Traction vs Wheel-Spinning
Money tasks that improve results and tasks that don't.
When it comes to personal finance, achieving long-term security and reducing stress isn't merely about earning more money; it's about investing effort in the right places.
While certain financial tasks require more diligent attention, others may actually benefit from a lighter touch.
Here's a guide on where to focus more effort—and where to dial back—to ensure lasting financial security and peace of mind.
More of this…
1. Budgeting and Expense Tracking
According to a Gallup poll, only 32% of American households prepare a detailed monthly budget, yet research published by the National Bureau of Economic Research (NBER) indicates households that actively budget experience 35% less financial stress.
“A budget is telling your money where to go instead of wondering where it went.”
— John C. Maxwell
Increasing effort in budgeting helps pinpoint unnecessary expenses and reallocates resources to areas that align with personal priorities and long-term goals.
I strongly believe that reviewing every expense every month is key to financial success. An example of this is reviewing, with your spouse if applicable, your credit card statement and bank statement. This improves accountability and accuracy.
Research supports this: a study published in the Journal of Consumer Research found that people who monitored their spending regularly spent 15-20% less than those who didn’t.
My wife and I skipped several months once only to find a recurring fraudulent charge on one of our cards. $39.99 a month for 4 months. It's not a lot but I feel like I allowed myself to get robbed.
The simplest budgeting plan I’ve recommended is what I call the guardrails budget. In this plan, one hits their savings goal at the first of the month and then pays off their (credit card) bill(s) at the end. Between those 2 guardrails, you can spend whatever you want guilt-free.
2. Understanding and Improving Credit Scores
The Federal Reserve reports that nearly 40% of adults in the U.S. are uncertain about what impacts their credit scores. A solid credit score can significantly reduce borrowing costs—by hundreds or thousands of dollars—over a lifetime.
Regularly checking your credit report, understanding its components, and taking action such as paying bills promptly can yield substantial financial benefits.
Click this link to get your free annual credit report. I recommend my clients do this every 2 years at minimum.
3. Retirement Savings
A startling statistic from Vanguard shows the median 401(k) account balance is only around $27,376 for Americans aged 35-44. Consistent, early investment in retirement accounts can dramatically increase long-term financial security due to the power of compound interest.
"Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it."
— Attributed to Albert Einstein
Consistently contributing—even small amounts—can drastically change financial outcomes, easing stress as retirement approaches.
Double check your pay check to make sure you are saving the right amount into the right account(s).
4. Debt Reduction Strategies
According to Experian, Americans hold an average personal debt of $101,915. Devoting more effort to debt reduction, particularly high-interest debt, saves significant money and stress in the long term. Aggressive strategies, such as the "avalanche" method (paying off debts with the highest interest rates first), have proven highly effective.
"Debt is like any other trap—easy enough to get into, but hard enough to get out of."
— Josh Billings
Paying down a 29% interest credit card balance is like getting a guaranteed 29% return on an investment. Guaranteed 29% in the market is impossible. Pay it off, lock in that ‘return’ and feel better about your money.
Less of this…
1. Daily Market Monitoring
Excessive tracking of daily stock market fluctuations can lead to stress-driven financial decisions. According to research from Fidelity, investors who regularly tweak their portfolios based on market volatility tend to underperform those who adopt a "buy and hold" strategy.
2. Over-Analyzing Minor Expenses
While tracking expenses is vital, obsessing over minor costs (the classic "latte factor") can distract from more impactful financial moves. Personal finance author Ramit Sethi emphasizes focusing on big wins—like salary negotiations or housing costs—rather than minor expenditures.
“Spend extravagantly on the things you love, and cut mercilessly on the things you don’t.”
— Ramit Sethi
3. Attempting to Time the Market
Research consistently shows market timing rarely succeeds. According to a comprehensive study by Charles Schwab, investors who tried to time the market missed critical recovery days, severely reducing returns.
“The stock market is a device for transferring money from the impatient to the patient.”
— Warren Buffett
Conclusion
Focusing your energy strategically on tasks that genuinely impact your financial health—budgeting, debt management, credit improvement, and retirement planning—while minimizing stress-inducing activities like market timing and micro-managing minor costs will lead to greater financial security and peace of mind.
Adopting this mindful approach to your financial tasks ensures you direct your efforts efficiently, enhancing both your finances and overall well-being.