Meeting with clients for mid-year planning sessions the past few weeks has been wonderful.
No — really! And yes, I know, I should get out more.
The reason we enjoy doing this (especially this time of year), is seeing that look on our clients’ faces when we identify tweaks and quick moves which can bring a significant ROI on their tax return for their effort and time… well, it’s worth all of the time we’ve put into learning this craft.
Sometimes during these meetings, I find myself sharing some of the private details of how I think about taxes, finances and investing for my OWN family. Yes, I do try to practice what I preach in these Notes to my clients and friends. (And yes, believe it or not, I do have a private life outside of tax forms.)
Enough people have told me that these back-of-the-napkin principles which I share have been helpful, that this morning I’ve been motivated to put some of them down for you in easy-to-digest form.
So, without further ado, here are some of Aurelia Weems’s ‘secret’ financial principles…
“The only person who is educated is the one who has learned how to learn and change.” – Carl Rogers
Whether you’re running a Fortune 50 corporation, or just trying to keep your household expenses from exceeding your salary, the same basic financial concepts which I use in my personal life can apply to yours. In my practiced opinion, these are fundamental building blocks for wise financial decisions.
You almost don’t need much else besides these four ideas (almost)…
Quick Interest Calculations: The Rule of 72.
Want to double your holdings? The Rule of 72 can tell you how long it will take, based on the specific interest rate you’re looking at. Just divide 72 by the interest rate.
For example, if you’re looking at an investment with an interest rate of 6 percent, then 72 divided by 6 gets you an answer of 12 years.
This is a rough estimate, of course, but it’s pretty effective.
In fact, you can also turn the equation around to determine the interest rate you’re looking at if someone promises to double your returns in a set amount of time. Twice as much money in 12 years? Divide 72 by 12 and you get an interest rate of 6 percent. This rule lets you evaluate investment opportunities quickly and decide where to put your money.
What do you need to give up in order to get something you want? It’s almost always a question of money, but also one that involves time and value.
Pursuing an advanced degree may take years — are you willing to put in that amount of time? Will a sports car give you enough enjoyment to offset going into debt for it?
Whatever decision you end up making about how you are investing your money, should also be applied to how you think about your time. Sometimes it really does pay to invest in a lawncare service so that you can free yourself up to do more “valuable” work on behalf of your family.
This is money you can’t get back — a non-refundable airline ticket, for example. The idea here is that you need to keep sunk costs in the proper perspective. It’s easy to start thinking “Well, I’ve already spent $100, what’s another $25?” You’ve got to be willing to walk away sometimes.
Once something is paid for, and cannot be refunded, it shouldn’t impact your future financial decisions. It is a “sunk” cost, i.e., water under the bridge, and whatever you do in the future won’t ever get it back.
Time value of money.
According to this principle, a dollar you receive today is worth more than a dollar you’ll get tomorrow. You’ll have opportunity to invest that dollar immediately and begin earning more revenue from it (and also avoid losing value because of inflation).
Again, this helps you make certain calls about your purchases — and your income. It’s the old “a bird in the hand” theory in action for your wallet.
These four principles have served me well over the years.
Are there any that you think I have missed? Do you have questions? I’d love to hear from you, so shoot me an email with your thoughts.
Warmly (and until next week),
Aurelia E Weems, CPA