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3 Fundamental Rules for Financial Freedom

Published on April 24, 2023

John Hagensen

We’re all looking for the best advice when it comes to our money, but sifting through all the noise can be overwhelming. This week, John reveals the three rules everyone should follow to make managing their financial life a cinch (1:00). Plus, John talks 401ks — including the biggest challenges and opportunities participants should be looking out for this year (14:37) — before outlining several risks of DIY investing (29:55)

Episode Notes:

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, the negative power of financial media, how to avoid common pitfalls in your retirement plan, as well as how much you need to make to be considered rich. Now, join me as I help you rethink your money.

I want to start with a statement that might be controversial, but it really shouldn’t be, and that is that financial news is financial entertainment. The financial media isn’t providing sound financial advice for your situation. Financial media’s objective is to get ratings and clicks and advertisements, which is fine, as long as you understand that what you’re watching is purely entertainment. Remember The Jerry Springer Show? It started out actually mostly as political commentary, probably didn’t have much of a future, just another one of those shows, yet it turned into a 27 season show that spanned nearly three decades and almost 5,000 episodes. Now, one, it shows we’re a little messed up that that many people enjoy watching them pull each other’s hair and brawl on the stage and everybody’s chanting, “Jerry, Jerry, Jerry.” By the way, if you don’t know what I’m talking about, you are likely a better person than those who do. It is not quality TV. But one thing is certain when you watch Jerry Springer, you know it’s staged.

You know that it’s purely dumb, brainless entertainment. And hopefully you know that it should have zero relevance or takeaways for your life, except that you don’t want to be one of those people pulling each other’s hair and brawling and cursing on national TV, making a fool of yourself. So, I guess there is that takeaway, but by contrast, when you watch CNBC and you hear a financial pundit who went to a great school and seems important by their title, or you’re listening to Cramer telling you to buy, buy, buy Lehman Brothers as it’s plummeting during the financial crisis, and then you go buy Lehman Brothers only to have it wipe out that portion of your portfolio. Or you see that advertisement about the hot stocks to buy, or this great analyst who predicted the 2008 collapse is making an even more important forecast for this upcoming year. Click to learn his secrets.

Now there’s TikTokers and social media influencers presenting opinions as well, but when you listen to these so called experts and they’re telling you about how deep the next recession’s going to be or which asset category you should own or which stock you should trade, you would be far better off ignoring all of it. You’d be better off not having that information clouding your judgment, because we know how difficult it is to control our emotions when it comes to our money with fear and greed.

And so constantly consuming this financial entertainment is akin to an alcoholic sitting down at a bar and saying, “Well, I’m just going to drink club soda.” Sure, you can do it. That club soda’s fine for you, but it probably increases your odds of failure. And this jumped out to me this past week as I was listening to a particular podcast, and realizing in the midst of my consumption, man, I really hope no investors actually act and make decisions based upon this entertaining dialogue full of financial experts making guesses and musing on what might happen over the next six months to a year.

Instead consume financial media exactly the same way you would an NBA playoff game or an episode of The Bachelor. And, yes, this is going to be the most dramatic rose ceremony in Rethink Your Money history. And I want to share with you a story that perfectly encapsulates this concept. So, over 8,000,000 people opened new brokerage accounts in the first three quarters of 2020. We were locked up in our homes having money helicoptered down by the government from the sky like manna to the Israelites, and people were like, “All right, sports gambling online, online shopping and online trading.”

And while the thrill of enormous stock gains may have provided a much needed distraction during the pandemic, one of those people is now experiencing an unintended tax consequence. And if you just finished up your taxes and if you didn’t extend, maybe you’re feeling good that that box is checked, but I sure hope you didn’t get the sort of surprise that this Robin Hood newbie is facing, which is a potential tax bill of $800,000. And the craziest part, that is despite only making $45,000 in net trading profits. So, how did this happen? He opened a new account for $30,000, then he had between $200,000 and $2,000,000 worth of trading volume daily.

This ultimately resulted in $45,000,000 worth of total trades, and in the end, we did do all right, made $45,000 a profit at the end of the year. But I cannot overstate this enough, $45,000,000 in total trades for a $45,000 profit. Received his 1099-B, the tax form, that showed a $1,400,000 capital gain income. And it all came back to this wash sale rule. And while this won’t likely impact you to the same extent, because you’ll likely not make $45,000,000 worth of trades in one calendar year, especially on a $30,000 account, but I have absolutely seen this negative and unintended, often unknown, consequence for everyday investors. What the wash sale rule is there to prevent is you taking a loss on the sale of a security that’s down in value and then immediately repurchasing it just to book the loss.

You need to wait longer than 30 days to buy the same or a substantially identical one, as the IRS puts it, to be able to lock in that loss. So, for example, let’s say you have 100 shares of X-Y-Z stock that you bought for $10 a share, which cost you $1,000 total. The stock goes down 20% to $8 a share, and you sell it. You kind of like the stock, but you’ve got a loss. 23 days later you say, “You know what, I’m going to re-buy X-Y-Z stock,” because you repurchase the stock inside of that 30 day window, you have a wash sale. And while this is fairly intuitive, it’s easily overlooked, especially by many newbie investors and traders. In the case of this person, technology can provide for less friction while investing, it can make it fun, more convenient, but it can also downplay risks that may lead novice investors astray, as Jason Zweig, author of the Intelligent Investor column at the Wall Street Journal said.

And this ties back into the discussion around the consumption of financial media because it can often serve us with a false sense of bravado, or another way of putting it, a heavy dose of overconfidence bias that we’ve got more financial acumen because of the information we’re consuming. Now, I want to address the elephant in the room, that you’re listening to me on the radio or on a podcast, depending upon how you are consuming Rethink Your Money. Do you notice that no part of this show speaks to what I think is going to happen with the markets? Because I don’t know,. It’d be entertaining. I could invoke a lot of emotion if I told you I think everything’s going to go down in value so you should put everything in some high commission annuity.

There’s plenty of that out there with the next invite to a steak dinner workshop in your town. You don’t need that from me. And in a lot of cases you’ll have buyer’s remorse. I don’t tell you which direction I think the market’s going to move, where the economy’s headed, which stocks you should buy, which sectors or asset classes are likely to do better than others. Again, I don’t know. Instead, the purpose of this show is to bring to light the things that I’ve observed as a wealth manager, as a reformed broker, someone who used to do things incorrectly at the beginning of my career, the most common mistakes that I’ve witnessed, so that hopefully you can achieve the best outcomes possible when it comes to what you’ve worked so hard to save. And here’s the encouraging part of all of this. If you know the right things, you don’t need to know everything.

In 2022, the FINRA Foundation National Financial Capability Study found that the average respondent correctly answered just over two and a half out of five financial literacy questions correctly. Why don’t you try answering these five questions for yourself to see how you do? Number one, suppose you have $100 in a savings account, it’s earning 2% interest per year. After five years, how much would you have? So, $100 earning 2% interest for five years. Little bit north of $110. Question number two, imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today? Well, the answer, which has been a hot button recently of course, is that you would have less because that 1% is not keeping up with the rate of inflation.

Question number three, if interest rates rise, what will typically happen to bond prices? Answer, bond prices will fall. Questions number four and five are both true and false, and didn’t you just love true and false questions back in elementary school? Even if you were just completely clueless, you’d try to read between the lines of the question, and then even in a worse case scenario, you’re 50-50. A 15 year mortgage typically requires higher monthly payments than a 30 year mortgage, but the total interest over the life of the loan will be less. That answer is true. And the fifth and final question, true or false, buying a single company’s stock usually provides a safer return than a stock mutual fund. That answer is false. There is single stock risk and a lack of diversification. Again, the average American could only answer half of those questions correctly.

Now, because you’re listening to the show, I suspect that you did much better. And that’s not to beat up the respondents to the study, but it is eye opening that so often, while we’re focused on other aspects that are far less important, we fail to have the knowledge of the most basic financial principles. Let me share with you what I think are the most basic rules for financial success. First, spend less than you make. Have a budget. Understand what you’re making and what you’re spending. Number two, give 10% and save 10%. If every $100 that comes in, $10 go to those in need that have less than you, and $10 is allocated to savings, you’ll be far ahead of the vast majority of those around you. And once you’re spending less than you make and you’re giving and you’re saving on a regular basis, you buy equities, you diversify those investments per your risk tolerance and time horizons, and rebalance your portfolio systematically.

And that all starts with a written, documented, dynamic financial plan. And I really want to help you accomplish your goals, relieve stress, and simplify your life. That’s what my colleagues and I provide here at Creative Planning. We want you to have someone sitting on the same side of the table as you, like an advocate on your team, for your success, to help you make better money moves in the midst of this financial pornography. Shout out to Carl Richards who labeled the financial media with that term, but it’s true. It’s what it is. And it’s hard to steward our monies well when we’re being inundated with information, most of which is designed to get our attention rather than help our accounts. The mission here at Creative Planning is that for any decision you are making that begins or ends with a dollar sign, we want you to have someone on your team acting in your best interests to help you.

And that’s why we don’t manufacture our own mutual funds or other investment products. We’re not receiving third party kickbacks from advantaged funds. And surprisingly, and sadly, that’s really unique in our industry, it shouldn’t be, but it is. We’re also not selling you commissionable products. We’re not a broker dealer. We are investment advisors that have aligned our interests with our clients as fiduciaries. So, whether it be taxes, estate planning, financial planning, investments, you need a trust company, business planning, risk management, retirement plans, whatever is on your mind, we believe that your money works harder when it works together. Speak with a local advisor to get a second opinion by visiting creativeplanning.com/radio. Why not give your wealth a second look?

Well, my special guest today is Rick Unser, he is a managing director here at Creative Planning. He resides in beautiful Orange County, California, and helps lead our 401(k) team, and that’s why I asked him on today so that we could discuss retirement plans. Welcome to Rethink Your Money, Rick.

Rick Unser:         John, thanks for having me.

John:     We have well over 133,000,000 full-time employees as of the data in March, many of which are fortunate enough to have some sort of retirement plan, so let’s just begin there, Rick. What mistakes do you see Americans make with their retirement plan?

Rick:      Now, I’m going to take a page out of Wheel of Fortune here. I don’t know how many people still watch the show, but I don’t know, it’s still out there.

John:     Is Vanna White still on it? Is she still on it?

Rick:      I think so. I feel like I see the highlights every now and then and her and Pat Sajak, they’re still doing their thing. But in the final puzzle, everybody seems to choose R, S, T, L, N, E as their first five letters, so when you think about 401(k) mistakes, I feel like there’s an equal parallel, which is you’re not contributing enough to get the employer match. For a lot of people, that’s a very common mistake. Or you’re not diversifying your investment options, you’re putting all your money in one investment, or you’re picking them based on the names that you might be familiar with. Or you’re letting the headlines influence your investment strategy. So, I think when you look at some of the common mistakes that’s usually what most people are going to refer to as don’t do these things. I think a lot of those are pretty self explanatory.

John:     Yeah, they are. One of the ones that I see often is the person who’s 37 and plans to retire at 65, but says, “Well, I’m more of a moderate or conservative investor,” so you go look at their 401(k) plan that they’re going to be penalized if they pull money from over the next 22 and a half years, and three quarters of the accounts in a stable value fund are bonds because they don’t want volatility. And you’re like, your time horizon is over two decades on this, just don’t look at it for the next 20 years if you need to keep yourself emotionally in check because you need growth over the next 20 years. So, that is one where I see, and I think those are often influenced by the headlines that people see, for sure. Talk to me, Rick, about some of the things that you’ve seen that are maybe less obvious that people need to be aware of.

Rick:      And if you don’t mind, I’d love to have one tag on to your letting the headlines influence and people being stuck in cash or bonds. I feel like that’s a question that we get a lot. “Hey, I’m scared of the markets. I don’t want to lose money.” And I don’t know about you, but one of the things that I’ve posited to people over the years is, okay, I get it. You’re going to sell, you’re going to de-risk, you’re going to preserve that money. That’s the easy decision. Now, what comes next?

John:     Yeah, what’s your entry point.

Rick:      Right, what’s your entry point back into this? Because I think we would all agree, that’s not a long-term strategy, that’s a strategy that’s not going to work in your favor over, I think as you said, the next 22 and a half years.

John:     Yeah, as always, the allocation comes down to time horizons more than anything else. Well, Rick, what is maybe a less obvious mistake you see within retirement plans?

Rick:      There’s a lot of people out there that try to front load their 401(k) contributions. I’m going to make my entire 401(k) contribution in the first quarter of the year. So, for example, a lot of people right now are maybe making their last 401(k) contribution for the year. Well, if your company has a match and that match is applied on a per payroll basis, you might be doing a great job of saving and getting your money into the market, but you could be leaving a lot of money on the table that your employer is providing you in matching contributions.

The way that most matches are structured is, even though you might have put in, for 2023, you might have put in your $22,500, or maybe your $30,000 if you’re catch up eligible, the match is calculated based on a percentage of your pay. So, sometimes you have to do the math and get the Excel spreadsheet out, what they see is the perceived benefit of getting their money in early, they’re cutting themselves short on the amount of match they’re getting from their company as a result.

John:     This is one of those where you really need to know the specifics of your plan. If you happen to be fortunate enough to have pay periods that are $25,000, $30,000 a pay period, and you can front load it that much and don’t need some of the money, good for you, right? Some people can, but you absolutely wouldn’t want to do that and risk the potential to receive the match in any way because that’s free money and a 100% return on your investment day one. So, what about Roth and pre-tax contributions?

Rick:      So, believe it or not, there’s still a popular perception amongst some highly paid people that they are not eligible to make a Roth 401(k) contribution, “My CPA says I make too much money,” and I get that on the IRA side, but on the 401(k) side, you’re eligible. There are no income limits.

John:     I also see that trip people up with Roth conversions.

Rick:      There’s a certain narrative within the 401(k) world, which is you should always put your money in Roth. And I get it, you pay your taxes today, your money grows tax free, you can take it out tax free, but very seldom are there blanket statements that are always true, right?

John:     Yeah, the Roth versus deferred argument has always, in my mind, been less complicated than people make it. You’re purely trying to figure out which way do I arbitrage taxes to my advantage? So, if you’re making $1,000,000 a year right now, putting you in a 37% tax bracket, if you anticipate that in five years when you retire, you’ll be living on $200,000 a year, it’s pretty reasonable, even if tax rates increase, that you’ll be in a lower bracket than 37%. That’s really all the calculation is. Should I defer because my tax rate today is likely higher than what I expect it to be down the road? And I’m talking with managing director and one of the heads of our 401(k) team, Rick Unser. So, Rick, let’s transition to loans. What mistakes do you see regarding 401(k) loans?

Rick:      When you take a loan, obviously you’re taking money out of the market, you’re not distributing it from your 401(k) plan, but you’re selling your assets in the plan to use as collateral against your loan. So, I think a lot of people that are anti loan, that’s always the, hey, your biggest mistake is the opportunity cost of money, the returns that you’re sacrificing. And I think, again, for most of the times, that’s a very valid argument.

However, there’s a couple of things that I think where loans maybe get a little bit of a bad rap. For some people borrowing at prime plus one might actually be a much better option than credit card debt. There’s a good chunk of the population where, from a day to day standpoint, solving real financial problems for people, sometimes it does make sense. So, I’m one of those people that talks out of both sides of my mouth on loans where I prefer you don’t have one, but sometimes there’s a case to be made, this was your best financial decision based on other options you either did or didn’t have at your disposal.

John:     This is an example of where personal finance is a lot more personal than it is finance. You do want to make sure you understand that, in many cases, 30 days after leaving your job, it has to be paid back in full. So, the stability of your current employment would be a consideration there. And then also certain plans want it paid off before they will either let you contribute and or whether they will provide a match. So, these are all the nuances to the plan. I’ve seen people take a loan, they switch employers and they say, “Great, you have 30 days to pay this back.” And they’re looking around going, “Well, I don’t have the money. That’s why I took the loan in the first place was because I don’t have the money,” so that can catch people a little bit off guard.

Rick:      And just one more thing on the loans, M&A is a big thing in the market right now. That’s the other element that catches a lot of people by surprise on loans is, “Hey, my job’s very stable. I’ve been here for 10 years,” but there’s a lot of things going on in the M&A market, and a lot of times when companies sell, what happens is their 401(k) plans are terminated, and as a result, that will then make your loan due and payable.

John:     How about beneficiaries? What do you see for mistakes regarding that?

Rick:      So, this is one of those things that I’ve unfortunately been through the other side of this with plan sponsors with the companies that we work with as clients and trying to figure out if you have a life event, if you get divorced, if you get remarried, if you have kids, whatever it is, just make sure somewhere, somehow, you’re looping in your 401(k) beneficiary into this thought process because it is important. For most people, their 401(k) balance is going to be their single largest liquid asset, so as a good housekeeping measure, double check what you have set up as your beneficiary every few years.

John:     Well, this is great advice, Rick. It’s been enlightening and I appreciate you sharing some of these common 401(k) mistakes and for joining me here on Rethink Your Money.

Rick:      Thanks, John.

John:     Do you have a retirement plan? 401(K), 403(b), Thrift Savings Plan, 457, or maybe it’s just an IRA? Well, if you have questions and you’re not sure where to turn, we’d love to help you as we’ve been helping folks just like you with their retirement plan since 1983. To speak now with a local advisor, visit creativeplanning.com/radio. There’s no obligation to become a client and it is completely complimentary. Why not give your wealth a second look at creativeplanning.com/radio.

My dad would often say, when I was a child, “Kids these days,” and you know what? This past week I caught myself shaking my head slowly, looking at one of my kids as they were doing something that I disapproved of, and I said, “Kids these days.” What are those commercials? I think it’s Progressive Insurance, fantastic ad campaign where they say, “We can’t stop you from becoming your parents.” And you know what? It is true. And I think older generations are famous for believing that the younger generation just doesn’t quite get it, or maybe the world isn’t improving, they don’t work as hard as we did. And we can debate specifics on whether or not the world is better today than 50 years ago, but at a broad level, virtually all measurables reveal that the world is in fact significantly better. Poverty, disease, infant mortality, life expectancy, global peace, overall quality of life.

100 years ago, the average square footage of a home in America was 1,000 square feet. Today, nearly 2,800 square feet is the average new single family home in America. Now, the fact that Americans, and in particular American teens, are less happy than ever before, that’s a topic for another day and another show, but this mindset of wondering how future generations are going to fare is not a new one. As a parent to seven kids, I find myself thinking about this as I interact with my kids and I see them growing up and I envision the world that they’ll live in. Charlie Bilello, our chief market strategist here at Creative Planning is, in my opinion, the best there is at distilling complicated financial topics into easy to understand visuals through his use of charts. It’s probably the reason he has over 500,000 Twitter followers as well.

And I will post to the radio page of our website This Week In Charts by Charlie entitled The Next Generation. Again, that’s creativeplanning.com/radio to view those charts. And of course, you can also schedule a time to meet with a local advisor here at Creative Planning there at creativeplanning.com/radio as well. 78% of respondents in a recent study said that they do not feel confident that life for their children will be better than it has been. And the number one answer as to why they felt that way was inflation, high housing, high healthcare costs, high education costs, and wages that seem to not be keeping pace were their concerns. Let’s start by looking at how we got here and then I’ll share with you how we may be able to get ourselves out of it. And let’s start with government spending. We were at 185% in US government spending, which is obviously well above the US inflation rate.

And we saw acceleration of this in 2020 and 2021, which led to massive deficits. And it’s not completely unlike the challenges we face personally with our finances, this spending feels great in the short run, but now we’re feeling some of the consequences in the long run in the form of high inflation. It reminds me of when our now 12 year old Cruz asked me when he was much younger why we have anyone that’s poor when money is paper and we can print it? And it makes sense for a kid to think that, but of course when you print a lot of money, more money circulates in the system and it devalues each dollar. Go ask Venezuela how this worked out. And so that was the fiscal policy component of inflation. But then you look at the monetary policy side of things and the Federal Reserve continued stimulus, even after the economy came off of the financial crisis, the Fed chose to continue this wealth effect, which propped up asset prices with very little pushback.

Finally raised rates in 2017, but then moved them right back down to zero in 2020, as we know, during the COVID-19 pandemic. So, the broader question is really what are we seeing now? Inflation, after having spiked to 9%, cooling back off substantially from its highs, the housing market’s repricing through January of ’23, it was the seventh consecutive monthly decline, a 5% pullback. And this is coming off the biggest bubble when you compare housing prices to income. So, how do we get out of this? How do we make it so that our children have a better standard of living? We need to be more financially responsible to reduce our deficit, and we need to normalize policies so that we do not have ultra easy policies artificially suppressing interest rates.

And by the way, this will be an uphill battle because even though 78% of Americans don’t feel confident their children will have it better, no one wants to take short term pain, especially the generation who benefited from these very policies. And, again, if you want to see Charlie’s entire presentation visit the Creative Planning radio page. Well, it’s time for a game of rethink or reaffirm where I’ll break down common wisdom or a hot take from the financial headlines and together we’ll decide if we should rethink it or reaffirm it. Our first piece of common wisdom is that do it yourself investing can work, but it’s a lot harder than you think. Not everyone needs a financial planner, but everyone needs a financial plan. Now, I do think that most people would be better off paying a great fiduciary financial advisor who’s sitting on the same side of the table as them, helping them make quality decisions over long periods of time, helping them build a financial plan, monitor that financial plan, looking at taxes, looking at estate planning.

I do think that there is tremendous value for most people to have that relationship, but not for everyone. And the people that I’ve seen who are successful do it yourself-ers have a rare combination of both financial aptitude, and more importantly even than that, the right disposition. So what I’d be asking yourself, if you currently don’t have a financial advisor that you work with in an ongoing capacity, do you have the time to be doing this yourself? Because it’s important. It’s everything you’ve saved. If you’re married, your spouse will be depending upon you doing a great job with this. If you’ve got legacy plans, your loved ones are also going to be depending upon you not making mistakes and doing this well. And so in addition to the time, do you have the desire? Is this something you want to dedicate a lot of that extra time toward?

And lastly, do you have the expertise? So, time, desire, and expertise. Once those are answered, you want to look for these five key traits of successful do it yourself investors. Number one, high level of discipline. Number two, taking initiative. Number three, patience. Number four, humility. And number five, optimism. That’s a rare blend because some of those are somewhat contradictory, right? Taking an initiative but also being patient, being optimistic, also being humble. And while I’m biased, I want to be clear that in my opinion, a really good financial advisor is not costing you money. Let me put that another way.

If your advisor is excellent, the value that they are providing should be in excess of whatever you are paying them, meaning, yes, they make money, and in the end, you are in a better financial situation. And there are a few specifics that I would call tedious things that are probably worth paying for, like opportunistic rebalancing. When everything’s going down, first quarter of 2020, fastest bear market we’ve ever seen, and you’ve got an advisor strategically rebalancing and buying more shares while they’re on sale before they pop up 70% over the final nine months of the year.

You buying shares at huge discounts because you’ve got a systematic plan in place. Some do it yourself-ers may possess the discipline and the initiative and the optimism, those three of the five traits, to make that happen, but many won’t on their own. And there you go, that’s worth whatever the fee was to that advisor for probably the next several years due to that performance lift. Strategic dividend placement, asset location, putting the right investments in the right types of accounts. How about making strategic tax trades in a year like 2022, where stocks and bonds are both down in value? There were huge opportunities to book losses and use those to offset future gains or current gains that you now can realize. It’s worth paying for strategic income decisions, a mean reversion analysis, and most importantly, it simplifies your life. You’re able to avoid the big mistake and you’ve got a team of fiduciaries that you can count on.

And so let me also share with you the risks that I have personally seen as a wealth manager of people who were doing it themselves, came into my office and said, “Here’s why I need to hire someone now because I’ve done X, Y, and Z.” And those things are procrastination. “I meant to get this done, John, three years ago, never did. Dang it, that cost me a lot of money.” Another risk of do it yourself investing is it’s very easy to act on emotion when you are rogue. There can be a huge lack of technical knowledge and experience, and probably most important is limited perspective. Morgan Housel said that your past decisions make up less than 0.00000001, probably even lower, but we’ll just stop there, of the world’s outcomes. But that background, your personal individual experiences, account for a high percentage of the way you view the world.

And so if you’re someone with a fairly simple situation and you’ve got time and desire and expertise to handle the situation, then maybe you can do it on your own, and mostly because you really want to. But I would encourage even that person to find a great registered investment advisory firm, get a second opinion, which most like us here at Creative Planning offer at no cost, learn about the ways that that firm helps people just like you and what they suggest you look at to improve your plan. And if they’re like us here at Creative Planning, there’s no large upfront costs. There are no commissions being paid. You can cancel at any point and discontinue paying any fees. And so the barrier to entry is really low. Therefore, the verdict on do it yourself investing can work, but it’s a lot harder than you think is a reaffirm. And so if you have questions, we’d like to help answer those for you as we’ve been providing since 1983, helping families in all 50 states and over 75 countries around the world. Why not give your wealth a second look at creativeplanning.com/radio.

It is time for listener questions and my answers. If you’ve got questions, email those over to radio@creativeplanning.com. Our first two questions come from Darren in Fargo, North Dakota. Darren must not have gotten the message that the second question actually is not complimentary, we charge more for that, but no worries, Darren. I’ll send you the invoice after the show. Let’s get to the first question. “I have a 401(k) provided by my employer. And considering how the stock market can drastically fluctuate, should I contribute more of each paycheck to it, less, or make no change?” It’s a great question, and I think I’ve got a fairly straightforward answer. Investing a regular amount each month, or really each pay period, which for most companies is every two weeks, is a great tool for directly combating market volatility and fluctuations. Because by doing that, which is referred to as dollar cost averaging, you’ll be contributing and investing at times where the market’s up and you’re paying a bit of a premium in hindsight, and in those times you’ll receive less shares.

But other times the market will be down and you’ll receive more shares buying into a discounted market. But here’s the key. Over a long timeframe, it averages out. If you go back to 1926 and you look at 30 year forward returns of every single month, so that’s 808 rolling periods, the best 30 year period is 15%, the worst is 8%, the average is 11% per year. Some are better than others, certainly 15 is better than eight. But overall, it tends to work out well, and hopefully you’ll achieve the desired returns needed to accomplish all of your goals. But trying to time the market or decide when to increase or decrease contributions isn’t something I’ve ever seen anyone execute well.

Darren’s second question. “I’d like to attend graduate school and take online classes from one of the in or out of state colleges that offer an MBA or similar type of master’s degree, but if I can help it, don’t want to completely max out all of the financial aid that I am eligible for that type of degree. I already have student loan debt from a two year degree and a Bachelor’s degree. Your thoughts?”

This question is very specific to Darren, so that’s one where we have an office there in Fargo, and I would encourage you to speak with a wealth manager there in North Dakota to look more specifically at your situation. But what I can share is the way I think about student loans and the leverage you are going to potentially get by taking out student loans. If you get a degree in underwater basket weaving, yeah, probably won’t help you that much. One of the most successful friends I have, he’s a realtor. He flips homes. He owns an unbelievable amount of rental properties, and he dropped out of college to begin his real estate career.

He was far better off not taking out more student loans, delaying his career a couple of years when he knew he wanted to be in real estate, which he didn’t need a degree for. No one’s not using him as their realtor when he’s awesome at what he does because he doesn’t have a college degree, you don’t care. But if you want to climb the corporate ladder at a big company, those degrees can matter significantly, and your ability to even be invited to interview for some of those positions as those are the table stakes. And if you look at the average American’s income by education level, a high school graduate, $40,000 a year, an associate’s degree, $51,000. If you have a Bachelor’s degree that jumps all the way to $80,000 per year, a Master’s degree, $98,000, a professional degree, 151,000. And if you go to all the work of getting your Doctorate, you actually don’t earn quite as much as a professional degree, but you’re at $141,000.

So, here are the takeaways. College graduates with a Bachelor’s degree earn more than double the salary of those without a degree, and those with professional degrees earn almost four times as much as a high school graduate. Well, that’s a very worthwhile investment from purely a financial standpoint. Again, there are other factors to consider here, but staying in school, it does pay off on average. Another takeaway is the Master’s degree may not be worth it, to take out another a $100,000, $150,000, $200,000 worth of student loans, delay your career by two, three, four more years to get started has statistically, from a generalized standpoint, only a small increase in average salary. And so, Darren, again, you need to talk with a wealth manager, a fiduciary that can build out your financial plan, look at your goals, look at your specific career opportunities today, what you’d like to pursue, and how necessary additional degrees would be in having success within that field. Thank you so much, Darren, for both of those questions.

Our final question comes from Michael in Scottsdale, Arizona, where he asked, “The Fed coin appears to be the replacement for the dollar in conjunction with the FedNow system rolling out in July. I think many will protest the Fed Coin. What is your opinion on diversification into some yuan currency? It appears alliance with China, Russia, Brazil, Iran, and others are establishing the new world currency as the Yuan. Saudi Arabia is selling oil now in the Chinese yuan and not the dollar. Will the devaluation of the dollar cause bonds to lose value?” There is a lot to unpack here, but a potential collapsing dollar often causes behavior that is the exact opposite of what you’d want to do in the event of our currency being devalued or fully collapsing. So, here’s, Michael, my advice. Number one, don’t put all your eggs in one basket.

You need to diversify and diversifying means diversifying internationally. This is why isolating your investments only within United States companies, which by the way make up about a little over 50% of all traded securities, meaning our companies are the 800 pound gorilla, so to speak, but that almost half of all global market capitalization are attributed to international companies. The best way to lower your risk and protect your valuables is through diversification. And that is far and away the best thing you can do.

The second thing you can do is part of the advice I provided for Darren on his first question about market volatility. If you’re investing systematically through dollar cost averaging, you’ll buy through good and bad currency environments. And lastly, avoid going into debt. This is just reason number 1,129 of why you want to avoid carrying debt if at all possible. Stocks, commodities, physical real estate will not be significantly affected by currency changes regardless of whether those changes are fast or slow.

But in answer to your question about bonds, all bonds except those that are indexed for inflation, will be demolished by sudden unexpected devaluation of the dollar. And of course cash is about the worst possible place you could sit in the event that we had the American dollar significantly devalued or removed as the reserve currency. And, again, if you have similar questions, send them my way by emailing radio@creativeplanning.com.

I want to end today’s show with a question that you may have asked yourself in the quiet moments on your own, but would probably have never had enough nerve to say it out loud. And that question is, are you rich? Well, how much money do you need to be considered rich? According to Schwab’s 2022 Modern Wealth Survey, Americans believe it takes an average net worth of $2,200,000 to qualify a person as being wealthy. So, that’s what respondents thought. Yeah, a little over $2,000,0000, you’re wealthy, but where are Americans actually at? As of last year, the top 1% had a net worth of $10,800,000.

So, if you want to be in the top 1%, we hear all the time about the one percenters, you’re going to need about an $11,000,000 net worth. Now, here was what I found interesting. To be in the top 2%, so now you’re not quite in the very top, but you’re still doing better than 98% of all other Americans, you need $2,470,000. So, the top 1% is at $10,800,000 and that goes all the way down to a little under $2,500,000 one percentage below. And what that tells us is how much money many within the top 1% have, hundreds of millions or billions, pull that up significantly. To be in the top 5%, you need a $1,000,000 net worth.

So, if you have a million dollar net worth, including real estate, your investment accounts, what you have in the bank, personal property, if that totals $1,000,000, you are wealthier than 95% of all Americans. To be in the top 10%, you need a net worth of $855,000. And to be in the top half of wealth in the United States, your net worth needs to be a little over $500,000. According to the most recent Federal Reserve Board Survey of Consumer Finances, the median net worth of all families was $121,700. Now, the average net worth was $748,000. And, again, the average is being pulled up by net worths in the billions where the median number is exactly where the 50th person out of 100 would be. And that number is a little bit sobering. Barely over $100,000 puts you right in the middle. Not average, but middle net worth within America.

Of course, comparison, as we know, is the thief of joy because it either causes pride because you’re doing better than others or it causes often envy and jealousy and a lack of contentment if you don’t feel like you’re stacking up well against others. But regardless of how you feel, let’s broaden this out a bit beyond our borders. I know we’re Americans and we have pride in our country and we should, we have a great country, but if you’ve ever traveled internationally, it’s such a powerful way to gain perspective. I recall walking down the streets of Addis Ababa, Ethiopia, over the course of our four trips to Africa in adopting our two older sons, and being overwhelmed by the intense poverty that I was confronted with. Starvation right in front of you, not me referencing because it’s been four hours since I went to Jersey Mike’s, “Man, I’m starving.”

No, these people really are, and I don’t like it when my kids use that expression. It’s not their fault, it’s just a figure of speech. But after seeing true starvation, you think twice about using that word because your stomach’s growling. But then you fly out of Ethiopia on a $40,000,000 airplane. You get in your car with power steering and air conditioning. You arrive at your home that’s protected from the elements and far larger than anything we need, and it’s incredibly convicting when that memory fades. And if you’re like me, you start worrying about really trivial things. And I’m not saying this to make you feel bad, I am just as guilty as anyone when it comes to this lack of perspective.

But maybe this next statistic will provide a reality check for all of us in terms of just how blessed we are. To be in the top 50% of income globally, not in America, but globally, you need to make $4,000 or more per year. Think about that for a moment. Let that sink in. And so, like a lot of things, when we try to answer, are we rich? The answer is found far more in our perspective than our circumstances. What a beautiful reminder for us to reflect on this week that we have and often forget to be grateful for. And remember, we’re the wealthiest society in the history of planet Earth. Let’s make our money matter.

Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio, and to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC registered Investment advisory firm that manages or advises on a combined $210,000,000,000 in assets as of December 31st, 2022. John Hagensen works for creative planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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