Bear Mountain Capital Inc.

My Favorite 80/20 Relationships

| April 15, 2024

Behavioral Finance | Blog | Budgeting | Planning Perspectives

You’ve likely heard of the 80/20 rule before; if you haven’t, prepare to have your mind blown … (just kidding). The 80/20 rule, aka the Pareto Principle, is a phenomenon which states that roughly 80% of results come from just 20% of inputs.

Using the 80/20 rule as a framework for decision making can help you focus your limited resources on actions that are the most impactful. When it comes to our finances, we’re always looking for quick tips and tricks. Here are some of my favorite 80/20 relationships.

Hit the checkmark box to increase your 401k contributions.

If your 401k plan can automatically increase your savings rate by 1% each year – you should do it. We could all agree that saving 1% more is a realistic goal. While it may seem immaterial and honestly a bit silly today, 10 years from now you’ve increased your retirement savings by 10% (not considering pay increases along the way).

As someone who runs financial projections for a living – this is substantial, especially when you’re younger (and you’re the youngest you’ll ever be). 

Stop obsessively budgeting… reverse budget instead.

(Hot take alert❗️) People don’t have to be be as focused on budgeting as much as they think…most of us tend to live an average lifestyle. I’m not trying to downplay the importance of knowing how much you spend, but too often we’re focused on ‘categorizing’ what our expenses are… either way, it’s an outflow.

Instead of focusing on how much is going out the door, you could shift your focus to how much you’re saving. Treat your savings goals just like your mortgage/rent – automate it. Set up automatic deposits so it goes out every month or with every paycheck.

     Income                                                                      Income

 (Expenses)  —- Shift Your Focus —->  (Savings/Investments)

     Savings                                                                     Expenses

By focusing on hitting your savings goals first, you’ll naturally be able to control what you spend because there will only be so much left over afterwards; nudging you to live within a certain budget. There’s power in positive thinking and when you view things from this perspective, it focuses your energy on growing your assets over time which is what truly matters for obtaining financial independence.

Utilize High Yield Savings Accounts

High yield savings accounts offer higher interest on your cash than most ordinary savings accounts and they’re easy to open – making it a no brainer. 

Usually you’ll open these types of accounts with a different banking institution, as most retail banks don’t offer competitive enough interest rates. The most competitive rates are typically offered by online banking institutions since they have lower overhead costs (no retail footprints).

Having your excess savings in a separate institution can serve as an additional layer of protection if you want to prevent yourself from spending more than you’d like. Cue Kevin Hart’s, “see the way my bank account is set up.

Stop trying to beat the market; beat your income from last year. 

Everyone thinks they’re a great driver, but statistics tell us we’re all probably just about average… When it comes to investing and picking the best stocks or funds to invest in, there’s an even higher likelihood you’re below average. Ironically, it’s also very common for professional investors to underperform.

Checkout this year’s SPIVA scorecard to see for yourself. Over the long run, across numerous asset classes, actively managed funds often underperform the index they’re trying to beat…A well-balanced portfolio of cheap, tax-efficient, index-based ETF’s can get you to where you want to go. 

When it comes to your money, your time is better spent investing in your career and focusing on ways to increase your income (and saving the excess). Outside of your finances, your time is better spent living your life with those you care about rather than trying to predict if a company is going to surpass next quarter’s earnings expectations.

Getting the big things right!

To quote former NFL player/coach, Herm Edwards, “a goal without a plan is a wish!” Without having a sense of direction, it’s hard to know where you stand and what you need to do (or not do anymore) to set yourself up for success.

To get big things right, you need to get an understanding of where you are today, what you’re planning for in the future, and what it’s going to take to make sure you live a fulfilled life. These big questions are often uncovered through a holistic financial planning process that considers all the moving pieces in your life. 

It takes upfront work to get things in order, but boy does it pay off in the long run.