Money Management Made Simple: Ockham’s Razor Can Still Guide Us Centuries Later

Don’t hem and haw, talking a problem to death. Solve it. Use a simple, clear strategy.

Many in doubt over which solution to take to their money woes should take the simplest one. This is a rule that can be followed in money management. It is based on the same principle as recommended by the Friar Ockham some seven hundred years ago.

Ockham’s Razor, also known as the law of parsimony, tells us that the simplest solution tends to be the best one. When presented with competing answers, Ockham tells us that we should opt for the easiest one. It is the one with the fewest assumptions.

To achieve financial independence, take a few simple, clear ideas and apply them over years.

*Be Steady and Consistent

Set up a simple, regular saving and investing program. Stick to it. Put it in place and forget about it. Put 10 percent of your pre-tax income at work into a 401(k) or IRA. Don’t fret over it. Just do it. Simply set it up and let the plan run. Once a year review it, deciding if you can increase your contribution and the distribution of your investments, then let the automatic investing function take over and make you a bundle over the long run. For instance, invest $500 a month in good times and bad over thirty years. Let’s say you earn an average of earn nine percent yearly—the latter is the historic long-term return of the stock market—you end up at $922,237, not including taxes.

*Diversify

Be sure you have some stocks, some bonds and some cash. How much? Generally, the younger you are, the more aggressive you can be; the higher your percentage of stocks can be. That’s because you have more years to make up for any bear markets you will encounter. But be sure you have a strong stock component—low cost stock index funds tend to be best—but also have some bonds. Why not all stocks? Bonds tend to shield you from the worst of terrible stock markets such as 2008. Today, as an old man, I have a 50 percent stock and 50 percent bond allocation in most of many portfolios. Why? I am ancient. I wouldn’t have a lot of time to make up for a lousy stock market, which we will certainly get at some point but I can’t say when. However, old though I am—I was born when Truman was in the White House, France was still on the Fourth Republic and the Dodgers, “Dem Bums,” were playing in Brooklyn—I could still live another twenty years or more. Hence, I might still need some portfolio growth, although wealth preservation becomes more important as one nears the end of a life.

*Adopt a Simple Budget

Have a spending plan that is reasonable and easy to remember. It should be stated simply and be clear such as: I will pay off credit card bills every month and pay no card interest. There is a simple rule that will save you thousands of dollars in interest and superfluous charges over the course of decades. It should be easy to remember. It should also steer you clear of needless interest charges and outrageous costs that come from those who recklessly spend.

*Set Simple Financial Goals

Make them clear, easy to understand, and easy to explain to others such as: I will build up a $10,000 emergency cash reserve in the next two years. I will spend x-amount on a vacation each year and not go over this amount (It is so nice to go on holiday and not have to worry about how deep in debt you are going to be when you return home to the unpaid bills). I will pay off my 30-year mortgage in 25 years. I will build up a portfolio of $500,000 over the next 20 years. The number can be almost anything you think is reasonable. Have reachable goals. Here is another goal: My portfolio will reach a certain point at which I will have achieved financial independence.

*Winning the Game

The latter is really the name of the game. Here one can use money for the best thing money can bring you: Freedom from unpleasant work or circumstances. Then one can spend the rest of a life devoted to whatever it is that will make you happy, whether it is gardening or travelling or writing the great American novel or doing volunteer work.
Great things can be accomplished with simplicity. That is something Friar Ockham knew very well. It is all there for you. That’s provided you take a razor to one of the big problems of life and cut it down to a manageable size.