Where Should We Start: Part 2


In the first post of this series, Part 1, I wrote generically. In this post, I will write more specifically to young people, but most of it will apply to everyone.

The most valuable asset that you own is yourself. Avoiding debt is number 1. When you take on debt, you sell your most valuable asset to someone else.

Start to accumulate cash as quickly as possible. Doing this will do multiple things. First, it will insulate you when unexpected costs arise, and they will. Second, having cash available when opportunity arises will allow you to be able to take advantage of those opportunities.

Think of yourself as a business rather than an employee at every job. Throughout your life, look for opportunities to create multiple sources of income. If my friend from the previous post had done this, losing his job would not have cost him so dearly.

When someone does hire you, you will be introduced to retirement accounts for the first time. Some of you will be offered a 401(k), others such as teachers will be offered a 403(b). Assuming that you are saving as we talked before, when you decide to participate in your company’s retirement account, be very conscious of fees. Take a look at an example of how much a small fee can cost you over time here.  Learn this now! 

You will be inundated throughout your life about how important it is to save for retirement. Educate yourself on this. You might find more freedom investing outside of a retirement account in things that will create  multiple sources of income without the restrictions. Income is what creates freedom not how much money you have in a 401(k), IRA, etc.

Look around you when you are in cities. Notice the names on the largest buildings  and stadiums in most towns.You will see the names of banks, insurance companies, and investment companies on many of these buildings. Remember this when you are deciding who to work with and think about whose money built these buildings.

If you are going to invest in the stock market, learn to do it yourself or when using an investment adviser, know exactly how much you are paying for said advice.  Take a look again at just how much 1-2% can cost you.

Take control now.

I am looking for opportunities to teach these topics to schools, churches,  to employees, and as many people as possible. You can do this yourself, but you don’t have to do it alone.



Where Should We Start?

Save for the future, but be ready for now

Part 1

This will be the first post in a multi-part series. In this post, we will be more generic, and the rest will be targeted to more specific ages.

Let’s start with a true story. One of my friends was a successful businessman. During the early to middle 2000s he made a substantial income. He was married with two daughters. With plenty of income and substantial retirement savings. His future looked great.

Around late 2007, the industry he worked in took a big hit and the company he worked for filed for bankruptcy. His oldest daughter was in college and his youngest daughter was about to start. He lost his job, and quickly found another, but at his new job, his income decreased by almost 80%.

He had done a great job saving for retirement, but a miserable job saving outside of it. With his cashflow from his previous job, it never occurred to him how vulnerable he was.

Fast forward a couple of years and this successful businessman had no more retirement savings because real life hit. He needed money. To make matters worse, he had to pay almost half of the money he withdrew to the IRS. Now, in his late 50s, he and his wife find themselves in a situation that they never dreamed. Dependent on their income to live with very little cushion for life, and almost nothing saved for retirement. Their daughters did graduate from college.

Where did they go wrong? Almost all of their money, other than their income, was in his retirement accounts. He had done exactly what he was told. What millions of Americans continue to do. When real life hit, having most of his money in retirement accounts became very expensive.

So, where should you start? You and your family! With so much stress put on saving for retirement, too many people focus on an event that they may never live to see. I am not saying that saving for retirement is not important.

Begin to accumulate as much cash as you can. Not only does this insulate you from emergencies, it opens up a world of opportunities. Not to mention it can save you thousands in interest that you will never need to borrow.

If you’re young, start now. If you are in your 30s or 40s, start now. Those of you in your 50s or older, start now. This is the beginning of financial freedom and insulation from life.

Youngsters, Part II will be directed at you but is applicable to all of us no matter what age.

Educated Decisions

Without understanding, you may never know how expensive that advice was.

Billions are spent every year on education. Technological developments have been made that would have been considered science fiction 25 years ago. Cars that can practically drive themselves and information at our fingertips, yet very little is taught about how to make wise decisions financially.

We graduate from high school or college, find a job, and in passing HR mentions this thing called a 401(k) to save for retirement. Most will ignore this early on, even though many companies will give you money when you participate. That’s for another blog.

Eventually, many will choose to participate in their company offered 401(k). With no idea how to pick funds, they will often ask a co-worker, “what did you pick?” And, that is what they choose, and many will never change. Not exactly a scientific method, and they wouldn’t know what they were looking at anyway. There is a better way, and it’s quite simple.

Next comes marriage, then kids, and before long you are pulling your hair out simply trying to keep up. What do you do? You need to save for retirement but how are you going to pay for college. What do you prioritize?! It can be overwhelming.

And, where can you find unbiased advice? Advice from someone that isn’t getting paid to sell you something or taking a piece of your savings every year whether you make money or not? Where can you find the education you need to make educated decisions?

How do I save for my kid’s college education in the most efficient way? How much am I paying for those mutual funds and is there a better choice? A one percent charge sounds small, but how much will that cost you over the next thirty years? (possibly hundreds of thousands) Am I missing something?

I spent 18 years in the belly of the financial planning beast, and I know there is a better way. My goal is to teach as many people as possible with classes through churches, schools, and businesses. Then, individually help families do it on their own but not alone!

The Shift and Confusion

My future, financially, is dependent on this decision, and I’m so confused!

In the late 1970s a benefits consultant named Ted Benna noticed an obscure provision in the tax code, Section 401(k). He recognized it as a way to save for retirement that was tax advantaged.

At the time, if you were fortunate enough to have a retirement plan, it was probably a pension provided by your employer. Today, the 401(k) is common and has taken the place of most employer provided pensions.

With the popularity of the 401(k), the risk of being able to retire has been shifted to the employee and away from the employer. This shift brought an entirely new group of people to Wall Street, main street. As of September 2018 there was over $5.6 trillion in 401(k)s and $29.2 trillion in total retirement assets.

What sprung up from this was a new industry, financial planning. Along with 401(k)s, we now have IRAs, Roth IRAs, 403(b)s and millions of people with very little understanding about investing or the products offered.

There’s stocks, bonds, fixed annuities, variable annuities, mutual funds, exchange traded funds, real estate investment trusts, and a whole host of investments that can be bought. Yet, the average person understands very little about any of them.

To add to the confusion, there is a unique vocabulary used in the industry that makes investing even more confusing. Rather than using the word debt, the word debt is replaced with leverage. Is that because, debt is bad but leverage sounds good? Then there’s the word diversification, which in layman’s terms means, “I have no idea what to put you in, so if I use ten different investments, one is bound to go up.”

Another word is rebalance. The gist of this word is, “I don’t know when to tell you to sell something, so every once in a while, we will sell something and buy something else.” Then they use words that sound like fraternities such as alpha and beta. Plus, there are basis points, standard deviation, etc.

“I’m so confused. You just do it.” These are the exact words that I heard countless times from clients, and they are dangerous.

In 1999 when I started in the business, I was naïve and ignorant, yet well meaning. Then came 2008, and people lost significant amounts of money. In 2009, the markets began to rebound, yet my clients did not. Why?

I began to break down many of the investments that I had sold, and it became very clear why these accounts were not rebounding. All had fees in excess of 2%, and I saw some that were higher than 5%. These are not one time fees! They are annual! There was even a fee in some accounts that was guaranteed to increase in the dollars paid regardless performance.

Miserable, I began to do research, and gathering 22 years worth of data on the S&P 500. My belief was that if I was going to charge clients a percent of money under management, then the least I should do is get them a better return than what they could get from low cost from a Vanguard S&P 500 Index Fund.

In 2013, I introduced a strategy based on that research. And, when I presented it, this is what I said, “We have 22 years of data. Literally the opening and closing price of every day for those 22 years. If I come to the conclusion that you would be better off buying an index fund, I will tell you and find another way to make a living.” September of 2017 was when I walked away.

Today, millions of people walk into financial planning firms and wealth management firms because they are confused and scared, and looking for help. What they need is education and guidance and the cost of that education and guidance should not be dependent on how much money they have.

There is a better way!

Buckets, Water, and Savings

What does a bucket and water have to do with savings?

Imagine that your job or business is a faucet. Water from that faucet is used for two things. One is your lifestyle and the other is savings. The bucket represents your savings.

As you live your life, much of the water is used for food, housing, clothing, and a multitude of miscellaneous expenses. Some of the water is diverted to the bucket.

Water accumulates into the bucket in two ways. The first is you pouring water into it. That’s from the faucet. The other way the bucket is filled is via rain. Rain is the return or interest that you earn on that money. Sometimes while carrying the bucket, some of the water spills out and other times you take some out for personal use.

Now, imagine at the bottom of the bucket is a small leak. Maybe one or two percent of the water is leaking out. As you are filling the bucket, the leak is so small, it isn’t noticed. The unnoticed drops are going into another bucket.

The owner of the second bucket sold you your bucket along with hundreds of buckets to others. Some will leak 1%, while others can leak 2% or more. With hundreds of small buckets, he can catch the leaking water from all of the buckets along with the water he received when he sold the buckets.

When you retire, the faucet will be turned off, and you may need to tap your bucket. Hopefully it will rain enough that your bucket never becomes empty.

In some cases, it rains enough that you never notice the leaks. In other cases, you become concerned because it’s obvious that your bucket has less water. You think, “maybe there’s something wrong with my bucket”, so you return the bucket for a new bucket. Or, you decide to try another bucket store.

In 1989, a guy had 100,000 gallons of water in his bucket. His bucket had no leaks. At the end of 2018, he had 1,673,787 gallons of water. Another guy had a bucket with only a 1% leak. At the end of 2018, his bucket had 1,278,270 gallons. Their friend had a shinier bucket with a 2% leak. His bucket at the end of 2018 had 963,758 gallons.

One or two percent sounds small, but over time the drops of water add up. Just 1% cost one guy 395 thousand gallons of water while 2% cost the other guy 710 thousand gallons.

For only a couple gallons of water a year, you can learn about the buckets with no leaks, where to find them, along with help on how to use your faucet more efficiently.

We can’t control the rain or the water that spills out, but we can plug the leak that is filling someone else’s bucket.