Complexity Ain’t Yo Friend
You've read the title, and it's obvious: I don’t like undue complexities. Life already has its fair share of tangles and knots, and as the days get jam-packed, my patience for undue complications shrinks even more. Especially when it comes to our finances. Ever caught yourself in a moment where you're staring at a financial statement or an investment update, and your brain's just going, "I think I get it... but do I really?" Or maybe you've felt that slight pang of exhaustion, worrying about things that you need to do, bills that need to pay or simply worrying about forgetting important deadlines for bills? If any of this resonates, there's a good chance your financial life has been hijacked by undue complexity. Remember our "slow cooker" analogy from the July newsletter? Slow, steady, and consistent efforts towards financial independence trump fast and furious approaches. Complexity, my friend, throws a wrench into this beautiful, simmering pot. It makes the process erratic instead of rhythmic. To put it plainly, as complexity grows, commitment tends to fall. That's not pessimism; it's pure, unadulterated math. Complexity can manifest in multiple ways in a family’s financial life. Let's highlight some typical culprits, and attempt to find our way out: Complex Investment Products There's this notion floating around: "Complexity equals sophistication, which equals better returns." Nope, not necessarily. More often than not, simplicity wins. Many complex investment products not only have hidden fees but are also tricky to decipher. Let's talk Indexed Universal Life insurance (IUL) for a moment. On the surface, it sounds appealing – life insurance combined with a potential for cash value growth based on a market index. But when you peel back the layers, the intricacies of IULs – from caps, participation rates, to the surrender charges – can become a daunting maze. And while the potential for tax-free loans against the cash value seems enticing, the costs, and the potential for misunderstanding or mismanagement, make it a challenging product for many. In contrast, opting for straightforward term life insurance, combined with investments in transparent instruments like low-cost index funds or ETFs, can often be more manageable and comprehensible. This separation allows for clearer understanding, easier management, and often more predictable outcomes. This isn't to say IULs don't have a place in the financial world; they might for specific needs. But it's essential to understand the complexities thoroughly before diving in. Remember, sometimes simplicity not only brings clarity but also peace of mind. Too Many Accounts Diversification is awesome, but over-diversification? Not so much. Juggling numerous accounts becomes cumbersome. And here's a fun fact: having multiple investment accounts doesn’t mean you're diversifying! True diversification lies in the variety of assets, not the number of places they're stored. So, if you’re sprinkling the same investments across multiple brokerages, you’re just adding layers of complexity without reaping the rewards of true diversification. There’s another hidden cost of complexity. You’ll likely feel it when you file your taxes. If you file taxes yourself, the 1099s that you get from multiple brokerage firms as well as the 1099-INT you get from banks will definitely take longer for you to complete. As if filing for taxes is not a hassle already, right? If a tax professional is helping you file taxes, the additional time involved in data inputing will inevitably reflect itself in a higher bill. In short, probably not worth it. Missing Automation Let's circle back to our goals. Say you're aspiring to invest a set amount monthly into your IRA. Are you manually making that transfer? Are you setting reminders, filling out forms, or making calls? Automation is the key here. It streamlines, simplifies, and ensures consistency. Automate those payments and watch as the hassle and the chances for human error diminish. As much as you can, get your investing and bills automated so you can have more time devoted to things, well, that’s not paying your bills. “I thought you always advocated for more mindful ways to manage your finances” Yes, yes I do. However, I would argue that automating parts of your life can really help you to get the time back for things that give you more value in terms of mindful money management. I would argue the 10 minutes of introspection will pay more dividend that 10 minutes of mindlessly paying your bills. To wrap up, I'm sure there are more complexity culprits lurking around the corners of our financial lives. Maybe some you've encountered, maybe some still waiting to jump out at you. So, here's my call-to-action for you: take a step back, reevaluate, and streamline. Just like how we make a spending plan for our money, taking our complexity in your life is a way to make a spending plan for your time. It’s not about saying no, but saying yes to things that you want to spend time on more.
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