While there are some very complex elements within personal finance - from the intricacies of modern portfolio theory to alternative minimum tax calculations - most of the subject matter is actually fairly comprehensible, says Certified Financial Planner Tim Maurer.
It's human nature, not math, that seems to complicate the subject the most. Personal finance is behavioral, Tim says. On one hand he's had clients who make $300,000 annually living paycheck to paycheck and the other he's helped at least one former secretary who retired (and passed away) with more than $3 million.
"Simple though it may be, the discipline of personal finance is not easy because we are such complex beings," he adds. "And most of us operate in groupings with other complex beings - our families! Each of our life experiences shapes our beliefs about money, and what we believe about money will impact what we do for it and with it, for better and worse."
Tim, who's a wealth advisor for Buckingham Asset Management and the Director of Personal Finance for The BAM Alliance, recently offered us his insight on everything from weeding through all the personal finance advice to planning for retirement.
Tell us about yourself...what's your professional background and interest in personal finance?
I just began my 17th year working in personal finance, although oddly enough business was always my Plan B. I declared my major in the eighth grade - seriously - and early on Plan A was to be a Navy fighter pilot (it was the Top Gun era). All the way through college, I was really hoping to be a rock star and tour the world with my brother and a few bandmates. A desire to NOT be poor, however, persuaded me to "fall back" on finance after I graduated and gigs weren't paying the bills.
I became attracted to the business of money because I assumed working with it was a sure path to having it - money, that is. But I learned early on that: 1. There are many more high-paying jobs than being a financial advisor, especially if you want to make money fast, and 2. Money wasn't my primary - or even my secondary - motivator.
What really motivates me is using relationships as an educational tool to promote positive outcomes in the lives of individuals and families. Money is the context, but personal finance is more personal than it is finance. I'm more fascinated by behavioral finance than I am financial analysis. I'm all for making a good living, but I'm in it for the people, not the money.
Tell us about your book, The Ultimate Financial Plan: Balancing Your Money and Your Life. What's it about and who should be reading it?
Several years ago, I began teaching a class called "The Fundamentals of Financial Planning" at my alma mater, Towson University. I loved teaching, but not the textbook and course materials. I found myself supplementing the text more and more - through my lesson planning and by writing my own exams - until I had enough material to write my own book.
While I used it as a textbook - and it has been approved as a text for the first module of the CFP® curriculum - it doesn't read like one. That's intentional. My co-author, Jim Stovall, and I use a lot of stories and real-life examples to hopefully bring what is a notoriously dull subject to life. We wrote the book for consumers at various stages of life interested in giving themselves a comprehensive overview of personal financial planning - from articulating values and setting goals (the most important part of the book) - to making important tax, insurance, investment, education, retirement and estate decisions.
In retrospect, I actually prefer the book's subtitle, "The Intersection of Money and Life." "Balance" implies that money and life are two opposing forces, but they don't need to be, and my goal is to help people better blend them.
For someone who is in constant financial straits - either because of overspending, bad investing, loads of debt, inability to save or all of the above - how do you help them re-examine and re-evaluate how they view money? What seem to be the biggest hurdles in this journey?
I start by examining the present. What kind of shape are you really in today? Some people are in a better position than they think they are, but the reverse is also true. And I'm not just looking at their balance sheet and income statement. I also want to know what it is that drives a person. What is it that you really want to be about?
Then, I invite them to explore their past. How did you get here? Were there specific circumstances involved? Is it because of poor decisions? If poor decisions, can we connect the dots to the experiences in your past that may have predicted the behavior? If not, working with a professional counselor may indeed be my next recommendation.
After getting an accurate picture of the present and connecting the dots to our past, it's time to envision what we want the future to look like. Few will be able to accomplish everything immediately, so I can help here by directing them to prioritize their goals in accordance with the set of values that we articulated at the beginning of the process.
There seem to be - by our estimate - about a gazillion books, blogs, websites, apps and publications related to personal finance. How can we weed through all the information to find what's most relevant to our needs and goals?
You can't. Frankly, this is why outlets like Mint.com play such an important role in curating the most reliable content, separating the wheat from the chaff, the sales shtick from the genuine advice. But one of the reasons there is so much information out there is because we are all so different.
Where content creators and consumers err, however, is in applying any advice too literally without ensuring it meshes with who you are as a person. Much like in parenting, any expert who claims to have all the answers is actually displaying their ignorance because the variables in each parent and child relationship alter the equation.
Unfortunately, the personal finance space is rife with know-it-all gurus who demonize any diversion from their prescriptions. Such messages may be good for personal brand-building, but they're inherently faulty. It's important to follow a strategy that has been proven to work, but it's also essential to follow a strategy that resonates with you - because a great strategy that you give up on fails every time.
What seem to be the most common questions, concerns or problems followers or clients of yours have when it comes to their money? How do you respond?
The commodity my clients and followers lack the most is rarely money, but time. They know they need to review their life insurance, reallocate their 401(k) and set an appointment to draft a new will. But the seemingly endless urgent requests on their time keep crowding out the important tasks on the deferred to-do lists.
They may think that more money would solve all of their time problems, but it rarely works that way. Sound familiar? That's why I write and educate more on career and time management than most expect out of a financial advisor - because they're all interconnected.
What advice on saving for retirement seems to surprise your clients the most?
I rarely refer to retirement saving apart from the context of short- and mid-term savings. Education planning, for example, is a mid-term savings initiative, as is saving for a boat or the down payment on a first or second home. Emergency savings is clearly short term, but so is buying groceries and going to the movies.
With that perspective, I never browbeat investors into the rate of retirement saving that I deem best. I do an analysis to the best of my ability and then empower them to decide how much of their current income they want to dedicate to the short, medium and long term. This strategy also helps put retirement saving into perspective - it's really just setting aside income for a time when you may not be able to generate it through employment.
Too many financial advisors and writers spend all of their time harping on retirement savings, but that paints you as merely the guardian of your client's, or reader's, highly uncertain future. We need to demonstrate more care and interest in investors' todays so that they will heed our suggestions for their tomorrows.
How can we figure out how much we'll need for retirement?
If you're asking how much you need to have today to live comfortably indefinitely, simply take the amount of income you'd need and divide it by 0.04. That answer tells you (very crudely and with no guarantee) how much money you should have stashed aside in a diversified balanced portfolio to provide you with your desired income and a little hedge for inflation. For example, if you need $100,000 in income annually, you should expect to have $2.5 million (100,000/.04) in a diversified balanced portfolio to maintain that level indefinitely.
If, in the more likely scenario, you're asking how much a person should save to have a high probability of meeting their retirement goals, the grandfatherly wisdom of putting aside 10 percent actually works in most scenarios, believe it or not. The problem is that life isn't linear. There are so many variables that few of us will be able to maintain a static 10 percent throughout our working years, so 10 percent should be the average, not the cap.
For example, the stereotypical young married couple - pre-kids - can and should invest more than 10 percent because they can afford to and they are likely to see their savings rate drop during their parenting years - possibly below 10 percent or down to zero for a stretch. Then, after the kids are grown and you're in your peak income earning years, you'll likely need to back-end load your retirement savings with a rate much higher than 10 percent. Of course, starting early or late will have a very significant impact on this equation.
How soon should we begin saving for retirement? What are your favorite methods for building that retirement nest egg?
Between ages five and seven - seriously! It's at around this age that most kids are old enough to start receiving an allowance, and I invite parents to consider this as their first opportunity to establish the saving (and giving) habits that will hopefully compound as children move closer and closer to independence. I love the iPad/iPhone app iAllowance, by the way.
I remember my dad telling me at a very early age that I should give 10 percent and save 10 percent - first with the pittance I got from my allowance, and then from birthday gifts, and then my first part-time job at age 12 - because it would only get more challenging to maintain that discipline as I got older and the numbers got bigger.
Of course, I pitched a fit then, but you were right, Dad, about a lot of things!
But Dad didn't know about the Roth IRA, and that's the place I recommend kids begin to invest as soon as they're old enough to get any income whatsoever. At that age, you'll be paying little to no tax, turning it into tax-free income in the future.
What should we be doing to manage our money after we retire?
Retiring is one of the most stressful things a person can do. The best thing you can do for your money is to phase into retirement. For even the most financially well-off clients, I recommend they retire in stages instead of going cold turkey from high-stakes productivity to full-time golf and early buffet dinners.
Go part time. Or better yet, pivot to a "dream job" that pays less but doesn't feel like work, and then do it indefinitely. Reducing the income-producing burden on your nest egg early in retirement is one of the best things you can do for your money and, according to doctors, also for your health.
The next most important thing to do is to establish a portfolio that you fully understand and that you can really live with, because the biggest investing problems in retirement come from drastic changes to an investment strategy.
You can't be too conservative, because you may not give your money the best chance to outlive you.
But even more importantly, you can't be too aggressive - especially in retirement - because your income distributions will compound the destruction in down years. In all likelihood, this would cause you to abandon your investment strategy at the perfectly wrong time, missing out on the eventual market rebound.
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