In the United States, we've come to praise efficiency. Getting more done in less time gets you a gold star of approval from the rest of society. And that's great when it comes to your work life. But when it comes to your personal financial planning, is it possible to become too efficient?
How Efficiency Results in Disaster
In the light of the pandemic, we've seen various instances where being overly efficient has backfired. Take the efficiency of hospitals, for example. Keeping a limited number of ICU beds is wise because hospitals aren't wasting space. But when demand increases, the lack of ICU beds causes a huge issue for the influx of patients desperately in need of care.
Is it possible you're treating your finances similarly? Some people get so caught up in over-optimizing their portfolio and keeping everything invested for maximum gains that they might forget the need for cushion, for breathing room.
And sometimes worrying too much about efficiency is simply wasted time. For example, people might spend hours figuring out how to get the highest credit score possible. But in reality, there's not much difference from a lender's perspective whether you have an 820 or 825 credit score.
How to Create a Balanced Yet Efficient Financial Picture
The key to optimization is creating the right amount of efficiency without going overboard.
- Build up reserves. Life is going to happen, and there's nothing you can do about it. But putting proper emergency reserves in place means you won't need to sacrifice other investment opportunities to pay for unanticipated expenses.
- Focus on time in the market, not timing the market. Investors that try to time putting money in and pulling it out at the exact right moment might miss out on growth by not being in the market or getting out too early. Develop a strategy, then stick to it. Keep in mind that may mean taking a passive "set it and forget it" approach to let your money build over decades. Sometimes, especially in investing, less is more.
- Pay for expertise. Some people think that paying for expert advice is a waste of money. But a financial planner can actually help you become more efficient not only in your investments but how you think about money. They can point out areas you may not be paying enough attention to and clue you in on where you can afford to take more risks.
The Bottom Line
When it comes to managing finances, efficiency is a great thing. But putting too much concern into optimizing your finances or fretting over small things can increase financial stress. That's where creating a financial plan, building an emergency cushion, optimizing where you can, and letting it ride can help. As long as you're working from a solid financial plan, you don't need to worry about creating maximum efficiency in every area.
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Original Source: Credello: Being Highly Efficient is Great, But Can It Be Disastrous for Your Finances?
