Wiser Financial Advisor – Just Do These Three Things
Today we’re going to talk about simplifying down to just a few actions to focus on.
Clients ask me, “Hey, are there some good episodes that I can share with my kids?” or “Josh, you work with a lot of people that have been enormously successful in their financial lives. What did they do? What are some commonalities that we can repeat and hopefully get the same result?”
In other words, they’re asking, “What’s the secret to getting rich?”
If we had to narrow it down to three very actionable pieces of advice, what would those be? Today I have titled our episode Just Do These Three Things because these are the three I believe will make the biggest difference in your financial outcome. And this is really shareable content for anybody in your life that you think needs to get started the right way and focus on a few principles.
Principle number one of the three: Avoid getting into debt like the plague. We really want to avoid borrowing from anyone, even family. And if we do, pay it off as fast as we possibly can. We want to pay our debts off ASAP. This is about increasing cash flow and creating greater financial security for you and your family.
You might say, “But this debt is at zero percent interest.” Or, “It’s deferred interest on my student loans.” Whatever the case may be, debt is the enemy of growth. Bottom line, there’s still a required monthly payment. When you go into debt, you’re borrowing from the future. It’s pretty common in our society. I hear a lot of people justify it by the interest rate they’re paying, or the low payments they have. One thing I can tell you is that wealthy people don’t have debt or have very little debt. If they do have any debt, it’s probably on a piece of real estate. They probably have a ton of equity and for whatever reason haven’t paid off the full principle yet.
Even rich people like having no debt because it just feels good. And although there might be some math we could do to justify investing the difference and hopefully ending with a better outcome, the bottom line is that we don’t know what kind of results you’ll get in any kind of an investment. Nothing is guaranteed. So, when it comes down to it, we want to pay things off as fast as possible to increase cash flow and give ourselves an emotional sense of financial security.
In getting rid of debt, we like to use Dave Ramsey’s debt-elimination strategy, which is called the debt snowball. And in fact, Dave didn’t invent it himself, it was somebody before that—but it works. It works really well, and there are a lot of studies that will point back to it being a very effective strategy at eliminating debt quicker than many other strategies.
To do the debt snowball, you list all the money you own. Then you list all your debts in order of the largest to the smallest. You want to focus on the smallest debt first; that is, the debt with the smallest balance. Then you’ll make the minimum payments on everything on that list of debts except for the smallest one. You put 100 percent of all the extra money in your budget into paying off that smallest debt.
We did a whole episode on the magic of the debt snowball a while back. It’s worth a listen, but this is the synopsis: Once we pay off that smallest debt, even if it’s a teeny amount of money—maybe only 20 dollars a month but when that debt is gone, we’ve freed up 20 dollars a month.
Somebody might say, “But my smallest debt is my Home Depot, and it’s at zero percent for six months. Why would I pay that off early?”
It’s about cash flow. At this point, we’re not talking about interest. We’re talking about increasing your cash flow. As cash flow increases, not only do you have a greater sense of financial security, but also realistically you actually do have better financial security. Just like a company. If a company has better cash flow, they’ve got greater financial security. You and I as consumers, when we increase our cash flow we increase our personal financial security.
It opens up options in certain ways. When we pay off that smallest debt, we move on to the next. We take all our extra money plus that $20 or whatever we freed up in cash flow and put that onto the next smallest debt. Eliminate that one and the next one and the next one, until they’re all gone. You’ll even get your mortgage paid off eventually and you could be one of those weird people that might be in their 30s or 40s and has gotten completely debt free, including your mortgage. That feels good to have no debt principle!
Number two of the three things is to live on 80 percent of your income. The other 20 percent is for your future. Twenty percent is what you use to create your financial future by not spending it now. When we consciously choose not to spend 100 percent of the money that comes in, we shift ourselves into the identity of an investor instead of just being a consumer like most Americans are. And hey, it’s good for the economy to have more consumers, right? Consumer spending makes up most of the economy–about 70 percent in fact. That’s great for the economy but not so good for your budget. You need to live on 80 percent now and put 20 percent into the future—because the future is expensive.
Someday many, many years down the road possibly, you want to be in a position where you have income coming back to you without you having to work. That happens by putting that 20percent away now. We’re not even worried right this minute about where the 20 percent is going. That’s important too, but more than anything is the importance of forming that habit, that principle of learning to live on 80 percent of our income so we can push that 20 percent out into the future. If you do this, your future is likely to be very bright. Even if you don’t put it in the best place, it doesn’t matter that much.
And it won’t make a whole lot of difference if it’s 20 percent or 10 percent or 15 percent that you’re feeding into the future. Just make that decision on an initial amount you’re going to put away. Start with whatever you think you can do right now. That’s great. Then increase it a little bit at a time. If you’re putting away 5 percent into your 401K right now, raise it to 6 percent. Raise it to 7 percent and test it out. I don’t think it’s going to matter a whole lot when you get your next paycheck. You’ll probably be surprised at how little difference it makes just going 1 percent more. Then eventually, you’ll get to that 20 percent number. And when you live on 80 percent of your income, you have made the decision to be an investor instead of just a consumer.
Now we’re going to touch briefly on where to put that money. Because it does matter as far as your outcome. It really depends on your situation and how much time you’ve got ahead of you, but I can tell you my preference, especially if you have a long time—let’s say at least five years—is to put it in investment categories so that you at least have a chance of outpacing inflation. Commonly we’d be looking at things like stocks, real estate, or commodities. These tend to do a good job outpacing inflation or always matching inflation over time. Now what comes with that is volatility, so be aware of that. Volatility is why it always goes back to saying, “Well, it depends.”
Before advising you, we’d need to have a deeper conversation to make sure that we understand your situation and where you’re comfortable within your timeframes. Considering all that stuff is our job as Certified Financial Planners—to dig deep and understand you, your family, your situation, to make sure your money is invested the right way for you.
Again, the principle here is to live on 80 percent of your income. There’s not a whole lot we can do if you’re not saving anything and you have no room in your budget. That’s why we hammer on principle number one—paying off debt to free up some cash flow. Now the money that was going to pay off debt can be put into the future. Now we don’t have those required payments sucking us down each month. Now we can take that money and start investing in different places and we have a chance to start thinking about investment categories.
I recommend starting now and growing the habit by deciding, “I’m going to live on 80 percent of my money. The rest of it I will have automatically deducted from my paycheck or from my checking account each month.”
Now for principle number three, the third thing to do: Have a real plan. What I mean by that is have a plan that’s measurable. Make it specific enough that somebody can look at it and say, “I get it and I believe this is something that could work.”
If you don’t have a real plan, you’re like most people. Most people do not have a real financial plan. They might have a vague idea of how much they’re putting away, or how much money they’ve got in investments, but haven’t developed a real plan.
Some of the key questions to think about are these:
What do I want for my future?
What am I trying to accomplish here?
And if you’ve got a spouse, what do we want for our future? As we’re planning our life, what do we want that to look like?
Chances are, the answers are going to involve building up some wealth, unless you plan on working forever. And I would debate you on that because even if you want to work forever—and I love my job, I love what I do here at Keystone working with clients, it’s an honor to do what we do—but having a real plan means we’re specific enough to have a plan that would get us conservatively to where we want to go. That means having money going away for retirement right now. If that’s in place, I might choose to work many, many years beyond the point that I’m financially free, but I want to have a choice rather than being in the position where working is something that I have got to do.
And of course we’re biased a little bit, but I’ve got stats to back this up: When it comes to developing a real plan, more than likely hiring a Certified Financial Planner will get you there a lot faster. You can do it on your own; it’s not that that can’t be done, but the odds are better when you have expert help.
Now, back to the question of what rich people do. Well, Investment News did a survey of millionaires and of course there are lots of millionaires now; being a millionaire isn’t as big a deal as it was decades ago, but it’s still a lot of money. Most of us feel good about having at least a million bucks in a bank or in investments. So in this study by Investment News, they discovered that 70 percent—that’s 70, not 17 percent—of millionaire households used some sort of financial advisor. Clearly, these millionaires saw value in hiring somebody.
Don’t just hire any financial advisor. Hire the best, which are Certified Financial Planners, the gold standard for financial planners. That means you’re working with a fiduciary, somebody that actually understands the financial world and has been trained to ask the right questions, dig deep into your financial situation and build out a plan that has a high likelihood of getting to where you want to be.
It’s important to work with somebody who’s qualified. You could do it on your own, but 70 percent of millionaire households use some sort of financial advisor. And I think you would want to go with the gold standard. If you’re going to hire somebody, you might as well hire somebody who’s good at what they do, very qualified and experienced.
I ask my clients, “Why do you use us for your financial planning? Why don’t you do this on your own?”, I’d say the majority of the time when a new client joins us, they have come from doing it on their own. They weren’t working with a financial advisor or planner before. If they did, it was probably a salesperson, somebody just selling them financial products. It wasn’t the true financial planner or fiduciary. But most people have been doing it on their own. They’re very good savers. They’ve followed these other principles before they even get to us. In a lot of cases they were avoiding debt like the plague, which is principle number. one. They were living on 80 percent of their income, principle number two. Sometimes they were living on even less than that and putting more away.
They also had a plan and they hired a financial planner to help get there, principle number three. They hire someone for a couple different reasons. They don’t want to spend their precious time becoming a financial expert, watching the market and keeping up with all the changes in the world. In fact, they know that it’s smart to delegate to other people who are really good at stuff. Each of have only 168 hours a week, and many of those are sleeping, right? So there are only so many hours we’re able to spend time with people that we care about and make memories and do things that are truly fulfilling.
If it’s fulfilling to you to become a financial expert, that’s great. If that’s how you want to spend your free time, becoming a financial expert and watching the markets and keeping up with all the changes to legislation and what’s happening in the world, more power to you. But in a lot of cases what we find is that even the people doing it on their own aren’t really enjoying it. You know, they’re really not finding that it’s giving them a lot of juice in life to be spending their time that way. And they figure out later on that they need somebody who’s good, someone to be there as their fiduciary.
So, rich people do tend to be good at delegating because they were probably business owners. They probably were managers or high level executives at a company. They didn’t get to where they are by trying to do everything themselves. It’s just not possible because of the number of hours in the day, and besides people want to put their passion into other things. So they hire the best people and get out of their way. They hire a fiduciary that’s looking out for their best interests. A fiduciary is legally obligated to be looking out for the clients’ best interests and helping them see things that they don’t see. Rich people want to hire somebody they can trust to handle things so they can just go live their lives and not have to worry about the financial stuff.
Now, does that mean that you should just hand your money over to somebody and not pay attention to it at all? Absolutely not. It’s important to have some accountability in both directions. Back to having a plan, a good Certified Financial Planner will help you get very clear on where you are today and where you want to be in the future. It’s their job to build a plan that has a high likelihood of succeeding in our world. We can’t use the word guarantee, but what we’re trying to do is build plans that have a high likelihood of succeeding. That happens by using time-tested principles, following the financial world, and being very cognizant of what’s going on out there as well as what’s going on in your life.
So, that’s the three things to do if I had to narrow it down to three. I expounded on each of them, but if I had to narrow it down to just doing three things, this would make such a difference in people’s lives.
Number one: Avoid going into debt like the plague. Most of us are going to have to borrow some money at some point. If you choose to borrow some money, pay it off faster than you have to pay it off, as fast as possible. You will be much more free by doing that, not just financially, but also there’s some clarity, some peace of mind that comes with that.
Number two is living on 80 percent, taking the other 20 percent and putting it into the future because that’s what you’re going to live on someday when you’re financially free.
Number three is to have a real plan, and ideally hire a Certified Financial Planner, your own personal fiduciary who is going to be your financial partner and help you along the way. You want to be very aligned with that person to make sure their interests are the same as yours and that you are headed in the same direction.
One point I do want to make, especially for those of you who might be younger and just starting out, you might hear that third one and say, “Hire a Certified Financial Planner or fiduciary? They’re not going to work with me. That person is probably working with millionaires, people much wealthier than I am. I don’t have any money. I can’t really afford to hire a financial planner.”
You might be right. It’s possible that you would be right because many good financial planners that are very successful have minimums—either minimum fees or a minimum amount of the assets they’re managing to make their own business financially work out. If they’re good at business, they’re going to have a minimum amount they need to receive from each client for it to financially make sense. So one thing I will tell you is, you might be surprised. There are a lot of planners, including us, that do have a way to pay a retainer fee, possibly, as opposed to a percentage of assets. Some will waive an asset minimum if you can pay the minimum fee. You might be saying, “I can’t even pay a minimum fee. I’ve just got nothing. I’m just starting out. I’m barely able to pay the bills.”
Many of us—and I say us because we do this—many of us are in this for a business but we’re also in it to help people, and we love to help people who are just starting out. Many of us do pro bono work. Both myself and Jeremy, our other Certified Financial Planner here at Keystone, spend dozens of hours each year doing pro bono work. By that I mean that we sit with people, doesn’t have to be young people, could be people of any age that just need some guidance. They’re people who normally would not be able to afford or don’t have the assets to hire a Certified Financial Planner. If that’s you, let me know. We will make sure that you get some help. We may not always be the ones to do that but we will get you pointed in the right direction and make sure you get some guidance on implementing some of these principles.
If we had the top 10 things or the top six things or something else, then I would have talked a lot longer today, giving you more ideas. But there is power in focus. There is power in focusing on a small number of things, and for those of you who have been very successful in your careers, your lives, you probably will tell me that you were able to focus on a few things and that’s how you were able to be successful.
So keep that in mind as you’re thinking about these three things, whether it’s for you or for somebody else you care about.
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Thank you for listening.
I hope you have a great week, and God bless.
This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.