Four Disciplines to Financial Success

I’ve said before that the path to financial success is really simple, just not easy. A lot of the tasks that are needed to get ahead financially are really quite simple. Things like:

As simple as these things are, they are not easy to do because it requires discipline.

Discipline vs. Conviction

Most investors think that investment success comes with conviction or intuition when really the thing that matters most is discipline.

If you wanted to become financially independent, what would you have to do? What are the important disciplines to help you get ahead financially? There are lots of theories out there; some are wacky, wild and crazy. For me, it’s more about common sense than anything else. For me, there are four key disciplines to financial success

A Disciplined Savings plan

In order to get ahead, you must put money away for the future. It requires a certain level of discipline to put away money on a regular basis. A forced saving plan is simply one where you have money debited out of your bank account each and every month. David Chilton popularized the phrase pay yourself first. The reality is it matters less what you invest in and more that you maintain a discipline to put away something regularly. There are two key points to remember: It’s never too late to start and the more you save the more choices you have for the future.

A Disciplined Spending Plan

Also in conjunction with a forced savings plan, you need to make sure that you are spending less than you earn so you do not go into huge amounts of debt just to try to save money. It all starts with that dreaded “b” word: Budgeting. Make sure you have a disciplined spending plan and you have a realistic idea of what is important and what is not. Make sure you can differentiate properly between your needs and your wants.

A Disciplined Investment Allocation Plan

In the real estate business, you’ve probably heard the old saying “location, location, location.” When building an investment portfolio, the saying should say “diversification, diversification, diversification.”
The problem is diversification has been treated more like an art than a science. For most people diversification is more about quantity rather than efficiency. In a recent study, the average number of mutual funds held by Canadians is somewhere between 15 and 20. In most cases, you can optimize a portfolio with 5 to 12 funds.The key is to have a properly allocated investment plan and then having the discipline to stick with that plan. The most successful money managers like Warren Buffet, Sir John Templeton, and Peter Lynch are successful because of adherence to their discipline. And yet they all have different disciplines.

A discipline to rebalance

In a previous article, I showed the financial merits of rebalancing. Little did I know that I would include re-balancing as one of the key traits to financial success? Once you have an investment plan, rebalancing helps you to make the best long-term decisions year after year.

According to Investopedia.com, rebalancing is simply the process of realigning the weighting of a portfolio. Through rebalancing, you will always sell higher and buy lower. Although we know that buy low, sell high is supposed to be the best strategy to invest, it is also the hardest to implement because it require overcoming significant psychological barriers to chase investments that have done the best. Just think about it, when you look at your investment statement and you see the investments that are doing poorly versus the ones that are doing well, what is your first inclination? Is it to get rid of your losers and buy more of your winners? Success comes in doing the opposite and that takes discipline.

So there you have my four disciplines to financial success. Did I miss any other disciplines worth sharing?

Stay true to your disciplines and success will follow. Good luck!

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

2 Responses to Four Disciplines to Financial Success

  1. Jim – your quote about financial success being “..simple but not easy” is a direct restatement of a well-known quote from investment guru Warren Buffet. Rather than try and pass this off as your own, I would encourage you to give credit where it is due and rephrase your quote to include reference to Mr. Buffet (e.g., I agree with Warren Buffet when he says….) or come up with something original.
    Eric

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