Nikola Tesla was a brilliant inventor, with nearly 300 patents to his name. He also had some unique habits. Among them: Every night, before he sat for dinner, he would ask his waiter for a stack of 18 napkins. He would then use them to carefully wipe down his silverware. Even at the Waldorf Astoria hotel, where Tesla lived for decades, and where the silverware was presumably clean, Tesla insisted on this time-consuming process before every meal.
In the language of economists, Tesla’s silverware-cleaning process had negative marginal utility. Translation: It wasn’t a great use of time. Maybe the first napkin, or even the second, helped ensure a clean set of utensils. And it probably gave Tesla, who had contracted a debilitating infection as a child, additional peace of mind. That’s called positive marginal utility. It served some use. But beyond that, it’s hard to imagine that all that additional cleaning and scrubbing contributed much. It just took time. That’s called negative marginal utility. It consumed time without adding any value.
When it comes to managing your finances, I suggest looking at things through this same lens.
The world of personal finance, unlike more scientific fields, is full of uncertainty. Consequently, in many situations, additional effort won’t get you any closer to a better answer—like cleaning your silverware for the eighteenth time. For many people, this notion is counter-intuitive. When we were children, we were all taught to work hard. You’ve probably heard of the 10,000-hour rule for mastering a skill. And in most fields, additional effort typically does yield a better result. That’s why it’s natural to associate success with hard work. And usually that’s the case. But in the world of personal finance, it’s a little more nuanced. There is, I think, an important distinction to bear in mind.
Historically, when people talked about personal finance, they focused primarily on investment-related questions—which way the market was going, which stocks were hot, and so forth. For years, these kinds of questions received the lion’s share of attention. But research has shown that most of the time people spent on these questions was not time well spent. Stock-picking, market timing and economic analysis rarely yield positive returns—somewhat like Tesla’s repeated re-polishing. What’s worse, these activities also tend to leave investors with bigger tax bills.
Don’t get me wrong. A well-constructed portfolio is certainly important and certainly worth your time and effort. I would just be careful not to give it too much attention—especially at the expense of other important financial questions. Below, for example, are questions that I see as a much better use of your time:
Tax planning: The rules are the rules, but are you doing everything you can to minimize your tax bill within those rules?
Debt management: Are you managing all of your obligations in a way that optimizes for cost, tax-efficiency and peace of mind—especially with the rule changes that went into effect last year?
Cash flow and retirement planning: Are you on track for retirement? For your children’s college education? If not, how could you get on track?
Estate planning: If the estate tax rules reverted to their old limits, would this be a concern?
Risk management: Do you have sufficient disability, life and umbrella insurance? Following this decade’s long bull market, is it possible that you have too much?
Career management: In my work as a financial planner, I’ve noticed something surprising: Some employers—even those that appear similar on the surface—offer benefits that can result in very different total compensation for their employees. This may take the form of supplemental retirement plans, profit sharing programs or equity grants. As a result, some people end up with total compensation that can be 50% or 100% higher—for exactly the same work. And since these incremental dollars are the most likely to be saved, the impact on your savings could be dramatic. This, I think, is something that is underappreciated and worth paying attention to as you manage your career.