Carl Richards is well versed in financial mistakes, not only from his work as a certified financial planner, but also from personal experience.
During the last housing bubble, Richards moved to a new town, got swept up in the frothy real estate market and bought a $575,000 home – well beyond the $350,000 he and his wife had originally budgeted . He borrowed 100% of the purchase price and was told he could borrow more if he wanted. He and his wife opened a mortgage line of credit.
By the time the market started to fall and he realized he had to move back to Utah, they owed over $200,000 on the original loan balance.
They ended up having to do a short sale.
In another previous bubble, the tech bubble, he kept a diversified portfolio and refused to indulge in tech stocks. At that time, he was working at a large brokerage firm that did a lot of research, and he read a long report on InfoSpace.
“I was like, no, I won’t, no, I won’t, no, I won’t, no, I won’t, and finally, and I took $10,000 that was a lot of money then and it’s a lot of money now, and I bought InfoSpace,” he says. His stock is now worth $81.
He jokes that the lesson he learned was “if you throw in the towel on your plan, at least do it soon”.
From his mistakes, Richards knows the value of creating the right plan and sticking to it. He has now come out with a new book, “The One-Page Financial Plan”, which was inspired by a common question he answered to friends and family who, say, in the last five minutes of a night out , after paying the bill , wanted advice on how to manage their money or invest their 401(k), or other financial matters. (Read 10 reasons why financial plans aren’t just for the 1%.)
Here are the easiest tips he has for getting what you want from your money, with the hardest at the end.
1. Ask why money is important to you.
When his friends asked him for financial advice during those few minutes, “I was giving prescriptions to people without any tools to diagnose,” he says. He quotes a quote from Stephen Covey, author of “The Seven Habits of Highly Effective People,” who said, “It’s easy to say ‘no!’ when there is a “yes!” Deeper. burning inside.
Knowing why money is important to you will guide you in every financial planning decision going forward, Richards says. A driven Type-A ER doctor was surprised to find herself saying that money was important to her because she wanted time to raise a family. Once she and her husband identified it, they were able to begin making financial decisions in line with their values.
“It’s easier to say no to things when you have a much bigger yes,” he says.
When Richards and his wife did this exercise, they decided they had three main goals: 1. Fully fund their retirement accounts each year, 2. Fund their children’s education accounts each year, 3. Save for a house. It was their one-page financial plan.
2. Guess where you want to go.
Knowing where you want to go will allow you to ask for directions.
Richards says he chose the word “guess” to recognize that people don’t really know what’s going to happen, especially over the 20- or 30-year time frames sometimes discussed in financial planning. “I try to give everyone permission to relax a bit,” he says.
Either way, don’t give up completely and say that since you can’t predict the future, you won’t make any assumptions. Do a projection, but don’t worry about “doing it right,” he says. If you need to correct the course later, do so.
3. Know your starting point.
In order to get where you want to go, it’s important to know your net worth – how many assets you have and what your liabilities are.
While it may seem like a simple step, Richards says it can quickly get emotional. “These are just facts, but you have to realize that every line on this balance sheet tells a story,” he says. Your list of debts may include one for a failed business, so you may think how stupid that was and your spouse may be tempted to nod in agreement.
Some people may even be so ashamed of their past actions that they want to skip this step. For example, a woman who had borrowed $8,000 decades earlier for a student loan had spent years not coping with it, and when she finally inquired, it had grown to $40,000.
So, he says, focus on learning from those mistakes and moving forward — not finger-pointing, wallowing in guilt, or engaging in avoidance.
4. Think of budgeting as an advocacy tool.
Often people base their spending decisions on emotional reasons and then look for evidence to support that decision. Instead, he says, we should be more deliberate about our purchases. Budgeting can help reverse bad spending habits, but it shouldn’t be seen as a punishment.
He says budgeting should be seen more as an expense tracking tool. “The tracking process will equal awareness and awareness will equal behavior change,” he says, bringing your spending into line with your goals.
5. Save as much as you reasonably can.
Once, when Richards asked his colleague if he was saving enough for his child’s college education, his colleague replied, “Carl, how about this: I’m saving as much as I reasonably can.”
Richards finds this advice more useful than recommending saving a specific percentage of money. If you have a spending problem you might want to institute some rules like holding new purchases to a 72 hour test where items stay in your online shopping cart and you see if you still want them 72 hours longer late.
But, overall, “if you’re doing this early work, where you’ve clarified your values and have some awareness, then saving is a natural consequence of that,” says Richards.
6. Buy just enough insurance — today.
People make two mistakes with life insurance. First, they put off the purchase, either because it doesn’t seem urgent if their health is good, or because it involves having a conversation that most people would rather avoid. Or they let fear guide their decision when buying life insurance.
“[Life insurance] It’s about replacing the economic loss, not the emotional loss,” says Richards, “so if you see it from that cold, hard angle, you just need to calculate what that loss will be and find the least insurance. expensive to do this job. For the vast majority of people, a term policy, which is like renting life insurance for a certain period, is preferable. Make sure you don’t put off buying it.
7. Remember that paying off your debts can be a great investment.
“We’re notoriously bad at calculating the cost associated with borrowing,” says Richards. He has a friend who in college needed a tent to go camping, so he bought one with his credit card. He guessed that 10 years later the interest had ballooned so much that it was equivalent to a down payment on a house. “It was the most expensive tent in history,” says Richards.
It avoids calculations that claim that paying off debt is an expensive use of money when it can instead be invested. “Look, paying down debt is a great investment,” he says. (If you’re wondering how to balance debt repayments with pension contributions, read this article.)
8. Invest like a scientist.
Richards has a doctor friend who once told him, “If I practiced medicine like I invest, I would have killed half my patients.” Before prescribing anything, he had read peer-reviewed studies to make sure he was making the right choice, but with investments he received recommendations from friends and relied on his intuition or what that he had heard on the news without doing his own research. .
“We can actually look at the data and separate the speculation and the circus from entertainment,” says Richards. The basic formula for successful investing, he says, is to first diversify your portfolio. This means: go for index funds or exchange-traded funds that contain hundreds of stocks, instead of one or two or even ten stocks. This reduces the risk that an action could harm you. (Read the 7Twelve strategy to diversify your investments and see how to invest in stocks without too much risk.)
Second, keep your costs low. Research shows that there is only one reliable predictor of investment performance: cost. “The more you pay for your investments, the less money you’ll keep,” Richards writes. So look for cheap titles. (Here’s more on the importance of keeping your investment costs low.)
Third, recognize the correlation between risk and reward. The more risk you take, the higher the potential return. This doesn’t mean betting everything on a single stock, but recognizing that you’ll likely earn more from stocks than from bonds, that you’ll likely earn more through small companies than large ones, and that you’ll most likely get higher returns from companies. financially weak than strong companies.
9. Hire a real financial advisor.
Richards says it’s hard to be emotionless about your own money. That’s the real purpose of having an advisor.
“You don’t hire a financial advisor because you’re not smart enough to do it yourself,” says Richards. “You hire one because he’s not you.” He or she will know how to come between you and any potential mistakes you may make, even if you risk making financial blunders every five or ten years.
When looking for an advisor, choose one who gives you advice, doesn’t sell you something, and is open about conflicts of interest.
10. Behave for a very long time.
“The portfolio you build matters a lot less than sticking to it,” says Richards, who learned that the hard way with his $10,000 InfoSpace mistake.
“It’s relatively simple, the math side of it,” says Richards. “It’s the psychological side that seems to be really difficult for people.”
Having the plan in the first place will help you stick to your goals. He also recommends automating your decisions so you don’t have to rely on yourself to keep making good choices over and over again. Next, be sure to leave your plan alone. “Would you plant a tree and go there every month and dig it up to see how the roots are doing?” he writes. “Investing is one of those cool, rare things where we actually get rewarded for our laziness.”