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Earnings vs. Management - Two Sides to the Same Coin

If you asked the average person what it takes to be financially successful, more often than not they would say a high-income equals success. In reality, that is only one factor in the equation, and it’s also by far the least important factor. The other factor, the more important one, is managing your income/financial picture. Here’s a simple matrix will better illustrate this point:

I’ve met very few people who have strong money management skills but don’t succeed financially because of low earnings. On the other side of that coin, we’ve all seen plenty of people who have very strong earnings but can’t quite get ahead. Unfortunately, the vast majority of us focus only on earnings and think the rest will work itself out. Because this isn’t realistic, let’s look at what is ideal. Looking at the above chart, the best box to find yourself in is the top left corner where your strong income allows you to enjoy the present while intelligently managing for your future. That said, I’d much rather be in the top right box than the bottom left. Knowing the importance of the management aspect then leads us to the next logical question, how do we manage well?

There are countless things we could list here to optimize your management, the vast majority of your success for good money management rests on four basic principles:

  1. Keep your investment fees and expenses low

  2. Minimize your personal and investment taxes

  3. Focus on your asset allocation

  4. “Mind the Gap” to grow your net worth

Keeping your investment fees and expenses low is a key principle at Olsen Family Financial and is the main reason that we center our recommendations on low-cost index funds and Exchange Traded Funds (ETFs). For example, $100,000 invested for 40 years growing at 8% with an annual fee of 0.5% will swell to $1,804,424. That same investment with an annual fee of 1.0% will only grow to $1,497,444, a difference of $306,980 for only a 0.5% fee delta! Taxes can take an even more significant bite out of our investment returns, luckily, our index fund investment approach also happens to be one of the more tax-efficient ways to invest due to their low internal turnover and our buy and hold strategy. We help our clients build an asset allocation based on their goals, risk tolerance, and time horizon. There’s a saying that stuck with me to “Mind the Gap” in regards to growing the gap between our income and our expenses, whether that means increasing income or lowering expenses. The larger that gap, the easier to reach our financial goals, and the most successful money managers attach it from both sides. So I invite you to join me as we minimize our fees and taxes, invest according to our asset allocation, and mind the gap.

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