Blocking and Tackling - The Fundamentals of Personal Finance - Let the Games Begin!

As the summer draws to a close and fall approaches, school supplies are being whisked off the shelves, suitcases are being unpacked from the last getaway and, as importantly, (here in the South anyway!) the sounds of whistles blowing, pads popping, and coaches shouting signal the start of football season. At first blush, football and personal finance may not appear to be similar “games”, however, a closer look reveals some commonalities; a necessity to understand and execute the fundamentals – aka blocking and tackling.

There are times when all of us get lost in the complexities of any given subject. After all, the fundamentals can feel, well, just downright boring. However, we also all understand that if the fundamentals aren’t in place, the strategies, nuances and creative plays become irrelevant. Just ask five-time Super Bowl winning coach, Bill Belichick. When asked about his opinion of the plethora of new techniques and algorithms being used in the NFL today, Belichick expressed his thoughts in a recent USA Today interview, “…In the end, it’s about blocking, tackling, and fundamentals. We’ll emphasize those.” (We are wondering if he considers that gray hoodie part of his fundamentals too…).

Similarly, in the personal finance realm, if one gets the fundamentals wrong, the advanced strategies become irrelevant. The Bill Belichick of finance, billionaire Warren Buffett, had this to say when asked about the importance of simple, sound fundamentals in finance: “The business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective.”

So, let’s take a look at a few of the blocking and tackling fundamentals of personal finance. While admittedly we all likely understand these principles, consistently executing these basics can be more challenging.

Championship Habits (Saving)

Positive habits, according to championship football and life Coach, Tony Dungy, are what drive champions: “Champions don’t do extraordinary things. They do ordinary things, but they do them without thinking…they follow the habits they’ve learned.” Warren Buffett agrees. In a speech to college graduates, Buffett stresses the importance of forming good savings habits: “Most behavior is habitual…the biggest mistake is not learning the habit of saving properly." The single biggest factor to your financial success is your savings rate, and many people are simply just not saving enough. The Federal Reserve of St. Louis releases monthly data on personal savings rates defined as “the ratio of personal savings to Disposable Personal Income” (DPI – the amount left over after you pay your taxes). The average savings rate for 2016 was 4.9 percent, well below the recommended 15 to 20 percent. Compare that to the average savings rate of 11.9 percent forty years ago, and you can quickly see the problem; Americans are consuming much of what they make at the expense of their future financial freedom. You can tailor the perfect asset allocation strategy to your portfolio, but contributions to your nest egg are far more impactful than the mix of securities in your investment accounts.

Championships are Won in the Offseason (Invest in Yourself)

“Championships are won in the offseason”, according to Ohio State’s Urban Meyer. All coaches recognize that the development of their players is the single greatest factor affecting the team’s success. The best designed plays in the world are of little worth against bigger, faster, and stronger athletes. In the financial world, the greatest income producing asset you have is YOU. Developing your skills, talents, and abilities (aka as your human capital) will produce dividends far exceeding any other investment. Warren Buffet speaks of the importance of developing yourself: “But if you’ve got talent yourself, and you’ve maximized your talent, you’ve got a tremendous asset that can return ten-fold.” Nothing you can invest in will produce a higher return than the investment in yourself.

Act Like You’ve Been There Before (Lifestyle Creep)

Vince Lombardi, after watching his kick returner dance in the end zone after scoring a touchdown said, “The next time you make it to the end zone, act like you’ve been there before.” In the professional world, receiving a raise or promotion can feel like you just scored your own personal touchdown. Whether or not you’ve actually ‘been there before’ with this new-found income/status/title, you can still behave like you have. If you become accustomed to increasing your lifestyle commensurate with increases in income, you will be doing this likely at the sacrifice of the future, financially free, you. Doug Pauley, the founder of our firm, suggests this rule of thumb when you get a raise: Save 50%, expect to pay 25% in taxes, and use the remaining 25% for lifestyle creep. There is nothing wrong with increasing your standard of living; just don’t do it at the expense of your future self. Try never to grow fully into your income.

You’ve got to have a Kicker! (Funding your Emergency Fund)

Kickers are the emergency funds of the football world: underappreciated when they are doing their job, yet can cost their team the game when they aren’t. There are few things more financially boring than having cash sit on the sidelines making little to nothing in interest. However, when the rainy day comes that it is needed, your emergency fund will seem genius. Warren Buffett offers thoughts on the importance of cash, or an emergency fund: “Cash ... is to a business [or person] as oxygen is to an individual: never thought about when it is present; the only thing in mind when it is absent." Just ask the 7 out of 10 Americans who have less than $1,000 saved according to a recent study. Having your emergency fund in place allows you peace of mind knowing that you can weather a storm. We can suggest FDIC insured vehicles for holding your emergency fund at 1.20% or more. A small return indeed, however, as good as can be had in our current interest rate environment. Every little bit helps!

Control What You Can (Index Investing)

Nick Saban, five-time national championship coach, in his book “How Good Do You Want to Be?” summarizes his coaching philosophy by saying, “Worry about the things you can control in your life, both professionally and personally.” This rings true in the personal finance world as well. “Past performance is no guarantee of future results” could probably be considered the motto of the investing world. We have no control over the economy, geopolitical factors, taxation, natural disasters (our friends in Houston are painfully reminded of this) or the myriad of other factors that affect investment returns. One thing we can control, however, are the costs associated with the investments we choose. Jack Bogle, known as the godfather of index funds, puts it best by saying, “Simplicity underlies the best investment strategies. Basic arithmetic works. Keep your investment expenses under control," he says. Study after study shows that buying the market, by investing in an index, outperforms trying to beat the market with active management.

Success in personal finance, like football, begins with the fundamentals. Saving appropriately, developing yourself, maintaining a reserve, avoiding lifestyle creep, and investing in index funds are five of the personal financial fundamentals. We believe one of greatest values we bring to our clients is “gently holding them accountable to these fundamentals.” We look forward to our continued partnership with you coaching you on blocking and tackling, and the NFL kick-off game Thursday, September 7th. In the interim, we hope you enjoy the football season with Friday night lights, college, the pros, or all three!