In today’s podcast, Carl and I discuss why reducing a complex financial plan to one page can be key for living the fulfilled life you envision and how certain emotions can stand in the way. We talk about avoiding financial mistakes, and what a financial adviser’s (or a friend’s) role might be.
Because Carl is “The Sketch Guy” for The New York Times, we talk about the origins of Carl’s sketches, and how these sketches and Carl’s other art have been received in the art scene.
Finally, Carl and I discuss the process of publishing, and listeners will get an early listen to what might be the focus of his FinCon keynote address.
Consumerism Commentary is offering five free copies of The One-Page Financial Plan to five Consumerism Commentary readers. To be considered for receiving one copy of the book, which is also available at retailers, leave a comment below the transcript.
When your life is out of control, nothing seems to go right. You have the worst luck, and you can’t seem to get ahead with anything, whether a project, a goal, or even simple things like taking care of daily tasks.
The same is true in all aspects of your life, especially those in which you’d like to see change or improvement.
Control comes through the practice of making better decisions, those decisions that take your future into consideration. Sure, if you’re struggling to survive, “the future” is a luxury. I understand that. But even small steps towards control can help you move forward towards having the freedom to consider more than just how your family will survive paycheck to paycheck. When the situation is controlling you, you feel helpless. But starting to control the small things in life will offer the confidence to, stamina for, and even luxury of making life better for your future.
Being in control can be a significant achievement. But the work isn’t over once you have control. I realized this while watching a baseball game. It was a subway series, with the New York Mets visiting the Bronx to play crosstown rivals the New York Yankees.
The commentator used the phrase “command and control” in discussing the talents of a pitcher. Every pitcher who makes it to the major league should be in control consistently. That means they should be able to throw fastballs for strikes and get other types of pitches in the strike zone on demand, whenever desired.
Brandon Katz describes in Bleacher Report, a baseball blog, what happens when pitchers do not have control: “Without control, basically all hell breaks loose for the guy on the mound. If you don’t have a good feel for your pitches, then it’s going to be a night of free base runners and a lot of runs due to unintentional walks and undoubtedly a multitude of pitches up in the zone.”
Command is another matter. Having command of the pitch is what separates the great players from the everyday. Katz describes pitching command thusly: “Pitchers with good command have the talent to place their pitches any where they want within the strike zone; they are able to throw not just strikes, but good strikes.”
This is also what happens when pitchers are in sync with their catchers. The two players determine for every pitch the speed, direction, pattern, and target, and a pitcher with perfect command hits that target every time. When the catcher wants a cutter to approach the strike zone from the the top outside corner but land in the catcher’s mitt low and inside, the pitcher with good command makes that happen. When the catcher wants a series of three fastballs starting low and ending high and outside, tricking the batter into swinging at a fastball out of the strike zone, good command is necessary for the plan to result in a strikeout.
Control is just the beginning. I’m in control of my finances. I know I’m spending only what I can afford to spend, less than I earn with enough to save for the future. I am like a major league pitcher. Just my presence in the major league means I’ve outshone hundreds or thousands of others on teams in Little League, high school, college, and the minor league.
But I’m not Matt Harvey (or whoever your favorite superstar pitcher might be). I do not have complete command of my financial performance. Not only do I rely on the stock market to take my net worth higher, but I haven’t determined how to invest in such a way that I can position myself the best for my future.
While many would be satisfied with a diversified portfolio of index stock and bond funds, when your needs involve a regular income, protection of your assets, tax efficiency, and growth for taking advantage of a variety of opportunities, things get more complicated. I can throw my strikes, but I’m still learning about the finer points of money management — the skills that will get me to the point where I can just show up on the mound and batters get nervous.
For example, I’m in the process of moving out of New Jersey. My portfolio until recently included as part of my bond portfolio the Vanguard index fund that’s exempt from New Jersey state income tax. The purpose of that was to keep my overall tax burden lower while being able to (relatively) count on some steady income. But if I’m not a resident of New Jersey and not paying New Jersey income taxes, the tax benefit of the investment is irrelevant to me. And quite possibly a waste of an investment opportunity.
And one might argue that the state of New Jersey is in such a bad condition that it was a bad investment in the first place.
But now I have the full investment previously in the New Jersey bond fund sitting in a sweep account earning a paltry (taxable) 0.01% interest. I need to come up with a plan to invest this amount soon, as opportunity cost — the cost of doing nothing compared to potential results — is a real thing and quite expensive. My initial thought is to stop worrying about tax efficiency, particularly considering I am not sure what my plans for residence will be beyond the fall of this year. A strong suggestion in continuing the income portion of my portfolio is to look at the Vanguard Intermediate Term Corporate Bond Index.
Clearly, the trickier pieces of my investment game — being able to paint the corners with my strikes — is not where it needs to be yet. My control is on point; my command requires some work before I’ll get my All-Star Game invitation.
Here’s what I need to do.
Dive deeper into investment research. Until now, it’s been enough to know that the stock market index generally returns 8% over long periods of time for those who buy and hold and don’t react to market news. It’s been enough to know that bond indexes can balance stock indexes and prevent some damage in market downturns without a major detrimental effect to overall returns.
I’m still not interested in investing a major portion of my portfolio in individual stocks, but if a unique investment opportunity comes my way, I will need to be able to evaluate the offer and make a decision that is as informed as possible. I have some business opportunities coming my way, and I’d hate to miss something important because I wasn’t able to analyze the situation effectively.
Talk to more people in similar situations. I’ve done a great job of helping people and teaching others what I know. I’m always available for friends who want business advice or would like to take their blogging to the next level.
Because I found myself paving the way and perhaps doing things that haven’t been done on a large scale before, and have been that way for about three decades, I haven’t done the best job of seeking out mentors when what I’ve wanted to learn has all ready been perfected by others. Whether it’s success in business management or investing, I need to spend some time talking to established experts in addition to mentoring others who see my successes as something similar to what they’d like to achieve.
Practice over and over. It’s great to avoid mistakes, but there’s often to better learning substitute than making mistakes and having to deal with the consequences. The mistakes I’ve made throughout my life — and I’ve made many both pertaining to and beyond my finances — have forced me to learn on my feet, adjust, and improve. I’ve made poor decisions regarding working with others, I’ve had to learn to live with hurt in personal relationships, and I’ve misjudged people. Mistakes like these have given me more insight.
As I make more investing decisions, I’m sure I’ll make more mistakes. More opportunities coming my way means more opportunities to fail. But the experience I gain when that does happen will be valuable — and as long as I don’t rely too much on the success of any particular decision, I should be able to whether failures and use the knowledge gained to my advantage later, increasing my command, not just control, of my finances.
Accumulating money is not a real goal for anyone’s life. Growing wealth is not the point. People don’t work hard because they want to see their bank balance grow; those of us who track our finances and chart our net worth over time aren’t trying to compete in some financial competition.
I imagine there are individuals who do have an approach to money wherein the increase of the bank balance is the ultimate goal. But this approach misses the point. Perhaps these savers and earners haven’t given enough thought to why they want to grow their wealth, other than believing that society dictates that they do so — or they idolize people in the media who flaunt their wealth.
Money exists to be used in some kind of transaction — that’s all. So there’s no point in accumulating money just for money’s sake.
This is a concept I’ve covered on Consumerism Commentary in the past, but I bring it up again because it’s always relevant, and maybe it’s good to have reminders once in a while.
I don’t write about my own business much on this website. My business is based in the act and process of blogging. Consumerism Commentary has been my business. And while I think it would be fun to write about it more, as any business owner would like to write about his own business, I wanted to avoid that. If my business was a store I had planned with a friend, I would write about that here.
Writing about blogging as a business just didn’t seem right for this website, because I’d be “blogging about blogging.” The only people who may be interested in that are other bloggers, and Consumerism Commentary reaches a much wider audience than “other bloggers.”
Therefore I’ve stayed away from writing about how I earned money from my business, how I built that business, and how I eventually sold that business for an amount of money that would be potentially life-changing. And it’s a shame I’ve avoided the topic, because it’s really interesting, and I think other people, both those who consider themselves bloggers and those who don’t, would like to hear more about it.
(For those of you who don’t know, The Plutus Awards is an award ceremony I founded. The awards highlight the best in financial media and products. It was born from my own enjoyment of running awards ceremonies, something that started in college with my creation of awards with superlative and funny awards for members of my university’s marching band, with the ceremony at an annual banquet.)
This epic article was influenced by questions I get all the time from other bloggers who want to find a way to earn consistent income from their websites. Of course I’m happy to answer any questions privately, but I haven’t had an outlet in which I’ve felt comfortable sharing all the details.
And the massive more-than-4,000-word article just touches the surface — I could write a book about what I experienced over the past twelve years with my unintentional business.
I expected to receive some criticism from the article. I wrote about how I focused primarily on this hobby-turned-business and didn’t seek work/life balance between my work and social life. One reader felt sorry for me, as if I had missed out on something in pursuit of the almighty dollar. I probably took more offense to the reader’s remark than I should have.
There are probably some things that I’ve missed out on in life. I guess I could have spent more time watching movies with friends. I guess I could have tried harder to start a family. But I don’t think my life is any less whole right now.
But for me in the year 2000, earning a tiny salary from a nonprofit and living in one of the most expensive areas of the country, I had to do something about my financial situation. Life wasn’t about the money, but I needed to start paying attention to my finances, and I needed to figure out how to get my life moving in the right direction.
When you have no money and you begin thinking about what the future consequences will be, money starts to plays an important role in your life. The trick is being able to prevent yourself from seeking money above all else. You can prevent that by keeping larger goals in mind, by thinking about what the point of having money is. It’s more than just “freedom.” What would you do with “freedom” if you had it?
For me, it was starting a foundation. In 2000, I knew that if I had enough money, I’d start a foundation that focused on arts education. It might have been a little naive to have that as my plan, but the idea isn’t too far-fetched.
And if you’ve read How I Built a Seven-Figure Blog, you know that I didn’t start a business to reach that goal. I didn’t start a business at all. I focused my blogging, something I had already been doing for years, on a topic I wanted to learn more about — personal finance and money management. All I wanted to do was get better at managing the money I had.
After several years as an adult ignoring my finances, I had to make my life about money, at least a little bit, in order to improve my situation. Having been born into a middle class family in the wealthiest country in the world, I had been failing at maintaining that level. My situation, goals, and needs would have been different had I been born in poverty or to a wealthy family.
Now that I’m in a different financial situation, after seeing that hobby turn into a successful business that I later sold, perhaps it’s easy to say that life isn’t about money. When you have enough in the bank to be secure — you don’t have to rely on income from an employer, for example — it’s easier to focus on the grander goal.
Speaking of which, I’m happy that I’m able to reach some of my bigger goals before the age of forty. Remember that arts foundation I’d dreamed about? Well, I’ve changed my approach, but I’m still in the general vicinity.
I’m establishing a scholarship at my undergraduate university for music interns. Did my music education degree relate to how I’ve built my “career” over the last decade? Not directly, and that’s why it might not make sense to people why I want to give back to my university. But my experiences at my college did shape me and my approach to life.
But more importantly, I was required to take an internship for my minor that got me started with the organization that allowed me to get into a financial mess in the first place. The stipend through my scholarship should help students be able to afford to take the best internship opportunities without having to worry about how they’re going to earn a living while working for little or no money.
This will help level the playing field, so the best internships can go to more than just the wealthiest students who can afford avoiding work for a semester.
In addition, I’m also starting a foundation — but this will be related to financial media, like the Plutus Awards. I’ll be announcing more information about that soon.
So I’ve written quite a bit about the work side of my life, and lest anyone thing I don’t have perfect balance between work and non-work aspects of my time on this planet, there’s been a lot going on. Last month, I mentioned my apartment received storm damage. The landlord is still trying to repair the apartment — this is over a month after the incident — and I decided to exercise a clause in my lease that allows me to leave.
There is a world of choice available to me right now. I could do virtually anything. But, I made a commitment to work with a music group based in Princeton, New Jersey throughout the rest of the summer, so I won’t be leaving. I am signing a seven month lease, moving just over the border to Yardley, Pennsylvania, to an affordable but smaller apartment.
I’m downsizing, getting rid of some furniture and other items I’ve accumulated over the years. The lease will get me through this year’s Plutus Awards, and once that is over, I’ll be ready to think about leaving the area, spending the winter on the west coast with my girlfriend and family, and giving myself the opportunity to travel more.
Of course, I’ll need to “balance” these changes with working on my new projects.
Unless I decide to stop and live off my investments for the rest of my life. I’m just not ready to retire, though.
Over the last year, a friend of mine has been trying to convince me to move my financial assets.
I currently have a taxable investment account at Vanguard, and my portfolio consists of a mix that includes a domestic stock index fund, an international stock index fund, and tax-advantaged municipal bond funds. This friend believes that I should be approaching my investments somewhat differently.
He is a real estate broker, so he likes to think in terms of leverage. My asset level qualifies me for so-called “private banking” at most retail banks, and one of the things banks like to do for wealthier clients is hold onto their assets while offering special terms like reduced banking fees and great interest rates on a substantial line of credit.
I’ve had no need for such things thus far, but there may come a time where I want to use leverage to invest in a business, so I’ve been exploring the idea.
So far, I’ve talked to two firms. The first was the one recommended by my friend, as he manages the assets of his wife, who is a member of a prominent family that has seen success through generations in New Jersey. That’s Merrill Lynch. The other is a branch of my local retail bank, Wells Fargo Advisors.
I spoke to both separately, and they both put together proposals. Wells Fargo presented me with a team of people ready to take over my banking, while the Merrill Lynch adviser initially thought my plan was solid. Both parties drew up a proposal for me, and the two were very different. I had a much longer initial discussion with Wells Fargo, so their proposal took into account my preference for low-cost index funds, at least partly.
Neither of these teams of advisers are financial planners. They are salespeople, or stockbrokers, or financial advisers, or investment advisers, and they have products to offer. People in these roles can go by any variety of names and can be misleading to customers.
The price I pay for these products, in addition to the fees baked into investments that eat into net investment results, is generally a 1% fee for assets they manage. There are certain times when paying 1% of a portfolio’s balance every year — whether the portfolio gains or loses money — could be like paying someone’s salary. It’s far higher than the expense ratios embedded into my mutual funds.
In theory, even salespeople, whether they earn money from commissions, from kickbacks from fund managers, or from a combination of the two, should want to offer what’s in the best interest of the client. If they don’t, the client would leave, theoretically, and find a better salesperson. But I’m not so sure this theory works out in practice. Given two roughly similar investments, wouldn’t a salesperson want to offer the one that provides him with a little more income?
Legally, advisers must only sell investments that are appropriate for the investor based on the customer’s time horizon and risk tolerance. A financial planner, particularly one who is certified, is held to a different standard. A financial planner must give advice always with the customer’s interest in mind. That’s the fiduciary standard, and it would be the difference between a planner recommending a low-cost portfolio of index funds and an adviser or salesperson making decisions based on what’s more lucrative for the firm.
President Obama wants to change the regulations so all financial advisers, everyone who works for a bank and offers advice on investment decisions, are held to this fiduciary standard. This probably has more of an effect on what happens when you call up your employer’s 401(k) plan sponsor to ask for investment advice.
It’s clear why banks have no interest in adhering to a fiduciary standard. If stockbrokers were unable to sell all but the lowest-cost investments, it would change the entire nature of Wall Street. In order to stay in business, managers of active mutual funds would need to find a new way to sell their products. Banks would have to make up the income previously generated through incentives or kickbacks in other ways.
This is why the industry has reacted to the fiduciary standard proposal by claiming that the requested regulation would make it more difficult for the middle class to get financial advice. I don’t necessarily think that’s true. It might make investment sales at a bank less accessible to those without sufficient assets for the 1% fee to generate worthwhile revenue.
But that’s not the financial advice most people should be seeking — and I found that out when I attempted it myself. The middle class, whoever that may be — the not wealthy, who may be dealing with a growing retirement investment account, a house, and maybe some additional taxable investments — needs little in the way of investment sales and more in the way of basic financial planning advice. Maybe financial coaching.
Maybe there’s a different solution. More retail banks could offer financial planning or coaching, where the employees abide by the fiduciary standard, much like independent Certified Financial Planners. The model must work because Vanguard offers this service to its customers; there’s no reason why retail banks can’t figure out how to make sure the same type of service would be profitable.
If customers really believe the best place to go for financial advice is their local retail banks, those institutions can do a better job of meeting those needs rather than just putting them in front of salespeople. If financial planners can stay in business independently, banks should be able to find a way to incorporate that type of service into their offerings.
Employers may want to follow this example, as well. When I worked for a financial company, a company whose own subsidiary managed employee’s 401(k) accounts, employees were encouraged to talk to a company-provided financial expert. It was never clear — especially to me, thirteen years ago, before I knew about fiduciary standards and financial planners — who I was talking to or how they determined their recommendations and advice.
When you walk into a car dealership, you know you’re talking to a salesperson, and you know the goal of the salesperson is to sell you something. You also know that the salesperson has incentives to sell you cars, related products, and services that generate the most profit for the dealership.
For most customers, this isn’t as clear when you enter a retail bank. For some reason, customers believe that bank employees want to help and are financial experts who offer advice. The proposal of new fiduciary standard regulations could make sure that customers can walk into a bank and get the real advice they’re seeking.
The fiduciary standard isn’t a guarantee. As Walter Updegrave pointed out in a recent article for Money, an adviser and a client can never have completely aligned motivations. A financial planner would need to give advice that is in the best interest of his or her client, but must also be concerned about earning future business from each client, winning new clients, and staying in business.
No one, not even a fiduciary, can look out for yourself better than you.
And I understand that the general reaction to that fact is that we need to educate everyone more about managing their own finances, so they know to avoid brokers who try to sell customers what’s in the company’s best interest instead of what’s best for the clients. But this is a message that doesn’t get through completely, and especially not to the people who need to message the most.
Financial planners and coaches can keep trying to make it clear that they’re better resources for most people and we can continue pushing useless and harmful money management and financial literacy classes in high school, or we can make some industry changes to ensure that the professionals people are most likely to encounter when they need help are the right type of financial planners.
I’m going to go back to the bank. I may eventually move my assets to the bank to take advantage of access to credit, but only if I can do so on my own terms, investing how I want to invest, with no additional fees.
Do you think all brokers and financial advisers should be held to a fiduciary standard?
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