What can a bodybuilder teach you about setting financial goals to live a better retirement?
Not much, you might think… but hang tight a moment because famed bodybuilder, Dorian Yates, shared the secret to his success and it can be used to achieve financial goals too.
In his prime as a bodybuilder, Dorian wrote down his goals each week and kept track of every workout session. He set goals over short time spans, even if they seemed small – for example, “add 5 pounds to my bench press this week.”
He knew that small incremental progress every week would translate into huge gains over the long term. And he was right. He sculpted his body as he envisioned, and took home one of the most prized bodybuilding crowns, the title of Mr. Olympia.
His secret to realizing his ambitions stemmed from making the commitment to himself each week what he would do and created a plan to do it on paper. Like a captain on a ship, he didn’t leave harbor without knowing how he was going to arrive at his destination, and he had a map of how to get there.
His approach to bodybuilding can be applied to saving for retirement:
- Create your financial goals
- Write down your goals
- Create a plan for how you will achieve your goals
- Track your financial goals every step of the way
But what financial goals should you set?
Financial Goal #1:
Lower Commissions Paid To Brokers
When you turn on a financial news network, do you notice something about how you feel after a few minutes? Are you more emotional? Do you feel like buying stock or selling stock? Are you more eager to login to your brokerage account and trade?
At the end of each month and certainly each year, you might be surprised how much you actually pay in commissions costs. When you pay so much in commissions that your profits are eaten up by them, it’s called churning your account.
Instead, set the financial goal to lower the commissions paid to your broker so that you don’t churn your account, or simply overpay for the price of order entry. Write down how much you spend monthly in trading commissions. What percentage of your profits went to pay commissions?
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Financial Goal #2:
Pay Less In Fees
Fees are nasty little critters. The problem with them is they seem innocuous. What’s 1.25% a year after all?
A smart way to pay less in fees is to choose one of the top robo-advisors. Many robo-advisors have earned stellar reputations for keeping management fees low, delivering top notch customer service, and making it easy to set specific financial goals.
At Betterment and Ellevest, for example, you can virtually “bucket” your goals so if you are saving for a new home, buying a new car, or paying college tuition, you can target your specific goals and track your progress towards them easily.
Financial Goal #3:
Reduce Expense Ratios
Paying too much in management fees is fairly easy to spot because each month or quarter you receive from your financial advisor a financial statement, which reports how much you forked over in fees. Expense ratios are a whole other ballgame because they are largely hidden from view.
When you pay a financial advisor to invest your money, they will often favor mutual funds. Mutual funds have expense ratios that are charged at the fund level, so you rarely see them unless you go hunting for them.
Although hidden from obvious view, expense ratios when combined with management fees can add up to a hefty sum at the end of the year.
For example, if the total cost of management fees plus expense ratios was 2% annually for you, yet just 0.5% annually for your neighbor, and both your portfolios grew at the rate of 8% annually over 30 years, did you know that your neighbor would be about $300,000 better off than you?
|Year||Annual Gain (8%)||0.50%||1.00%||1.50%||2.00%|
Financial Goal #4:
Build A Diversified Portfolio
How did Warren Buffett get so rich? It wasn’t by building a diversified portfolio but by building a concentrated portfolio of stocks that beat the market. So, if a concentrated portfolio is the way to get super rich, why build a diversified portfolio?
The answer lies in the advice Buffett gives to non-professional investors, which is to buy an index fund that tracks the benchmark S&P 500 and leave it be for the long-term. He advocates diversifying even though he practices otherwise because he knows that few investors can beat the market over the long term.
To beat the market requires extreme rationality, buying the troughs and selling the peaks. It is so much easier emotionally to buy the peaks and sell the dips. That’s precisely why most people don’t end up wealthy.
Even professional investors find it hard to consistently beat the market. In fact, Buffett was so convinced hedge fund managers charging hefty fees couldn’t beat the S&P 500 over a ten year period that he placed a big wager on it with the winner’s proceeds going to charity. Ten years later, he was proven to be correct. After fees, it’s very hard to outperform the general market indices.
If you are not sure how to build a diversified portfolio, consider advisors like Personal Capital who offer not only an automated investment approach but also human advice so you get the best of both worlds.
|PERSONAL CAPITAL SPOTLIGHT|
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Financial Goal #5:
Max Out Your Retirement Accounts
Got a 401(k), IRA or Roth IRA, then if at all possible, look to max out your contributions. The obvious reason is that your earnings grow tax free until retirement. But you also get the dual benefit of lowering your tax bill right away.
If you earn $100,000 annually and put the maximum contribution of $18,000 (if under the age of 50) into your 401(k), your taxable income is lowered to $82,000. So not only do you get to enjoy tax free portfolio growth until withdrawals are taken but you get to pay less to Uncle Sam right away too.
>> Related: How To Lower Your Tax Bill
If you are not sure how your 401(k) is performing, analyze your holdings free of charge using a company such as Blooom, which specializes in optimizing retirement account allocations.
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Financial Goal #6:
Save Every Time You Buy
Saving more every month is a nice idea, but making it happen is not always easy. The extra $100 or $1,000 you save this month is worth a lot more than those amounts in the future because of the magic of compounding.
If you could invest $1,000 today and let it grow at an annual rate of 8% for the next 30 years, the final sum would be 10x more, or $10,000. What if every $1 you saved turned into 10 times that amount in the future?
All of a sudden, when you spend an extra $100 instead of investing it, think about it as spending $1,000 future dollars as opposed to “just” $100.
When you think about things you buy in future dollars, it helps to clarify whether it’s really worth it to spend the money today.
Still, saving regularly takes a commitment to the financial goals. And to simplify the process, Acorns lets you round up each dollar you spend and invests it automatically on your behalf. Simply connect your bank accounts or credit cards to Acorns and away you go.
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Financial Goal #7:
Lower Your Interest Rate Payments
Most Americans are saddled with some combination of student loan debt, mortgage debt, auto loan debt or credit card debt. So how do you pay off those debt faster?
The most important factor is the interest rate you are charged. If you have a student loan, look to some of the new lenders on the scene who have grown rapidly in recent years after building loyal communities by offering highly competitive rates and community perks too, such as SoFi.
A big killer of financial health is credit card debt because interest rates can quickly skyrocket. If you have $10,000 of credit card debt and paid 15% in annual interest rate charges that amounts to $1,500 a year of costs that gets you absolutely nothing in return – because it isn’t paying down the debt.
A person earning $50,000 a year who can save $2,000 annually will find it hard to escape credit card debt unless the interest rate is lowered. So, the #1 priority is to transfer the balance to a new card or negotiate with your existing credit card issuer.
Set Financial Goals You Can Achieve
The most important first step in setting financial goals is to write them down and keep track of them.
Jot down on pen and paper the 7 financial goals below along with any others which you know will help you live a better retirement, and most importantly, keep track them of them regularly.
- Lower commissions paid to brokers
- Pay less in fees
- Reduce expense ratios
- Build a diversified portfolio
- Max out your retirement account contributions
- Save every time you buy – automatically
- Lower your interest rate payments and pay off debt
What financial goals have you set? How are your savings and retirement planning tracking compared to your financial goals?