wise money management

Wise Money Management

My clients always ask me how I manage my own money as if it’s a secret that I keep to myself. The thing about wise money management is that people often feel like no matter how much they learn about the latest techniques and trends, they’re never quite doing it right, that there’s always some better way to save or to invest.  

Well, as a CERTIFIED FINANCIAL PLANNER™ professional with more than 20 years of experience, I’m here to tell you that the way I manage my own money is not all that different from how I manage my clients’. Here are 6 tips I focus on the most when managing my own money. 

1.) Start Early & Write it Down 

One of the best starting points for wise money management is to start early and write down both your goals and your accomplishments along the way. I began saving seriously at the age of 10 when I started a landscaping business with my best friend, Chris. Though many people do not start saving that early, or even early at all, it is never too late to start implementing wise money management techniques.  

I’m not sure how I intuitively knew to save money, but looking back, it was probably a combination of seeing how my parents and grandparents lived that had the biggest influence.  

Think About Your Past!

My parents lived a relatively frugal life and didn’t spend money on much of anything that wasn’t truly needed. Going out to eat at a sit-down restaurant was something I only remember doing once a year as an extended family get-together event around the holidays.  

My parents’ frugal lifestyle was influenced by how they grew up. Both sets of grandparents lived in small coal mining towns in southeastern Ohio. On my dad’s side, they had a huge backyard garden where they grew their own vegetables. Anything not used in the summer months was canned and prepared in the winter months.   

There was also no such thing as spending money on bottled water back then. I remember my grandfather taking me to the natural spring outside of town and filling up 5-gallon glass jugs that they would store in the basement and use for drinking water. All these experiences influenced my earliest values about money and wise management techniques.  

So, when my mom took me to the bank to open a passbook savings account after starting my landscaping business, I was hooked. I loved writing in the physical passbook the bank gave me. There was something magical about seeing the balance grow each week that inspired me to keep saving. In some ways it became addictive.  

Oftentimes wise money management comes in the form of very small steps that compound over time. Saving early, consistent investing, and tracking your progress are all small steps that can make a huge difference in the long run. Though living the frugal lifestyle of my parents and grandparents is an extreme, there are definitely important takeaways regarding cutting back on unnecessary items in order to make wiser money management decisions. 

2.) Practice Smart Diversification & Avoid Market Timing 

The next wise money management tip is to practice smart diversification and avoid market timing. I’m sure you’ve heard of diversification a thousand times, but it’s a common misconception that owning a handful of stocks, or a broad-market index fund, is enough diversification to keep your portfolio safe. This was a lesson I had to learn the hard way. 

After opening my savings account at age 10, my first real investment came at the age of 16 when I put all my money into a four-year CD (paying 12% at the time!). While this may be a good tactic for a 16-year-old, I’ve since taken a more diversified approach to investing. 

My first step in attempting to diversify was talking to the banker who set me up with the CD. As a 20-year-old with a high tolerance for risk, I naturally asked him what would give me the best return. He said a mutual fund that invests in small company stocks. However, in the same breath, he warned me not to put all my money into this type of fund even though it had some exceptional returns over the previous five years.  

Of course, I didn’t listen and learned the hard way that stocks often move in cycles, and just as I invested all my money into a small company stock fund, small company stocks went out of favor for several years.  

Though hard, it was a necessary lesson to learn, and now my view of smart diversification looks quite a bit different. It still involves using mutual funds and recently the addition of ETFs, but it has broadened to well beyond small company stocks.  

A smart approach is a global approach.

The global approach means you diversify your portfolio across close to 50 countries and over 9,000 stocks. Compare this to just one country and the 500 stocks represented by the S&P 500. Academic research shows that, historically, a global approach reduces volatility without sacrificing returns and it can often increase returns.1 You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, wise investors are well positioned to seek returns wherever they occur. 

Similar to smart diversification, avoiding market timing is another money management technique that can improve your returns over time. The fact of the matter is that timing the market doesn’t work. There is no way to predict short-term fluctuations with enough accuracy that you can consistently make the right decision about when to buy and when to sell. Staying in the market, even through volatile times, is a much better choice when trying to build long-term wealth. 

Historically, though it has had many ups and downs, the market has always rebounded over time. That’s why it’s so important to trust the market and avoid temptations to time it, instead letting time be your ally when growing your investments. 

3.) Consider the Drivers of Return With Wise Money Management

Although I learned my lesson about putting all my money into one small-company-stock basket, there was some validity to my thoughts about looking for higher returns.  

There is now a wealth of academic research into what drives returns. Without getting too technical, expected returns depend on the current market price of an investment and the expected future cash flows generated by the investment. Investors can wisely use this information to pursue higher expected returns in their portfolios. 

The 3×3 methodology is what I personally use because of the depth of academic research done on the technique as well as how pervasive it is. It can be successfully applied across various size companies as well as globally across international and emerging market companies. The 3×3 approach simply states that there are three factors that drive higher expected returns for stocks and 3 factors that drive higher expected returns for bonds.   

For stocks, the three factors are: 
  1. Company size: Small company stocks perform better on average than large company stocks over the long term. 
  1. Relative price: Look for stocks that are trading at a discount. A good analogy for this is only buying clothes when they are on sale. You’re still getting the same product, but you may have wisely kept an extra 20% in your pocket. 
  1. Profitability: More profitable companies perform better than less profitable ones. 

For bonds, the three factors that drive higher expected returns are as follows: 

  1. Term: The amount of time a borrower has to pay back its loan. Long-term loans are generally more expensive than short-term loans. Since a bond is essentially a loan from the investor to the company, a long-term bond will generally cost the company more (meaning higher interest rates to the bondholder). 
  1. Credit quality: Similar to an individual’s credit score, a company’s credit quality indicates its creditworthiness as a borrower. More stable borrowers get better deals on loans than less stable borrowers. If Krispy Kreme applies for a loan, they will probably pay higher interest than Apple. 
  1. Currency premium: Similar to the U.S. government and U.S. companies, international governments and international companies issue bonds to raise money. By expanding the opportunity set to include international bonds, you can improve expected returns.  

Understanding these factors is an important consideration when building a diversified portfolio and investing for the future. 

4.) Manage Your Emotions & Look Beyond the Headlines  

Back when I was 20 years old, my emotions and greed got the best of me. I saw the high double-digit returns that small company stocks had in the previous five years and I got excited. Markets will go up and down, but reacting to the current environment at the time led to a poor investment decision.   

Today, the headlines often drive the emotions of investors. Sometimes even those who are supposed to be the “wise money managers” will fall prey to their emotions and the latest investment craze or trend. Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad.  

When headlines unsettle you, consider the source and maintain a long-term perspective. I’ll let you in on a little secret. Usually sources (CNBC, CNN, FOX, newspapers, etc.) are driven by advertising revenue and their primary goal is to maintain a high level of viewership. Dull and boring topics don’t drive high viewership, which is why you don’t hear them talking about simple strategies like starting early, dollar-cost averaging, and diversification.  

My MBA professor regularly shared his favorite strategy of KISS (Keep it simple, stupid). At the time, I didn’t realize how much that age-old saying would apply to wise money management. Though it can be tempting to get in on the latest get-rich-quick investment, as much as possible, don’t let your emotions (or the headlines) get in the way when making decisions about buying and selling investments.  

5.) Emergency Fund & Vacation Account Tips 

One of the biggest threats to wise money management (by a surprisingly large margin) is large one-time expenses and vacation costs as they can quickly put people into debt or blow a budget.  

Most people actually don’t have a budget, which isn’t a big deal if you can adhere to one of the most basic rules of thumbs: Spend less than you make. Although simple, the average American is too caught up in immediate gratification to adhere to it. If you are one of the few who wants to start making wise money management decisions around taking vacations and planning for the unexpected, there are a few simple strategies that I use.  

You have probably heard of these strategies before, but have you actually acted on them? My intent by pointing out what may seem overly obvious is to create action. 

The first step is to open two new bank accounts. The first account is called “Emergency Fund” and the second “Vacation”. These don’t necessarily have to be bank accounts, but you should have a safe place to put money away that is separate from your daily spending and other investments. This will help you stick to a savings plan and create an easy way to track your progress. 

Saving for Vacation 

Most people have a general idea of what they spend on vacations. If you don’t, check your credit card statements and add up everything you spent on your last few vacations. Don’t forget about the excursions, activities, and extra eating out you did. These can add up quickly.  

If you take multiple vacations throughout the year, be sure to include the total in your estimate. Let’s say you are a family of four and spend $12,000 per year on vacations. The next step is to begin setting aside $1,000 per month into your vacation account. If you receive bonuses once a year or throughout the year, you can adjust accordingly, but don’t count on your bonus covering the entire vacation expense because unexpected things will come up.  

If the numbers aren’t adding up for you and you can’t set aside that much throughout the year, you’ll need to take fewer vacations or less expensive ones. Like I mentioned earlier, wise money management is often very straightforward but not always easy to implement because you often have to make difficult decisions on how to allocate your money.   

Remember: Spend less than you make! If you’ve been regularly spending $12,000 per year on vacations but you just proved you can’t make it work to save that money ahead of time, then you’ve been spending more than you make! 

Emergency Fund 

As far as an emergency fund goes, it works very similarly to the vacation account in terms of saving a certain amount per month. You’ve probably heard that you should have an emergency fund of 3-6 months’ worth of expenses. This is an excellent starting point and you typically won’t go wrong with having somewhere in between saved. However, here are a few guidelines to help you decide whether you should have closer to 3 or 6 months (or even more in some cases) saved: 

Save 3-4 months’ worth of expenses if: 
  • You’re relatively healthy 
  • You don’t have much debt 
  • You rent and your car is reliable 
  • Your job is very stable or you could easily find a job if you lose your current one   
  • You don’t have kids 
Save closer to six months’ worth of expenses if: 
  • You live in a high-cost-of-living area 
  • You own your home 
  • Your job isn’t very stable  
  • You have children, a stay-at-home spouse, or other dependents to support 
  • You have a medical condition 
Saving a year’s worth of expenses is ideal if: 
  • You have a high income 
  • You have a niche position or specialized job that might require relocation or take extra time to replace 
  • You are the sole provider to multiple dependents 
  • You are retired or nearing retirement 

6.) Wise Money Management Focuses on What You Can Control  

The bottom line is that wise money management focuses on small steps that you can control. Over time, your efforts will compound and your overall financial situation will be elevated to the next level. The tools to be wise with your money are at your fingertips, but putting them into action is often the most difficult part.  

Here is a summary of what you can do to start practicing wiser money management. Keep in mind that not all of these changes may be realistic to implement all at once. Wise money management is always a work in progress, but the sooner you start, the better off you will be. 

  1. Create a wise money management plan that fits your retirement needs and risk tolerance. 
  1. Use academic research to structure your investments in a way that increases your probability of higher expected returns. 
  1. Diversify globally. 
  1. Manage expenses, investment turnover, and taxes. 
  1. Stay disciplined through market dips and swings. 
  1. Don’t let your emotions and the media outlets get the best of you.  
  1. Employ the KISS principle. 
  1. Set up a vacation account and emergency account. 
  1. Track your progress and make changes as needed. 
  1. Consider working with a financial advisor if you are not doing so already. 

Learn More About Wise Money Management 

Are you interested in making wiser money decisions but struggling with how to implement these tips? We would love to hear from you! At Calamita Wealth Management, we work together with our clients to find the best solutions for their financial needs. To learn more about how we can help you find financial confidence and to discuss wise money management further, schedule an introductory phone call using our online calendar or reach out to us at (704) 276-7325 or todd@calamitawealth.com

About Todd 

Todd Calamita is the founder and managing principal of Calamita Wealth Management. Calamita Wealth is an independent, fee-only wealth management company located in Charlotte, NC, serving people locally and across the country. It focuses on providing wealth management solutions to affluent individuals over age 50 and their families. He has had more than 20 years of experience in the financial services industry. He is passionate about helping people have a better life. Todd does this by designing and implementing customized financial plans that bring clarity and confidence.

Todd is a CERTIFIED FINANCIAL PLANNER™ and CERTIFIED DIVORCE FINANCIAL ANALYST® professional. He holds a Bachelor of Business Administration from Ohio University. Todd also holds a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. He has authored a book, Plan Smart: Conquering 10 Common Money Traps, as well as numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He has also been featured in a Financial Boot Camp TV series as a volunteer showing people how to make smart decisions with their money. When he’s not working, you can find Todd spending time with his wife, Teresa, and their two sons, Colin and Cameron. He enjoys rock climbing, swimming, and traveling. Todd even has a black belt in Tang Soo Do, a Korean martial art. To learn more about Todd, connect with him on LinkedIn


1 https://corporate.vanguard.com/content/dam/corp/research/pdf/Global-equity-investing-The-benefits-of-diversification-and-sizing-your-allocation-US-ISGGEB_042021_Online.pdf