Carl
Richards is well-acquainted with money-mistakes — not only because of his work
as a certified financial planner, but also because of his personal
experience.
During
the last housing bubble, Richards moved to a new city, was swept up by the
frothy housing market and bought a $575,000 house — well beyond the $350,000
that he and his wife had initially budgeted. He borrowed 100% of the purchase
price, and was told he could borrow more if he wanted. He and his wife opened a
home equity line of credit.
By the
time the market started falling and he realized he needed to move back to Utah,
they owed more than $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 let himself get into any tech stocks. At that time, he was at a big
brokerage firm that did a lot of research, and he read a long report on
InfoSpace.
He jokes
that the lesson he learned was that, “if you throw in the towel on your plan,
at least do it early.”
From his
mistakes, Richards knows the value of creating the right plan and sticking to
it. He’s now out with a new book, “The
One-Page Financial Plan,” which was inspired by a common question he
would field from friends and family who, say, in the last five minutes of
a night out, after the bill was paid, wanted to get advice on how they
should manage their money or invest their 401(k), or on other money matters.
(Read the 10 reasons why
financial plans aren’t just for the 1%.)
Here are
the simplest tips he has for getting what you want from your money, with the
hardest one at the end.
1. Ask
why money is important to you.
When his
friends would ask him for money advice in those few minutes, “I was giving
people prescriptions with no tools to diagnose,” he says. He cites a quote by
Stephen Covey, author of “The Seven
Habits of Highly Effective People,” who said, “It’s easy to say
‘no!’ when there’s a deeper ‘yes!’ burning inside.”
Knowing
why money is important to you will guide you on every financial planning
decision moving forward, Richards says. One driven, type-A ER doctor was
surprised to find herself saying that money was important to her because she
wanted to have time to raise a family. Once she and her husband identified
that, they could begin to make financial decisions that lined up 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 major
goals: 1. Fully fund their retirement accounts every year, 2. Fund their kids’
education accounts every year, 3. Save for a house. This was their one-page
financial plan.
2. Guess
where you want to go.
Knowing
where you want to go will enable you to ask for the directions.
Richards
says he chose the word “guess” to acknowledge that people don’t really know
what will happen — especially on the 20- or 30-year time frames sometimes
addressed in financial planning. “I’m trying to give everyone permission to
relax a little bit,” he says.
No matter
what, don’t throw your hands up completely and say that since you can’t predict
the future, you won’t make a guess at all. Make a projection, but don’t worry
about getting it “right,” he says. If you need to course-correct later on, 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 much
you have in assets, and what your liabilities are.
Though
this might seem like a straightforward step, Richards says it can become
emotional quickly. “It’s just facts, but you’ve got to realize, every single
line on that balance sheet tells a story,” he says. Your list of debts may
include one for a failed venture, so you may think about what a dumb move
that was, and your spouse might be tempted to nod his or her head in agreement.
Some
people may even be so ashamed of their past actions they will feel like
avoiding this step. For instance, one woman who borrowed $8,000 a few decades
earlier for a student loan had spent years not facing it, and when she finally
checked in on it, it had swelled to $40,000.
So, he
says, focus on learning from those mistakes and on moving forward — not on
pointing fingers, wallowing in guilt or engaging in avoidance.
4. Think
of budgeting as a tool for awareness.
Often,
people base spending decisions on emotional reasons, and then go looking for
evidence to support that decision. Instead, he says, we should be more
deliberate about our purchases. Budgeting can help to turn around bad spending
habits, but it shouldn’t be seen as a punishment.
He says
budgeting should instead be seen as a tool for tracking spending. “The process
of tracking will equal awareness and awareness will equal behavioral change,”
he says, leading your spending to align with your goals.
5. Save
as much as you reasonably can.
Once,
when Richards asked his coworker if he was saving enough for his child’s
college education, his colleague responded, “Carl, how about this: I’m saving
as much as I reasonably can.”
Richards
finds this advice more useful than recommending one save a specific percentage
of money. If you have a spending problem, then you may want to institute some
rules like holding new purchases to a 72-hour test during which the items sit
in your shopping cart online and you see if you still want them 72 hours later.
But,
overall, “If you do this early work, where you’ve gotten clear with your
values, and you have some awareness, then savings is a natural outgrowth of
that,” says Richards.
6. Buy
just enough insurance — today.
People
make two mistakes with life insurance. First, they put off buying it — either
because it doesn’t seem urgent if their health is good or because it involves
having a conversation most people would rather avoid. Or, they let fear drive
their decision when purchasing life insurance.
“[Life
insurance] is about replacing economic loss, not emotional loss,” says
Richards, “so if you view it in that cold hard light, you just have to
calculate what that loss will be and find the cheapest insurance to do that
job.” For the vast majority of people, a term policy, which is like renting
life insurance for a certain time period, is best. Be sure not to put off
buying it.
7.
Remember that paying off debt 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 on 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.
He
eschews the calculations that claim that paying off debt is an expensive use of
money when it can instead be invested. “Look, paying off debt is a great
investment,” he says. (If you’re wondering how to balance debt repayments with
retirement contributions, read this
article.)
8. Invest
like a scientist.
Richards has
a doctor friend who once said to him, “If I practiced medicine the way I
invest, I would have killed half my patients.” Before prescribing anything he’d
read peer-reviewed studies to gain confidence he was making the right choice,
but with investments, he’d get recommendations from friends and go with gut
feelings or by what he heard on the news without doing his own research.
“We can
actually look at the data and separate out the speculating and the
entertainment circus,” says Richards. The basic formula for successful investing, he says, is, first, to diversify
your portfolio. This means: go with index funds or exchange-traded funds that
contain hundreds of stocks, instead of one or two or even ten stocks. This
lessens the risk any one stock can hurt you. (Read about the 7Twelve
strategy for diversifying 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 how well an investment performs: cost. “The more you pay for your
investments, the less money you’ll end up keeping,” Richards writes. So, look
for inexpensive securities. (Here’s more information on the
importance of keeping your investment costs low.)
Third,
recognize the correlation between risk and reward. The greater risk you take,
the higher potential return. This doesn’t mean to bet it all on one stock, but
to recognize you’ll likely earn more for stocks than for bonds, that you’ll
probably make more via small companies than large ones, and that you’ll most
likely have greater returns from financially weak companies than strong ones.
9. Hire a
real financial advisor.
Richards
says it’s difficult to be unemotional about your own money. That’s the real
purpose of having an advisor.
“You
don’t hire a financial adviser because you’re not smart enough to do this
yourself,” says Richards. “You hire one because they’re not you.” He or she
will help get between you and any potential mistakes you may make, even if you
were to be in danger of making financial blunders every five or ten years.
When
looking for an advisor, choose one who is giving
you advice, not selling you something, and who is open about
conflicts of interest.
10.
Behave for a really long time.
“The
portfolio you build matters a lot less than sticking with it,” says Richards,
who learned this the hard way with his $10,000 InfoSpace mistake.
“It’s
relatively simple, the math side of it,” Richards says. “It’s the psychological
side that seems to be really hard 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. Then, be sure to leave your
plan alone. “Would you ever plant a tree and then go in 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 being la Carl Richards is
well-acquainted with money-mistakes — not only because of his work as a
certified financial planner, but also because of his personal experience.
During
the last housing bubble, Richards moved to a new city, was swept up by the
frothy housing market and bought a $575,000 house — well beyond the $350,000
that he and his wife had initially budgeted. He borrowed 100% of the purchase
price, and was told he could borrow more if he wanted. He and his wife opened a
home equity line of credit.
By the
time the market started falling and he realized he needed to move back to Utah,
they owed more than $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 let himself get into any tech stocks. At that time, he was at a big
brokerage firm that did a lot of research, and he read a long report on
InfoSpace.
He jokes
that the lesson he learned was that, “if you throw in the towel on your plan,
at least do it early.”
From his
mistakes, Richards knows the value of creating the right plan and sticking to
it. He’s now out with a new book, “The
One-Page Financial Plan,” which was inspired by a common question he
would field from friends and family who, say, in the last five minutes of
a night out, after the bill was paid, wanted to get advice on how they
should manage their money or invest their 401(k), or on other money
matters. (Read the 10 reasons why
financial plans aren’t just for the 1%.)
Here are
the simplest tips he has for getting what you want from your money, with the
hardest one at the end.
1. Ask
why money is important to you.
When his
friends would ask him for money advice in those few minutes, “I was giving
people prescriptions with no tools to diagnose,” he says. He cites a quote by
Stephen Covey, author of “The Seven
Habits of Highly Effective People,” who said, “It’s easy to say
‘no!’ when there’s a deeper ‘yes!’ burning inside.”
Knowing
why money is important to you will guide you on every financial planning
decision moving forward, Richards says. One driven, type-A ER doctor was
surprised to find herself saying that money was important to her because she
wanted to have time to raise a family. Once she and her husband identified
that, they could begin to make financial decisions that lined up 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 major
goals: 1. Fully fund their retirement accounts every year, 2. Fund their kids’
education accounts every year, 3. Save for a house. This was their one-page
financial plan.
2. Guess
where you want to go.
Knowing
where you want to go will enable you to ask for the directions.
Richards
says he chose the word “guess” to acknowledge that people don’t really know
what will happen — especially on the 20- or 30-year time frames sometimes
addressed in financial planning. “I’m trying to give everyone permission to
relax a little bit,” he says.
No matter
what, don’t throw your hands up completely and say that since you can’t predict
the future, you won’t make a guess at all. Make a projection, but don’t worry
about getting it “right,” he says. If you need to course-correct later on, 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 much
you have in assets, and what your liabilities are.
Though
this might seem like a straightforward step, Richards says it can become
emotional quickly. “It’s just facts, but you’ve got to realize, every single
line on that balance sheet tells a story,” he says. Your list of debts may
include one for a failed venture, so you may think about what a dumb move
that was, and your spouse might be tempted to nod his or her head in agreement.
Some
people may even be so ashamed of their past actions they will feel like
avoiding this step. For instance, one woman who borrowed $8,000 a few decades
earlier for a student loan had spent years not facing it, and when she finally
checked in on it, it had swelled to $40,000.
So, he
says, focus on learning from those mistakes and on moving forward — not on
pointing fingers, wallowing in guilt or engaging in avoidance.
4. Think
of budgeting as a tool for awareness.
Often,
people base spending decisions on emotional reasons, and then go looking for
evidence to support that decision. Instead, he says, we should be more
deliberate about our purchases. Budgeting can help to turn around bad spending
habits, but it shouldn’t be seen as a punishment.
He says
budgeting should instead be seen as a tool for tracking spending. “The process
of tracking will equal awareness and awareness will equal behavioral change,”
he says, leading your spending to align with your goals.
5. Save
as much as you reasonably can.
Once,
when Richards asked his coworker if he was saving enough for his child’s
college education, his colleague responded, “Carl, how about this: I’m saving
as much as I reasonably can.”
Richards
finds this advice more useful than recommending one save a specific percentage
of money. If you have a spending problem, then you may want to institute some
rules like holding new purchases to a 72-hour test during which the items sit
in your shopping cart online and you see if you still want them 72 hours later.
But,
overall, “If you do this early work, where you’ve gotten clear with your
values, and you have some awareness, then savings is a natural outgrowth of
that,” says Richards.
6. Buy
just enough insurance — today.
People
make two mistakes with life insurance. First, they put off buying it — either
because it doesn’t seem urgent if their health is good or because it involves
having a conversation most people would rather avoid. Or, they let fear drive
their decision when purchasing life insurance.
“[Life
insurance] is about replacing economic loss, not emotional loss,” says
Richards, “so if you view it in that cold hard light, you just have to
calculate what that loss will be and find the cheapest insurance to do that
job.” For the vast majority of people, a term policy, which is like renting
life insurance for a certain time period, is best. Be sure not to put off
buying it.
7.
Remember that paying off debt 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 on 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.
He
eschews the calculations that claim that paying off debt is an expensive use of
money when it can instead be invested. “Look, paying off debt is a great
investment,” he says.
8. Invest like a scientist.
Richards
has a doctor friend who once said to him, “If I practiced medicine the way I
invest, I would have killed half my patients.” Before prescribing anything he’d
read peer-reviewed studies to gain confidence he was making the right choice,
but with investments, he’d get recommendations from friends and go with gut
feelings or by what he heard on the news without doing his own research.
“We can
actually look at the data and separate out the speculating and the
entertainment circus,” says Richards. The basic formula for successful investing, he says, is, first, to diversify
your portfolio. This means: go with index funds or exchange-traded funds that
contain hundreds of stocks, instead of one or two or even ten stocks. This
lessens the risk any one stock can hurt you. (Read about the 7Twelve
strategy for diversifying 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 how well an investment performs: cost. “The more you pay for your
investments, the less money you’ll end up keeping,” Richards writes. So, look
for inexpensive securities. (Here’s more information on the
importance of keeping your investment costs low.)
Third,
recognize the correlation between risk and reward. The greater risk you take,
the higher potential return. This doesn’t mean to bet it all on one stock, but
to recognize you’ll likely earn more for stocks than for bonds, that you’ll
probably make more via small companies than large ones, and that you’ll most
likely have greater returns from financially weak companies than strong ones.
9. Hire a
real financial advisor.
Richards
says it’s difficult to be unemotional about your own money. That’s the real
purpose of having an advisor.
“You
don’t hire a financial adviser because you’re not smart enough to do this
yourself,” says Richards. “You hire one because they’re not you.” He or she
will help get between you and any potential mistakes you may make, even if you
were to be in danger of making financial blunders every five or ten years.
When
looking for an advisor, choose one who is giving
you advice, not selling you something, and who is open about
conflicts of interest.
10.
Behave for a really long time.
“The
portfolio you build matters a lot less than sticking with it,” says Richards,
who learned this the hard way with his $10,000 InfoSpace mistake.
“It’s
relatively simple, the math side of it,” Richards says. “It’s the psychological
side that seems to be really hard 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. Then, be sure to leave your
plan alone. “Would you ever plant a tree and then go in 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 actualy get rewarded for being lazy.”
