Years ago the teacher in a college math class I was taking told a story I enjoyed. He claimed the story was absolutely true.
While on vacation with his family the pilot on one of the flights decided to have some fun with the passengers by having a contest. He announced the plane’s direction of travel, how far they were from the airport, what speed they were traveling, and the direction and speed of the wind. Then he said that the passenger who could most closely guess their arrival time would receive a prize.
The math teacher, thinking this problem was right up his alley, went quickly to work. Pulling his ever-present notebook and pencil out of his shirt pocket he wrote down the relevant information, translated the problem into an elegant algebraic equation, and solved for x. Then he wrote his name and answer on a separate piece of paper, tore it out of the notebook, folded it in half so no one could see it, and confidently handed it to the flight attendant.
After the plane landed the pilot announced the winner. The math teacher was close to guessing the correct time of arrival but he was not the victor. Someone had come even closer. His disappointment in not winning was quickly replaced with a combination of surprise and pride when his teenage daughter, who was not known in the family as a great math student, was proclaimed the winner.
After she collected her prize the math teacher quizzed his daughter on how she had arrived at the correct answer. His daughter sheepishly pulled the trip itinerary from the seat pocket in front of her and admitted that she had simply written down the published arrival time.
Simplicity and Personal Finance
The moral of the story is that we often make things more difficult than they need to be. This is especially true in our finances. Nobel winning economist Paul Samuelson once said, “The prudent way is also the easy way.” Although Samuelson was speaking specifically about investing the concept holds true in other areas of personal finance as well.
Those trying to sell you advice will try to convince you that personal finance is rocket science, and that you can’t do it on your own. For most of us this is simply not true. In fact, for most of us successfully managing our money comes down to consistently executing a few timeless and simple principles that you already know. These include:
- Live on less than you earn.
- Keep score with a budget to make sure this happens.
- Save at least 10 percent of everything you earn by paying yourself first.
- Avoid credit card and other high-interest debt.
- If you already have high-interest debt do whatever is necessary to pay it off as quickly as possible.
- Be extremely careful with other debt.
- Develop a simple investing plan and stick to it no matter what the market does. For an example of how simple a successful investing plan can be take a look at William Bernstein’s short e-book If You Can: How Millennials Can Get Rich Slowly. The book is free and only 16 pages long.
- Take full advantage of company matches and government sponsored tax-advantaged accounts such as 401(k)s and IRAs.
It really is as simple as that. Don’t make your finances more complicated than they need to be. Simply resolve to consistently execute the few simple financial principles that make all the difference. For 2016, simplicity is the watchword. Keep it simple and prosper!