No doubt you heard of the Big Rocks metaphor in setting priorities, focusing attention, and managing one’s time. It says you should focus on things that make the biggest difference and not get distracted by small things. When you put big rocks, pebbles, and sand into a jar, you should put the big rocks in first, followed by pebbles, then sand. If you put sand and pebbles in first, your big rocks won’t fit.
In personal finance we face a lot of decisions. Some of them are big rocks; some are pebbles; some are just sand. If you ask people who don’t read a lot of financial media and blogs, it’s very obvious to them what is the biggest rock. People who pay a lot of attention to their finance, however, can easily get distracted by pebbles and sand and forget the biggest rock.
I do a number of things to manage my financial affairs. In doing so, I accumulated knowledge and experience, which I share here. Some of them, to be honest, are just sand. Not that sand is useless, it’s just you shouldn’t mistake sand for big rocks.
I list below in random order a number of things that contribute to one’s financial well being. You tell me which ones are big rocks and which ones are just sand:
- Contribute to retirement plan at work, ideally to the maximum allowed by law.
- Invest in index funds and/or ETFs.
- Pay your credit card balances in full every month.
- Know which credit card to get and which one to use where for maximum rewards.
- Use a high deductible health plan with HSA.
- Stay in your “starter” home forever.
- Find the best provider for investing your HSA money.
- Get the best rate for your mortgage.
- Understand I-Bonds and TIPS.
- Know which cell phone plan to use.
- Only buy term life insurance.
- Get a 15-year mortgage instead of a 30-year.
- Do home maintenance jobs yourself to save money.
- Know how to do tax loss harvesting.
- Contribute to a Traditional IRA or Roth IRA. Understand how to do a backdoor Roth.
- Come up with the best asset allocation for your investments.
- Stay away from financial sales people masquerading as advisors.
- Drive a 15-year-old car.
- Send your kids to public school.
- Understand tax efficiency and which investments to put in which accounts.
- Figure out which bank to use for a savings account.
- Pretend you want to cancel cable and ask for a lower price.
- Figure out the best way to get and use frequent flyer miles for international travel.
- Participate in ESPP.
- Pay cash when you buy a car.
- Decide on whether to use CDs or bond funds for fixed income.
- Find and use coupons when you buy groceries.
- Know when to claim Social Security.
- Figure out the best method to rebalance your portfolio.
- Find the best rate for auto and home insurance.
- Minimize eating out.
Over 30 action items and counting. Some of them may qualify as a big rock, but the biggest rock is not in the list. If you manage your biggest rock well you can do none of the above and still be more financially secure than someone who does all of the above.
What is the biggest rock? It should be super obvious when you take a step back. If not, allow me to offer this one hint for what I regard as the biggest rock:
Do you think Dave Ramsey’s financial success comes from paying off his debt and refusing to borrow? Do you think Tim Cook knows how to do a Roth conversion ladder?
Why then do we see a lot of sand in the financial media and blogs? Because sand is easy and filling — there’s a good reason McDonald’s gets more revenue than Whole Foods — and because there’s money in making you do those sand things.
“I switched to this cell phone plan and I saved $_______.”
“I’m getting ___% rewards from this credit card.”
“I refinanced my loan to _____%.”
“I cut my spending on eating out by $______ a month.”
These are all small victories worth doing but remember they are not the biggest rock. Your biggest rock is your human capital, your ability to add value and do things fewer others can. It’s backward to treat your biggest rock as a mere inconvenience, something that should be thrown away ASAP.
There are only very few big rocks. Next time we continue with sand. 🙂
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KD says
Excellent piece. I agree wholeheartedly.
May I request an exploration of human capital and labor – distinguishing trajectory of employment with current employer from trajectory of career, understanding what steps to take for value addition, and many other issues like these?
Thanks!
Harry Sit says
KD – Cultivating human capital is easily said than done. It takes a long time. It varies greatly from person to person. The payoff is also far from certain. From the link TJ posted below, it could be going to law school and landing a job making $330k a year during years we hear as much as 1/3 of law school graduates can’t find jobs that require a law degree. You’d think “debt is evil” is too obvious and it requires no advanced degree to say it. Yet Dave Ramsey managed to “own” that message. Who knew you can become an international consultant and one of Time’s “100 most influential people” simply on organizing and neatness (Marie Kondo), making millions at the same time?
Sand, such as switching to a different credit card or saving money on cell phone expense, applies to everyone. It gives people instant gratification. The blogger also gets paid. That’s why everyone focuses on sand.
Sam Seattle says
I like this excellent post, Harry. I also like KD’s request above.
Jim says
Drive a 15 year old car is wisdom that is out of date. The main reason is better safety – what good is a nice retirement if you are seriously injured or killed in an accident or tied up in court, etc. Your life and health are more important than excessive frugalness – especially if you are driving other people like children or grandkids.
Also, better mileage, and better made cars exist now than 15 years ago. Buy a used 3 year old car with a good rating in Consumer’s Reports it is a wiser spend. This is coming from a man who drove a Ford Pinto with a stick shift for 10 years!!
Ritch says
LOL – it’s good to hear that you survived driving a Ford Pinto for 10 years. Unfortunately, that’s a statement some previous Pinto owners can’t make.
With all due respect, I don’t see anything wrong with saving money by driving a 15 year old vehicle, so long as it’s road worthy and has all the necessary safety features. The vehicle I drive the majority of the time is a 2001 with 206,000 miles. It runs great, gets appropriate mileage for a car its size and weight, is well equipped from a safety and security standpoint, and has all the amenities I require. But it cost me a WHOLE LOT LESS than a three year old used vehicle would have. For reliability and safety reasons, we do have a newer vehicle that is used for longer road trips – an 8 year old Honda Van with “only” 75,000 miles on it.
No one in their right might would advocate, or choose, to drive a vehicle that was a safety hazard. However, driving a safe, older used car can be a great way to postpone having to shell out “bigger bucks” for a much newer used ride. Therefore, I think an older vehicle is a viable option to consider, depending on one’s income, expenses and personal financial objectives at a given point in time.
Back in 2008 my wife and I bought a 1999 Toyota Camry for our son to use when he started medical school in 2011 [yes, we like to plan ahead]. It had 64,000 miles on it at the time. It survived four years of medical school, and now our son is carefully and regularly maintaining it with the hope that it will provide reliable transportation during his 6 to 7 year Residency. When it does give up the ghost, he’ll look for another good used vehicle at a reasonable price, paying much more attention to the maintenance history and mileage of the vehicle than to how old it is.
I mean no offense in responding to your comment. I just think we need to be careful not to “throw the baby out with the bath water” when we consider the current relevance of potentially outdated “conventional financial wisdom.” Sometimes I see folks suggesting that the “old” way of doing things is bad simply because the “wisdom” in question doesn’t line up with what they want to do. In this case, that might be done as a way to justify spending more than is necessary simply because someone “wants” a newer and nicer car.
Of course there’s nothing wrong with buying a newer and nicer car. I just think one needs to be honest with themselves as to why they’re choosing to spend more money to do so. Each to his own.
Great post, Harry. Your writing is often quite thought provoking. IMO, that’s a wonderful characteristic of, and compliment to, a blog’s author. Please keep up the good work!
Sam Seattle says
Yes, I agree that Harry’s posts are quite often thought provoking. I like them. A lot.
DTSC says
I would argue that the biggest rock is:
Spend less than you make.
If you don’t do this, nothing else matter
Harry Sit says
Even that is easier to do when you manage your human capital well. Even if you are able to beat Dave Ramsey on the savings rate you probably aren’t able to beat him on the amount saved each year.
Steve says
I have to agree with DTSC. Yes, a higher income can make saving easier. But even Dave Ramsey can spend all of his income and then some. If you never get into the habit of spending less than you make, you will never, ever get ahead. And if you get into the habit of taking all the credit you’re offered, leveraging your income, then you’ll actually fall further behind the higher your income!
Harry Sit says
Broke pro athletes notwithstanding, on average the savings *rate* goes up with income. When you multiply the higher income by the higher savings rate, you get double whammy (in a positive way). If this chart is accurate, at top 20% income the savings rate is 24%. The savings rate is 37% at top 5% income, and 51% at top 1%.
http://www.businessinsider.com/chart-savings-rate-by-income-level-2013-3
Badger says
Another vote for ” live below your means” as the biggest rock.
How else are you going to save? How else are you going to get to Financial Indepence?
Human capital would come in as a good size boulder, but it in my mind it all starts with the balance of good offense and excellent defense.
Harry Sit says
Badger – “Live below your means” is limited by your means. That’s why you see practically zero savings rate in the lower two income quintiles in the chart above, whereas it just naturally happens in the upper income quintiles. At the top 1% income, they don’t have to get religion and they still save 50% of their income. It’s an inconvenient artifact that savers don’t like to admit.
Badger says
Unfortunately most of us, do not have choice as to how we will earn.
Living below your means, is still the best road to financial indepence *.
We have been very fortunate. Not being on the hedonic treadmill has worked for us.
It also depends on where you live and who you associate with. We have saved 50 % of our income when we were in in the 50 % income quintile and save 50 % of our income when we are in the top 1 % income in the USA.
*Granted we have never been in lower quintiles and our health and job security has been excellent.
Harry Sit says
Badger – It’s true we can’t choose how much we will earn by just declaring we want a higher income. You must have done something to influence the move of your income from the 50 percentile to the top 1 percentile. It doesn’t just fall from the sky because we all heard of the lack of upward mobility in recent decades. If you kept your spending increase in check by not being on the hedonic treadmill, as your income went up dramatically, you would be saving 60%, 70%, or more of your income, not the same 50%. That again fits the pattern: higher income drives higher savings rate, which results in several times higher amount saved.
Badger says
How you see your self and when reality strikes, is hard to align. We never were at the 50 % percentile and were at the top 20 % percentile 35 years back.
I like to save, my spouse likes to give to charity. I rather pay the taxes. I am very much career oriented and use money/income as yard stick as to how successful I am. My spouse attitude is enough is enough and what more do you want ?
Something has to give and that is why our savings rate has not gone up.
I still like to think that unless you live below your means and reach financial independence is possible at any income level, however I agree that it is so much easier to save when you are in top 1 %.
robert says
I love all the suggestions…I think you have to be in a certain income bracket to afford an HSA…30k and up at least
Steve says
I think you missed the point of the article.
Sam Seattle says
Robert, I agree with Steve that I think u missed the point of the article.
Steve says
This article makes an effective point by burying the biggest rock almost as a footnote at the bottom of the article. I had to read it twice before I figured out what it was.
jc says
I realize this is a finance blog, but all to often people focus too many things other than their health. I’d argue that health is also a big rock and maintaining your health (both physical and mental) will strengthen your finances. Exercise more, eat well, stay optimistic, maintain social connections….
Also, important is protecting your assets through legal means or through insurance (life, umbrella, disability, etc.).
TJ says
So do you think Anita at Power of Thrift is making a mistake by quitting her law gig to travel?
http://www.forbes.com/sites/laurabegleybloom/2016/06/29/want-to-retire-in-your-30s-and-travel-the-world-this-woman-did-it/5/#193d424e744b
Is the concept of enough not a valid concept?
Harry Sit says
The law gig enabled her to travel. That just shows the power of managing human capital.
A personal decision is personal. It’s never a mistake as long as the person likes it that way. We also have to be careful to distinguish between early retirement and taking a sabbatical or gap years. The concept of enough is addressed in the previous post. Any number between $500k and $10 million can be said as enough. It just depends on the living standard you want and the opportunity cost relative to other things.
Sam Seattle says
Seems she uses dividend stocks to give her passive income. Harry, what do you think of that strategy? If I use dividend stock, I could have retired earlier?
Harry Sit says
Dividends are not magic. If you want more income you can always sell some holdings. The total returns matter. Whether the returns come from dividends or capital gains does not matter. Warren Buffet’s company didn’t pay dividend. It still made investors rich.
TJ says
She actually doesn’t use dividend stocks, she uses index funds.
JR says
Good point. My spouse is a veteran software developer, and is now a mentor to many young people just getting started in the industry. They see that he has been fairly successful, so they often ask him for advice on what the next hot tech stock is.
He tells them they’re not stock market experts, so don’t waste time trying to pick stocks. Instead, he tells them to focus on what they’re actually knowledgeable in–programming. Their most valuable asset is their skills. Invest time focusing on working their butts off, learning new technologies, doing projects outside of their jobs to increase their knowledge. Concentrate on that, and they’ll grow their careers and the money will follow. Then just stick the money in index funds.
He says they often just nod, humoring him. They’re looking for the quick path to riches. But I guess he hopes he gets through to someone.
Older and Wiser says
To perpetually healthy people, worrying about health is a waste of time.
To perpetually wealthy people, worrying about wealth is similar.
Those are both big generalizations, but I think they’re directionally accurate. Humans tend to take for granted that which they have in abundance, so the trick is being disciplined enough to ensure you’re covering all the key bases. Obviously most don’t cover any/many bases and so we wind up with the savings rate and average net worth we see today.
And for the other topic, when I made very little (military), I saved nothing. When I made a moderate income (~ national average), I saved moderately. I’ve been in the 1% for about 5 years and combined with living below my means have saved over half of my take home pay allowing me to become a MM. Plan to work for 3-5 more years and then retire with ‘enough’. Work to live, not the other way around, and it’s funny how long it took me to think like that.
Mylky says
I think the lack of reading comprehension is what is making people so defensive while responding to this post. Harry isn’t saying optimising/developing human capital is the biggest rock in Life, he’s saying it’s the biggest rock in Financial Success. If you become successful and then decide you’d much rather trade in your capital for “freedom”, that’s a Life choice, but your Human Capital is probably what put you in that position, more so than the decision to max out your retirement accounts (which would have required the income generated by your human capital, no?) So unless you inherited a truckload of money, doing any of those things listed (even living within your means) requires that you flex that one particular muscle FIRST. (Mixed metaphor? Eh.)