an ounce of financial planning can alleviate pounds of doubt. Planning connects your resources with your values and priorities. It’s your touchstone when uncertainty eats away at your resolve. And it guides how and why you’re investing to begin with. 

Here’s some good, 80/20 news: Your plan need not be elaborate or time-consuming to be effective. In The One-Page Financial Plan, author Carl Richards describes: 

“Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.”

If you’d like to do more, great. But even a one-page plan will give you a huge head start. Write it down, as Richards describes. When in doubt, read what you’ve written. Is it still “you”? If so, your work is done; stick to plan. If not, consider what’s changed, and update your plan accordingly. I

Building Lifetime Wealth, 80/20 Style

Properly applied, the 80/20 rule can help minimize the time and energy you have to put into maximizing your financial well-being. Whether you’re saving for retirement, funding your kids’ college education, preparing for a wealth transfer, applying for insurance, or otherwise managing your hard-earned wealth, we can help you identify and execute these and other actions that matter the most, so you can get back to the rest of your life. 

Ready to put the 80/20 Rule in action for yourself? Give us a call today.

Cary Facer

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Getting Your Household Cash Flow Back Under Control

Getting Your Household Cash Flow Back Under Control

Developing a better budgeting process may be the biggest step toward that goal.

Provided by Warren Street Wealth Advisors

 

Where does your money go? If you find yourself asking that question from time to time, it may relate to cash flow within your household. Having a cash flow management system may be instrumental in restoring some financial control.

 

It is harder for a middle-class household to maintain financial control these days. If you find yourself too often living on margin (i.e., charging everything) and too infrequently with adequate cash in hand, you aren’t the only household feeling that way. Some major economic trends really have made it more challenging for households with mid-five-figure incomes.

 

By many economic standards, today’s middle class has it harder than the middle class of generations past. Some telling statistics point to this…

 

*In 81% of U.S. counties, the median income is lower today than it was in 1999. Even though we are in a recovery, much of the job growth in the past few years has occurred within the service and retail sectors. (The average full-time U.S. retail worker earns less than $25,000 annually.)

*Between 1989 and 2014, the American economy grew by 83% (adjusting for inflation) with no real wage growth for middle-class households.

*In the early 1960s, General Motors was America’s largest employer. Its average full-time worker at that time earned the (inflation-adjusted) equivalent of $50 an hour, plus benefits. Wal-Mart now has America’s largest workforce; it pays its average sales associate less than $10 per hour, sometimes without benefits.1,2

 

Essentially, the middle class must manage to do more with less – less inflation-adjusted income, that is. The need for budgeting is as essential as ever.

 

Much has been written about the growing “wealth gap” in the U.S., and that gap is very real. Less covered, but just as real, is an Achilles-heel financial habit injuring middle-class stability: a growing reliance on expensive money. As Money-Zine.com noted not long ago, U.S. consumer debt amounted to 7.3% of average household income in 1980 but 13.4% of average household income in 2013.3

 

So how can you make life more affordable? Budgeting is an important step. It promotes reliance on cash instead of plastic. It defines expenses, underlining where your money goes (and where it shouldn’t be going). It clears up what is hazy about your finances. It demonstrates that you can be in command of your money, rather than letting your money command you.

 

Budget for that vacation. Save up for it by spending much less on the “optionals”: coffee, cable, eating out, memberships, movies, outfits.

 

Buy the right kind of car & do your cash flow a favor. Many middle-class families yearn to buy a new car (a depreciating asset) or lease a new car (because they want to be seen driving a better car than they can actually afford). The better option is to buy a lightly used car and drive it for several years, maybe even a decade. Unglamorous? Maybe, but it should leave you less indebted. It may be a factor that can help you to …

 

Plan to set some cash aside for an emergency fund. According to a recent Bankrate survey, about a quarter of U.S. households lack one. Imagine how much better you would feel knowing you have the equivalent of a few months of salary in reserve in case of a crisis. Again, you can budget to build it – a little at a time, if necessary. The key is to recognize that a crisis will come someday; none of us are fully shielded from the whims of fate.3

 

Don’t risk living without medical & dental coverage. You probably have both, but some middle-class households don’t. According to the Department of Health & Human Services, 108 million Americans lack dental insurance. Workers for even the largest firms may find premiums, out-of-pocket costs and coinsurance excessive. This isn’t something you can go without. If your employer gives you the option of buying your own insurance, it could be a cheaper solution. At any rate, some serious household financial changes may need to occur so that you are adequately insured.3

 

Budgeting for the future is also important. A recent Gallup poll found that about 20% of Americans have no retirement savings. You have to wonder: how many of these people might have accumulated a nest egg over the years by steadily directing just $50 or $100 a month into a retirement plan? Budgeting just a little at a time toward that very important priority could promote profound growth of retirement savings thanks to investment yields and tax deferral.3

     

Turning to the financial professional you know and trust for input may help you to develop a better budgeting process – and beyond the present, the saving and investing you do today and tomorrow may help you to one day become the (multi-)millionaire next door.

      

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

Citations.

1 – washingtonpost.com/sf/business/2014/12/12/why-americas-middle-class-is-lost/ [12/12/14]

2 – tinyurl.com/knr3e78 [11/27/12]

3 – wallstcheatsheet.com/personal-finance/7-things-the-middle-class-cant-afford-anymore.html/?a=viewall [12/15/14]