In today’s episode, we discuss the five factors that have a greater impact on your financial success than investment returns. While investment returns are important, focusing on these other key elements can have a far more significant effect on your long-term financial health.

First, saving is critical. The amount you save—both in retirement accounts and through daily spending decisions—matters. It’s not just about contributing to your 401(k) or setting aside money for a rainy day; it’s about your overall financial habits. By making mindful choices about your saving and spending, you can set yourself up for success, regardless of market fluctuations.

Second is taxes. One of the most overlooked aspects of financial planning is how taxes impact your wealth. Many people don’t fully realize how much they’re paying in taxes. Taxes can take a big bite out of your returns, so managing them effectively is crucial in building wealth.

Relationship stability is another often overlooked factor that plays a huge role in financial success. Whether it’s through a marriage, partnership, or family relationships, maintaining stability in your personal life can have significant financial benefits. Divorce, for example, can be financially devastating. By focusing on communication and stability in relationships, you can avoid costly financial pitfalls and ensure a stronger financial future.

The fourth factor is earning potential. While investment returns can certainly help grow your wealth, how much you earn from your job or business plays a much larger role in your financial success. Increasing your earning power—whether through advancing in your career, changing jobs, or exploring new opportunities—can significantly impact your financial situation.

Finally, we discuss real estate. It’s easy to get caught up in the excitement of purchasing a home, but it’s important to ensure that your housing costs don’t overextend you financially. Spending too much on a home can leave you with less money to save, invest, and prepare for the future. Make sure to make smart decisions when investing in real estate in order to ensure your financial stability and success. At the end of the day, while investment returns matter, they are just one piece of the puzzle.

By focusing on saving, minimizing taxes, nurturing stable relationships, increasing earning potential, and making smart housing decisions, you can set yourself up for greater financial success over the long term.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

-Find us on Facebook: www.facebook.com/friendstalkfinancialplanning

#ACPMemberWisdom #financialplanning #saving #taxes #relationships #earning #realestate #investing 

TRANSCRIPT:

John: Many people in the financial world focus on investment return, but there are five things that are more important to your financial success than investments. And that's our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Before we start talking about the five things that are more important than investment returns, hit subscribe. That helps other people find us on YouTube. Okay, John, let's talk about number one.

John: You probably get the same thing I do, Bridget, when you say, “Oh, I'm a financial planner,” people go, “Oh great, how's the market doing?” And of course, it's not like it's not important. It is important, but that's one of those things that is outside of our control. We can’t control what happens in the market, but there are things that we can control.

And really, as I look at the list of things (and I know we think similarly on these), I see that controllable things impact financial success way more than the investment side of things. The first thing that I think about is saving. How much you save is way more important than how much investment you get.

Bridget: Right.

John: And for me, it kind of breaks into two branches. One is how much do I put into my savings account and into my 401(k) plans and those sorts of things. But then the other side is how much do I save when I'm out acting as a consumer, when I'm buying the groceries and clothes and vehicles and. Am I a smart consumer and saving in that way? Plus, how am I saving as far as building up my nest egg? And I know that you're a big proponent of that too, but what are your thoughts?

Bridget: I totally agree. I would say for me how much you're saving in your investment accounts is bigger than how much you're saving as a consumer.

John: I'd agree.

Bridget: I think that a lot of people live paycheck to paycheck and carry credit card debt, which are hallmarks of not saving, while being very savvy consumers. So the biggest thing is how much you're saving. I think I'm probably less interested in being a savvy consumer at this point in my life than a lot of other people are.

At other times, I was a very savvy consumer, but now I spend more time and energy thinking about making money than I do about if I'm getting this particular item at the cheapest possible price. And it's just because how much I can save that way is maybe fun but not going to have as big an impact as if I'm thinking about how to grow our YouTube channel, for instance. That's a joke😊 

John: Yeah. And I think it depends on your circumstances.

Bridget: Right. I think sometimes people are very savvy consumers, but their energy might be better spent making more, which will be later on our list.

John: Yeah. What's the bigger bang for the buck? This just reminded me of a study I saw a decade ago or so. One of the big firms, Fidelity or T. Rowe Price or somebody did a study and said, listen, if you pick the mutual funds that were in the best quartile in your 401(k), it was a 401(k) thing, versus the worst fund picking over a tender of 20-year period.

So that was one difference. And then did you save 3% of your income or did you save 10% of your income? And people that picked the worst possible investments in the fourth quartile but saved 10% instead of 3% ended up far ahead of the people that picked the best investments but only saved 3%. It’s that sort of thing. The specifics aren't that important, but that idea.

Bridget: I don't know if you've had this experience, but I had one client come in and their spouse died. And their spouse was a very conservative person and had saved a lot, but it was all in a bank account.

John: Oh, interesting.

Bridget: Not even CDs. But because they had this saving habit, they were fine. This is a fine situation as far as we're concerned. It's not ideal. They can have a lot more money if they don't do that. But it happens. It's not something I recommend. And they come to us to help them feel confident about diversifying more and investing more. But I've seen more success there than I've seen with people who are savvy consumers but just not saving enough.

John: Yeah. It just goes back to the premise. It's not like investment return isn’t important. That client you described could have done better had they had a better investment performance. But the fact that they save is way more important. So saving, number one. Number two for me is how much do you pay in taxes? We all pay taxes. And why it's so important for me anyway is two things. One, it's a pretty big number relative to all our other expenses.

Maybe mortgage for some folks is higher, but when you take a look at how much we pay in federal and state taxes, local taxes, depending on where you live, and talk about income taxes, that is either the number one or number two expense for many, many people. And it's kind of hidden in that we have withholdings from our paychecks. And sometimes we'll have conversations. I’ll say, “Well, how much did you pay in taxes last year?” And I'll hear, “Oh, we didn't. We got a refund.” No, we all paid taxes.

And it's on whatever line of the tax return. Here's your total tax. But it gets lost in the shuffle, so we don't pay attention to it. It's not as salient—the fancy pants word for us. It’s not in front of our face, like when we go to the gas station the billboard has the price of a gallon of gas. So it's kind of hidden, and it's a big number. So when we can manage, that's more important than investment return for me.

Bridget: Yeah. And the same person who might be a very savvy consumer, will be kind of clueless about taxes and not want to do the work to go get the things that will help them save $500, because they'll think, “Oh, it's not that much.” I'm like, “$500 is $500 if you're saving it on your taxes. $1,000 is $1,000.” So you can get that bias where you're comparing it to how much you're paying in taxes. I'm paying $20,000 in taxes; $500 isn't that much.

Well, no, $500 is still a lot. Imagine if you could save $500 at the grocery store. Wouldn't you do it? Yeah. And it would take a lot more time than saving money in taxes. So I think saving money in taxes is huge. Next, and this, I think, is going to surprise people, but how stable are your relationships? That's number three.

John: I love it.

Bridget: Yeah. Getting a divorce is expensive.

John: We haven't seen an extended downturn in the market for a while. But going back to ’07, ’08, ‘09, when we had that whole credit crisis thing, it was a bad time from an investment return standpoint. But I remember talking with folks, listen, talk to somebody who's been through a divorce in the past five years. How much do you lose in the divorce versus in the stock market? That sort of thought process. And you go, “Oh, yeah.” And how steady are relationships again? Counterintuitive. What does that have to do with financial success? A ton.

Bridget: A ton. A ton. It's huge. And so, if people are having issues with relationships, getting counseling to try to work it out, is huge payoff if you can avoid a divorce because of it. That’s the return on investment.

John: I like the way you phrase it.

Bridget: Pardon me?

John: I said I like the way that you phrase that. And I had not considered that before just this minute. It's an expense to go to counseling, but it could be a great return on investment.

Bridget: Better than anything.

John: Yeah, that's really interesting.

Bridget: Yeah. And the happier you are, probably the more you make, too. And that gets us to the next thing, which is earning. This is number four. We think that how much you earn is more important than investment returns. Do you want to break that down a little bit, John?

John: Well, for me, it's sort of exactly at face value. We’ve got control over how much we earn, the type of job we take, the type of promotions, the things that we look for, and being able to earn more. If I take a different job and I'm earning 20% more, that's way more important to my financial success than my investment return is. If I'm under employed, I've got a job and I'm not maximizing my earning potential, that number over the next 5, 10, 15, 20 years is way more impactful than did I get 9% or 10% in my investments.

Bridget: And I want to give a shout out to Bert Whitehead here because he helped me develop this list. So I talked to him about 15 years ago now. And he had 10 things. We narrowed it down to five. But his saying was, “How much are you earning with joy?” And I think that with joy makes it a lot more insightful. First of all, you're less likely to spend just to console yourself because of your difficult job.

But also, it's a lot more sustainable so the earnings will hopefully be continuing. So being miserable at your job is not necessarily that great for your finances. And another thing that he would say is that it's a lot easier to earn more money than it is to cut spending. And I have actually found that to be true. Maybe it's not true for everybody but give it a thought.

John: I love that idea. Give it a thought. Don't dismiss it. Oh, no, wait a minute. Maybe it would be easier to make more money. We don't typically think about that, but that can be really, really impactful.

Bridget: Yeah. And it might or might not be true for everybody. Last but not least, are you house poor? If you're spending too much on your house and you can't save any money because you have to put all this money in for repairs and you have a big mortgage, etc., this makes it hard to save. And houses are not a liquid investment. And sometimes people make a lot of money in their houses, and sometimes they do not. And it's very undependable. I believe in buying a house, and I think it's a great part of your overall net worth. But being house poor, man, that is tough. So that is a big factor in your financial success. What are your thoughts?

John: Yeah, I agree. I think it was Bert Whitehead actually who taught me that real estate has made more millionaires in the United States, and it's also caused more bankruptcies. Real estate can be a great deal, and I'd even say usually it is, but when it's not, it's really a problem. And if you know people who have had problems with mortgages that are too big, houses they couldn't get rid of, all those sorts of things, again, way more important than what their investments were doing for them from a financial success standpoint. So right on point as far as I'm concerned.

Bridget: So then let's talk about investment returns. Not unimportant, but we really have two different factors that we like to talk about. So you're talking about the cocktail party when somebody says, “Oh, how much are you making right now?” I think, “Ay yai yai.” So there's short-term, which is that question, and then there's long-term. And long-term I think is more important in most cases and depends on being well diversified. So that's another part of investment returns that I think doesn't get the play that it probably should.

John: Investing is a long-term game. I don't know what the right number is. As far as a time horizon, what happened last year is speculation. Investing is a long-term deal. So we look at that. And being diversified is the same thing. In the last five years, US large cap stocks, S&P 500 has been the place to be. That's awesome.

You could have made a whole bunch of money there. But when it goes in the other direction, then suddenly you're in a bad spot. So being diversified doesn't help your short-term returns; it hurts your short-term returns. But we're talking about the next 20 years, 30 years, 40 years. It just makes a whole bunch of sense.

Bridget: Yeah. And we know that sooner or later US large caps will not be the number one thing to invest in. We don't know when that'll happen. That's the other thing. It’s kind of random too. It might have another run for quite a while. Who knows? But sooner or later it will go down and then you'll be happy that you have the other things.

John: That's right.

Bridget: Cool. That's a great place to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients. We'd love to hear from you. But we're also both members of the Alliance of Comprehensive Planners. And so, if you like what you hear on our show, but would like to find an advisor local to your area, check out acplanners.org.

Bridget: And don't forget to subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.