Do you spend a lot of time worrying about your finances? And then perhaps you start following some of the most common financial advice? But is that really helpful? Examples: We’re often told to trim the small daily expenses that add up over time—but that doesn’t really add up to any less anxiety. And we’re told to diversify our portfolios between stocks and bonds—but that isn’t a particularly effective way to reduce anxiety-inducing volatility.
Bottom Line Personal recently asked investment strategist Jared Dillian, a former Wall Street trader and author of No Worries: How to Live a Stress-Free Financial Life, what he recommends to reduce money-related anxiety…
Step #1: Scrap the classic 60/40 portfolio in favor of one that provides true diversification. Investors typically divide their portfolios between stocks and bonds—an allocation of 60% stocks and 40% bonds is common. Reasoning: Stocks offer strong upside, while bonds offset stocks’ volatility. But: Bonds aren’t that effective at offsetting stock market volatility. Example: In 2022, the S&P 500 stock market index fell more than 19%…and the S&P US Aggregate Bond Index declined more than 13%, resulting in losses of around 16% for the typical 60/40 portfolio.
Anxiety-reducing strategy: Diversify into “hard assets” such as real estate and gold, and dramatically reduce your exposure to the stock market. An investment portfolio consisting of 20% stocks…20% bonds…20% real estate…20% gold…and 20% cash has returned a very solid 8.1% annual return since the US went off the gold standard in 1971, and it has done so without ever experiencing an annual loss of more than 12.2%. In fact, this portfolio has fallen more than 9.2% only once in a year, in 2022. What’s more, because this portfolio includes a hefty 20% cash component, investors who use it rarely have to sell off other investments at inopportune moments to cover costs. Helpful: Money-market funds are a good place to hold the cash component of this portfolio. The SPDR Gold Trust (GLD) is a good way to invest in gold. Many people already have invested in real estate—equity in the family home counts. But if you haven’t, the Vanguard Real Estate Index ETF (VNQ) is a good option.
Step #2: Stop depriving yourself of small pleasures to save a few bucks. Among the most common pieces of advice given to people worried about money—eliminate small, unnecessary recurring expenses. Example: Skip the $3.59 Starbucks coffee every weekday, and you’ll save $900 per year. That’s questionable advice—such small savings rarely add up to enough to significantly improve your financial situation…and depriving yourself of daily pleasures only further focuses your mind on your financial worries. Every time you drive past a Starbucks, you’ll think, I can’t even afford a cup of coffee.
Anxiety-reducing strategy: Eliminate small expenses only if they don’t bring you sufficient pleasure to justify their cost…your spending is truly profligate…and/or your financial situation is so dire that every dollar truly counts. Otherwise, let yourself enjoy life’s small pleasures, and focus your financial attention on bigger things that can make a much larger difference to your bottom line—more about those big things below.
Step #3: When you hear the word “recession,” think “sale.” Economic downturns are a major cause of financial anxiety—unemployment rates rise…stock values fall…and the news is full of tales of financial woe. But for certain people, recessions are something else entirely—they’re buying opportunities. Luxuries such as beach houses, boats, RVs and more are available at sharply discounted prices during recessions because the supply of these items suddenly exceeds the number of buyers who can afford them.
Anxiety-reducing strategy: Maintain some liquidity. If you hold 20% of your portfolio in cash, as described above, you will have money to spend at times when everyone else is feeling the pinch.
Step #4: Your home is your castle—but you’d worry less if it was your cottage. Debt is the largest source of financial stress for many people…and mortgages typically are the largest debt obligation. Money spent on a house isn’t wasted—real estate tends to increase in value, and it can be an important component of a well-diversified investment portfolio. What really matters for your portfolio is your home equity, not the total value of your home.
Anxiety-reducing strategy: Consider downsizing. Because of the big dollar figures involved with real estate, it often is the single most effective way to reduce financial obligations and anxieties. Empty nesters often can downsize without even reducing their quality of life—once the kids are grown, some rooms in the home may go almost completely unused…and the quality of the local school system is no longer a high priority. Example: If you have a $2,500 monthly mortgage payment and $400,000 in equity in a home that’s currently worth around $800,000, you could downsize to a home that’s worth $400,000 and have exactly as much equity but with no mortgage payments. Doing this will almost certainly also reduce your property tax and utility, insurance and maintenance bills.
Step #5: Buy a vehicle that won’t impress anyone. For many Americans, cars are their second-biggest purchase after their homes…their second-biggest debt payment…and their single biggest financial mistake. The average new car now costs more than $45,000, and luxury vehicles can cost substantially more. That’s a massive amount of money to pour into a purchase that will quickly depreciate.
Anxiety-reducing strategy: If worrying less about money is a higher priority for you than impressing the neighbors, the solution should be obvious—pay as little as possible for a reliable car. Reliability is crucial because an unreliable car is a cause of financial anxiety, not a solution. Fortunately, there’s very little correlation between the cost of a car and its reliability—the Toyota Corolla and Camry and the Honda Civic and Accord are among the most dependable vehicles on the road and also among the most affordable, with starting prices comfortably below $30,000.
In normal times, the smart move would be to buy one of these cars used to save even more money…but the pandemic distorted the auto market so dramatically that desirable used cars currently cost nearly as much as new ones. For the time being, you might as well buy new—that way you get a full warranty and don’t have to worry whether the prior owner took proper care of the vehicle.
Step #6: Consider paying down debt rather than investing. The math here seems straightforward—if your investment portfolio delivers an annual return of 8% and your mortgage has an interest rate of 4%, then surely it’s foolish to draw down your investments to pay down your mortgage. But that math fails to take financial anxiety into account. The more money people have invested, the greater their fear when financial markets become volatile…but the less they owe on their mortgage and other debts, the better they tend to sleep at night.
It isn’t just mental health that’s at stake here—when people are in the grips of financial anxiety, they’re prone to making poor decisions, such as panic-selling stocks. That doesn’t mean everyone should prioritize paying down their mortgage over investing…just that it’s valid to consider your anxiety levels when making this decision.
Step #7: Before trimming expenses, ask yourself, Could I increase my income instead? Cutting costs is painful. Not only does it mean we must stop buying things we enjoy, we start to see the world from a “scarcity mindset”—we become focused on what we no longer have and worry about what more we might lose. Earning income often is engaging. We not only challenge ourselves mentally when we take jobs or start businesses, we start seeing the world with an “abundance mindset”—we become focused on the opportunities available and see brighter times ahead.
Anxiety-reducing strategy: Start a side hustle…take a part-time retirement job…or figure out what you own that other people might want to rent—every dollar you earn will ease your financial anxieties even more than a dollar saved.
