The “aha” moment – there’s nothing quite like that blinding light of understanding that brings deeper comprehension on an issue. Some are good: the joy and sense of accomplishment that came when some hard to grasp math concept suddenly became second nature. On the other side, some are bad: the sense of doom experienced on the side of the road when you realize the tools that you tossed out of the trunk did, in fact, have an intended purpose. Surely, you’ve experienced some of each.
Maybe you’ve also experienced some personal finance revelations as well. I know I certainly have. Here are five of my biggest. Read them with an eye towards avoiding them altogether or turning these potential aha moments into the happy variety:
Bodily What?
A couple of years into my time here at USAA, I got a call from a client I had worked with since shortly after my arrival. They wanted to let me know their personal light had gone on regarding their auto insurance. When we developed a comprehensive plan, I had noted that the $50,000 per person/$100,000 per accident bodily injury coverage they carried was probably inadequate in the event they were sued as the result of an accident. So, I recommended that they increase it. Sure enough, a couple of years later that’s exactly what happened and they were very thankful they had increased their coverage. Though I already understood this from an intellectual perspective, now I got it.
1% Expense Difference
As a financial planner, I’m always toying with numbers, and a couple of years ago I had a great aha moment with them. It happened when I was creating a presentation to show that investment expenses do matter. Though I’d preached this over and over through the years, the little spreadsheet I created to illustrate the point finally drove it home. Would you believe a 1% reduction in your average annual return caused by higher investment expenses could create a $100,000 gap in your ultimate IRA balance? It’s true! Contribute $5,000 to an IRA for 30 years, earn an average annual return of 8%, and you’ll have just over $610,000. Cut the return to 7% due to higher expenses and you’ll only end up with about $505,000.
Driving Yourself Into The Ground
No, I’m not talking about working too hard…but that can certainly be a revelation. Instead, I’m talking about how frugal car buying can translate into hundreds of thousands of dollars of savings. This revelation hit me while I was writing another article. I came up hundreds of thousands of reasons (or $) to own your car for eight years instead of four. If you direct what would have been car payments to your retirement savings your nest egg will be handsomely rewarded.
Taxes—It’s My Money
This aha moment hit me shortly after I left Uncle Sam’s loving embrace. I’d left the Army and had my own financial planning business and guess what? Come one April 15th I had to write a check for my income taxes for the first time in my life. It was then that it sunk in that tax withholding from a paycheck and your actual tax bill aren’t the same thing. Our tax system can easily confuse you about how much income taxes you’re paying. I’ve even had people who’ve sent thousands of dollars to Washington through paycheck withholding over the course of the year tell me, “I didn’t pay taxes, I got money back.” But here’s the thing. They did pay taxes. The money they got back was simply a return of their own money that wasn’t needed to cover the bill.
Investments Are Fashion.
Really? Early in my financial planning career I heard a folksy financial planner equate selecting investments with choosing a dress. Initially, I thought, “what?” but upon review, the light bulb went off and I realized yep, everyone is different and needs to use investments that, in his words, “fit them and they like.”
So there are some of my financial aha moments. Hopefully, they turn on a few lights for you. One last pearl hit me during a recent discussion on the benefits of saving and investing: Experiences can come with a price tag. That realization could be all you need to get or keep the ball rolling? I hope your ahas come with a smile!
