The holiday season is a time for introspection. It is a time to evaluate how we are living our lives and seek out ways to improve. This process started with Rosh Hashana, where the shofar “woke us up” to do teshuvah. Yom Kippur followed, where we repented for our sins. Now we are at Sukkos, the final leg of our holiday journey, an agricultural festival of thanksgiving as well as a commemoration of when Bnei Yisrael wandered in the desert for forty years. To me, Sukkos is one final opportunity to get our house in order before we embark on the new year. The decisions we make from Rosh Hashana through Sukkos may set the tone for the rest of the year.
Every year around this time I have the same epiphany: Investors should also set aside time to reflect on their money decisions from the past year. While there doesn’t need to be a specific day for this type of introspection, or a liturgy to recite, making sure to review our money decisions periodically is an important component of the financial planning process. Many of the poor financial decisions that investors make are avoidable with proper education and tweaking one’s lifestyle. Below are five common personal “financial sins” for which investors may need to make amends to get the year 5783 started on the right foot.
- Spending money you don’t have: Overall, the rise of American consumerism is a good thing. It’s good for the economy, stimulating growth as individuals purchase more goods and services. It also benefits the consumers who purchase products that bring joy or improve the way they live. However, there is a fine line between living “the good life” and taking out an insurmountable level of debt, which could lead to financial ruin. In today’s world, almost any purchase has a payment plan or financing option available to allow consumers to obtain merchandise they can’t currently afford. This may lead people to spend heavily on items like going away for yuntif, a second home in Yerushalayim, or even on higher education they can’t afford. Acquiring all these luxuries through financing may be a very imprudent decision. It’s imperative to be cognizant of your income level and cash flow and only spend within your means.
- Procrastinating retirement planning: Many folks hold off on planning for retirement. They assume that there will be a more opportune time to start planning for their financial future. This may be because they anticipate a cash flow improvement when their kids are finished with yeshiva day school, they will be earning more money after a promotion at work, or they will experience a meaningful liquidity event after the sale of their business. In reality, the longer one waits, the harder it is to save and accumulate wealth when considering factors like lifestyle creep and losing out on compound interest. To quote Pirkei Avot, “If not now, then when?” Starting to save even small amounts of money now is a far better approach than planning to save larger amounts when your financial situation hopefully improves in the future.
- Making financial decisions based on what your friends are doing: The social pressures that come with living in a tight knit community or having a close group of friends may be some of the most difficult money challenges to overcome. These pressures lead to a “keeping up with the Goldsteins” mentality, which may lead to heartache, regardless of income level. There is always somebody richer than you and who has better stuff than you. Coming to terms with this fact of life can make it easier for you to focus on what’s actually important. Social pressures may also lead people from the same circles to adopt a similar investment philosophy. However, investment discussions at the kiddush after shul or other gatherings typically focus on items that garner excitement like exotic investment opportunities, exclusive deals, and winning stocks. There is typically no mention of the various exciting investments on which people lost money, and diversified portfolios made up of low-cost index funds (Yawn!) rarely get airtime. Yet, the latter is a far more practical approach to accumulating wealth and reaching one’s goals. The best practice when it comes to friends and your finances is to keep the two separate.
- Dismissing your insurance needs because it’s expensive: Premium payments for life, disability, and long-term care insurance all eat into one’s annual cash flows. These costs are viewed as a nuisance, and obtaining this coverage is pushed off by some folks until it’s too late. I tell my clients to embrace this annual financial outlay and to view it as a small tax on being alive and healthy enough to provide for your family. It may be a financial annoyance today, but it can save your family from financial devastation in the future.
- Avoiding estate planning because it’s uncomfortable: Estate planning, and all its components, is generally the least popular part of financial planning because it involves contemplating one’s demise. The portion of the Unetanneh Tokef prayer on Rosh Hashana and Yom Kippur that discusses our death is one of the most emotional of the holiday season, leading many congregants to tears. In short, it is not a pleasant subject. However, what is even less pleasant is the fiasco that is sure to happen after the death of a family member who didn’t do proper estate planning. Taking the time to sit down with a competent attorney who specializes in these issues is imperative. The attorney can draft the relevant documentation, such as a will, health care proxy, power of attorney, and trusts, if necessary. Furthermore, the attorney can put together a cohesive plan and coordinate with the client’s other advisers to ensure that everyone is on the same page. Together, this collaboration will help ensure that the client is provided for in the event of deteriorating health, as well as for the orderly disposition of their assets upon their death.
- Rectifying your financial sins: Acknowledging wrongdoing is the first step of repenting for one’s sins. Hopefully, the aforementioned points will help you recognize some common errors made when managing personal finances. The second step is implementing changes in one’s life to correct course. Typically, taking small steps, rather than making drastic changes, is an effective approach.
Below is a small sampling of the many possible minor modifications that can help correct one’s personal finances.
Enroll in an employer’s 401(k) plan and have a small percentage of your salary automatically deposited every paycheck. It’s also advisable to sign up for automatic escalation of your annual contributions so you will gradually be depositing more money each year.
Get a relatively cheap term life insurance policy so you have some coverage in the event of premature death. Additionally, signing up for group disability insurance through work is inexpensive and can ease the financial burden on your loved ones if you are unable to work due to a disability. The modest expense of both these policies should not meaningfully impact your cash flow.
Establish an Investment Policy Statement (IPS) to help resist peer pressure: Writing out a simple IPS can be extremely beneficial in this regard. Your IPS should clearly define your financial goals and how you plan to reach them. It can also help you stick to a disciplined process for spending, saving, and investing. Utilizing an IPS helps investors focus on what is important while ignoring what isn’t.
There’s an anonymous quote that sums up this approach quite well. It goes like this: “Small choices become actions, actions become habits, and habits become our way of life.” Tiny adjustments can lead us to a better spiritual life and can improve our financial life as well.
Wishing all Jewish Press readers a happy, healthy, and prosperous New Year!
Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.