By: Reed C. Fraasa, CFP®, RLP®, AIF®
There seems to be a list of five things for anything you can think of to improve your odds of success. Pareto’s Principle (the 80/20 rule) states that 80% of the results will typically come from 20% of the cause. If a list of five things can truly make a difference in your life, that is an excellent return on your behavior.
A Harvard T.H. Chan School of Public Health paper published in 2018 on 111,562 men and women studied over 34 years found that following five healthy habits can significantly increase your odds of successfully living a long and healthy life.
1. Eating a healthy diet – whole fruits, vegetables, grains, nuts, no processed foods or added sugars, and minimum red meats
2. Exercising regularly – 30 minutes of moderate to vigorous exercise daily
3. Keeping a healthy body weight – BMI of ~18 to 25
4. Not drinking too much alcohol – Average of two drinks daily for men and one drink daily for women
5. Not smoking – Not consuming tobacco in any form
Many people look for that magic pill to help them live longer, healthier lives. They look at a list like the above and think it is too much to do all of it, so they may decide to do none of it. Instead, we should be asking the 80/20 question.
What is that 20% of causation I can do to produce 80% of my desired results?
The study results found that those who practiced 4 or 5 habits at age 50 lived eight to ten more years free of many chronic diseases than those who practiced none. Having that unhealthy food on rare occasions, or an extra drink, or missing exercise for a few days, will not make all the other benefits of the five healthy habits vanish. Practicing these habits will increase your odds of success, though.
Like the five healthy habits in health management, wealth management has its five wealthy practices. If I had to come up with five wealthy habits that, if followed, would be the 20% of causation to produce 80% of the results to increase your odds of success, it would be these.
1. Only use debt to acquire an appreciating asset – excess debt can become cancer in your body of wealth. Save to buy depreciating assets like furniture and things or plan to pay them off in 3 to 4 years – like a car. Your home’s mortgage will have an interest cost that you need to add to the purchase price, but over time the house will appreciate compensating you to offset the interest cost.
2. Start with an emergency fund – 6 months of living expenses in your local bank or linked savings account. Maintain that balance to keep pace with your standard of living. You may be comfortable maintaining less than six months but keep no less than three months and no more than six months for emergencies.
3. Short-term savings for spending goals of less than five years – you should not be invested in stocks and bonds for any sum you plan to spend down within five years. T-bills, bank CDs, and Ultra-short-term bonds are the only vehicles you should consider in addition to savings accounts.
4. Investment Capital – every dollar of discretionary income should be committed to investing in a consistent plan allocated to both stocks and bonds and alternative private investments if you qualify for them. Once you have established items 2 and 3 above, there is no reason to be concerned about volatility and headline news. Your investment capital is an engine that will continue to grow over time.
5. Review your wealth situation quarterly to monitor your progress – watching your investment capital daily or weekly will cause you unnecessary stress. Looking at your portfolio too frequently will magnify your perception of the volatility—traders reacting to short-term news cause short-term volatility to spike. You are an investor, not a trader. Watching your investment capital portfolio more frequently than quarterly will not improve your odds of success.
Like in healthy habits, there are many other habits and advice that can make a difference in your wealth, but the idea is to find the 20% of causation that will produce 80% of the results to improve your odds of success. Some people will be able to practice these habits independently. Still, many people will want to work with a CERTIFIED FINANCIAL PLANNER™ advisor skilled in the five to live by and many other techniques to help them discover and live out their goals.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.