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RETHINK YOUR MONEY

7 Tips for Taking Control of Your Finances

Published on January 30, 2023

John Hagensen
MSFS, CFP®, CFS, CTS, CIS, CES

This week John shares important steps we should take to get control of our finances and reap the benefits of effective money management. He also talks with Creative Planning Investment Manager and Chartered Financial Analyst® Kenny Gatliff about what to be aware of when investing this year. Plus, should we be rethinking the saying “it takes money to make money”?

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: Welcome to the Rethink Your Money Podcast, presented by Creative Planning. Ahead on today’s show, what history can, and maybe more importantly, cannot inform us regarding future investment strategies, what happened with the FTX scandal and what is the current state of cryptocurrencies, as well as an investigation into the viability of a long-standing financial rule. Does it hold up or does it not? I’m John Hagensen, and this is Rethink Your Money.

I want to start by asking you a question. Are you like me, where you’ll find yourself humming a song and a minute or two later, think to yourself, where in the world did I hear that? Why am I singing this song, hearing this song? Or if you’re with someone else, they’re like, “Why do you keep singing that? What’s going on?” “I don’t know. I have this song stuck in my head.” Well, you know it’s because something triggered that, you heard it somewhere. Whether consciously or subconsciously, it’s in your mind. And the truth is that what you consume, dramatically impacts your thoughts. This is why my wife Brittany and I in particular are very aware, and our kids would say really strict, regarding what we allow them to watch and listen to. Because the reality is we see what we look at.

Perfect example this week was our kindergartner Jude saw my wife Brittany and I hugging, I think I gave her a little kiss in the kitchen. And he said, “Ooh, you guys are having romance.” That’s the word he used, romance. I laughed and I asked Jude, “Where have you heard the word romance?” It’s kind of random. “And how are you associating that here with mom and I snuggling up in the kitchen?” And Zaya, immediately, our second grader, who… I mean, these two are like oil and water, they’re they’re completely determined to try to get one another in trouble, says, “He watches such and such show on his Netflix account, and they talk about bad things.” So now I’m perked up. I go in and look at his iPad. And we have parental controls and settings of ratings all dialed in. But there was this one show, kind of like a Saved by the Bell teenybopper show.

I mean, nothing terrible. But they discussed things in the show regarding boyfriends and girlfriends and holding hands and kissing. Typical junior high-type show. And I changed the ratings even lower, so now the guy’s got SpongeBob SquarePants, Cocomelon and Baby Signing Time. That’s all he’s got access to, he’s not going to be happy about it. But it’s not something he should be consuming because it impacts what he thinks. And here is why I think this is so important when it comes to our peace of mind, our satisfaction, our contentment around our money. We must be extremely conscientious, not just with our children but with ourselves regarding what we are consuming. It’s human nature to be more interested in bad news than good news. Doesn’t take long to figure that out. What bleeds leads, what drives ratings are things that generate fear, stress and anger, not happiness and joy.

And because we have access to more information than ever before, and we are in this 24/7 news cycle, it’s exposed us all to an increased negative bias. Oh, the economy’s terrible. A recession’s coming. Your life might look pretty good, but everything you’re seeing around you, ooh, things falling apart. Consider this: No US president in the last 20 years has had an approval rating over 55%. And at first glance, you may say, what’s relevant about that? Well, prior to that, almost every single president was over a 55% approval rating. What changed over the last 20 years? Our access to a constant stream of information that is mostly with a negative slant. The reality is it is cool to dislike things nowadays and go shout about them on social media. And while I forgive you if you think the world’s all doom and gloom and that it’s just getting worse, let me share with you just a few things that are positive and gradual so they’re not front and center when it comes to the news.

How about the fact that life expectancy continues to rise? I mean, even during the Industrial Revolution, the average life expectancy across European countries, we’re talking developed nations, didn’t exceed around 35 years. I mean, people were dying in their late thirties and even forties, even if you factor in child mortality rates that pulled down that average. And that’s the second thing that’s getting better. Child mortality rates have plummeted. Just a century ago, child mortality rates were still exceeding 10%. And that’s even in high income countries like the US. Thanks to modern medicine and obviously better public safety in general, this number’s been reduced to almost zero in rich countries. Just those two things I shared alone are worth celebrating, aren’t they? GDP growth has accelerated rapidly in developed countries. Global income inequality has gone down significantly as well.

Places like China and India and the African continent, the percentage of people that now live above the international poverty line is incredible, relative to the fact that even in 1975, about 50 years ago, more than 80% of Asia and Africa were below that international poverty line. More people are living in democracies today than ever before, and conflicts are on the decline. Certainly with the Russians invading Ukraine notwithstanding, when you compare that to certainly the First and Second World Wars and the countless conflicts that preceded those, we are in a period of increasing global peace. You’re not going to see that on the news. And so while the market performed poorly last year, let me offer you some positive news, some truth to hopefully renew your optimism for accomplishing your goals. The US stock market, according to Ibbitson and Associates, since 1926, has earned approximately 10% per year, effectively doubling your money every seven years by placing it there and avoiding the temptation to deviate from that strategy.

This is how good the wealth creation of the stock market is in the midst of down markets. You are more likely over the past 95 years to make 20% or more to the positive than to suffer any negative return within a calendar year. Let me restate this with even more detail. 34 of the last 95 years, the stock market has ended up 20% or more. Only 26 times in the last 95 years has the stock market ended in negative territory. Let’s look at how long these scary bear markets have lasted since World War II. You may be surprised how quickly in reality they recover. Peak to trough and back up to peak, on average, it takes 33 months, less than three years. The shortest bear market was COVID, it was seven months. And the longest was the 1973, 1974 bear market, which lasted for six years.

So about 70% of the time, over one-year periods, the market’s up. About 90% of the time, over five-year periods, the market is up. And about 98% of the time, over 10-year periods, the stock market ends positive. And again, I remind you of this because I know what you are seeing on your newsfeed. I know what you’re watching, what you’re hearing and what you’re reading. And the vast majority are negative, sensationalized headlines rather than truth. Remember my three rules for investing. Let’s not overcomplicate this. Number one, buy stocks. Number two, diversify those stocks between different asset classes. Diversify into safer categories such as bonds to fit your income and time horizon needs. And rule number three, adjust and rebalance that allocation as your investments move dissimilarly to one another and as your life changes. Oh, and bonus rule number four, repeat this for the rest of your life.

So buy stocks, diversify, rebalance, and repeat. If you have questions about anything related to your personal finances: taxes, estate planning, investments, retirement planning, insurance, whatever it might be, Barron’s has called us here at Creative Planning “a family office for all.” Why not give your wealth a second look? Speak with one of our local fiduciaries now at creativeplanning.com/radio. Well, the reason what you consume matters is because it impacts your mindset. And the reason that your mindset matters is that you and you alone will be responsible for your own success. No one else, even the most empathetic person in the world is going to care as much about your financial outcomes than you. Let me offer you six tips for taking control of your finances. Number one, you first have to commit to doing the right thing with your money. I met with a prospective client a couple of weeks ago.

It was the second time this gentleman had come in, in the last five years. Both times I told him the exact same thing: way too high of fees, getting no tax advice and as a result, overpaying on his taxes. And there were a couple very simple fixes to improve his plan. But he’s best friends with his current financial advisor and is unwilling to take any actions to improve the situation. And so the reality is no progress can be made if you’re not absolutely committed to doing the right thing with your money. Second step to taking control of your finances, give an honest evaluation of your current situation. Self-reflection is so important. But it’s impossible to know which direction to go when you don’t know where you’re at currently. It’s like when I was in high school and I was at the mall and I was looking for Abercrombie & Fitch.

I needed to find that little star on the map that said “You are here.” If you don’t know that, it’s not all that helpful. So make a list of all the debts you owe, along with the interest rate and the outstanding balance. Track your spending for at least 30 days and look at how closely that spending matches your budget if you have one. Review the financial goals you’ve set and see if you’re on schedule to accomplish them. List your assets, including any savings. Get a handle on where you currently are. So once you’ve committed to doing the right thing and you have a good feel for where you’re at, now, number three, create a customized financial plan. I talk every week about having a written, measurable, documented, adjustable financial plan. And to take that a step further, that plan needs to be customized for you.

It’s a big part of our ethos here at Creative Planning, not putting you in a one size fits all strategy. Think about this in terms of new homes. You can buy a spec home and move into what is already built or you can build a custom home. But imagine going to a consultation with a custom home builder and you show up to the property and they say, “Here’s the type of railing I like. Here’s the flooring that looks best. I’d go with a bedroom over here on this wing. Here’s how I’d lay out the landscaping. These are the types of appliances I use.” Well, if at any point while they’re saying that it’s different than what you want, you’re thinking to yourself, wait, I’m building a custom home. The idea of this is that I have the ability to pick these things.

So if conversely, you stand at that property with this home builder and they say, “What’s important to you? What do you value? What do you see this house looking like? What are the finishes and color and inspirations that you have? Tell me more about your family dynamic. Do you have a lot of kids or not a lot of kids? Do you like to host or are you more introverted? Is cooking important? Do you cook together or are you normally cooking on your own?” You then answer those questions, and that custom home builder says, “We can do all that for you.” Now you’re excited because it’s going to work for your specific needs and wishes, and that is what customized wealth management looks like. But sadly, I see every day people investing in portfolios and financial plans that aren’t tailored to their unique needs. Number four, recession proof your health. I don’t care how rich you are or how financially successful you are, if you’re dead, it certainly isn’t helping you.

If you’re sick and have a poor quality of life and are in and out of the hospital and can’t do the things with the people that you love, it doesn’t matter the number in your bank account. So my encouragement to taking control of your money is actually a seemingly weird pivot, but it’s not, it’s directly correlated. Make wellness a priority. Number five, as I just opened the show with, be extremely conscientious where you are receiving information and advice. We just had someone come in this month who had a $2 million portfolio with 100% of that $2 million in a 10-year fixed indexed annuity. All of their money in something that has very low growth rates and has very little liquidity. But this person got advice from the wrong person. And that insurance agent is likely cheersing their pina colada down in The Bahamas on some insurance incentive trip, paid for in part by this unsuspecting person that generated around a $150,000 commission check.

And I can think of countless other examples. And my sixth and final step for how you can take control of your finances, kind of a simple one, but you and I both know it’s not always that easy, and that is you have to take the first step. No one’s going to do this for you. And every great journey, I don’t care if your Forrest Gump and your run and your run and your run, it started with one first step. And so to quickly recap my six tips for how you can take control of your finances: Commit fully to doing the right thing with your money. Take stock of your situation. Create a customized financial plan. Recession proof your health. Be conscientious of where you’re getting advice. And be proactive to take the first step. And if you’re not sure where to turn for that first step, we are happy to help here at Creative Planning, as we are for families in all 50 states and 85 countries around the world.

Speak with a local advisor now who’s not looking to sell you something, but rather give you a clear and an understandable breakdown of exactly where you stand with your hard-earned money. Go to creative planning.com/radio to request that complimentary second opinion. That’s creativeplanning.com/radio.

I am joined today by an extra special guest. His name is Kenny Gatliff. He’s on the investment management team here at Creative Planning. He’s a chartered financial analyst. I asked him to join me so that he can help us make sense of what’s going on in the markets. Thank you so much for joining me here today on Rethink Your Money, Kenny.

Kenny:Thanks for having me. It’s good to talk to you again, John.

John: Let’s just start with the significant drop we saw last year in the markets. How has that changed the way that you think investors should approach the markets here in 2023?

Kenny: That’s a really good question, and it’s one we’ve been getting quite a bit. When you do see a bear market, they don’t come that frequently and so it tends to make investors very anxious as to, okay, what do I need to do? Do I need to respond differently? And the advice we always give is, if we look at history as any sort of marker, this is actually one of the worst times you can be out of the market, or I guess change your investing strategy based on fear. And what we’ve seen, just to give you a couple stats here, in our last couple bear markets, if you look at where the bottom hit in March of 2020 following the COVID crash, the one-month return from that was 25% up in the S&P 500, and then the one-year return was 78% up.

And then the bear market prior to that was in 2009, and that bottomed out in, again, March. And once again, we saw something very similar. We saw the one-month return falling to a bottom of 27% and the one-year up from that bottom at 72%. And obviously I’m cherry picking the data here, and we don’t know exactly where our bottom’s going to be. The point being said here is when the market does bounce back often it bounces back very quickly and in a way that if you are on the sideline and you miss that, that’s something that’s really difficult to recover from.

John: Good point. Now when you look back in retrospect, you often find that when investor fear is at the absolute peak, the market was already beginning its ascent off the lows. You mentioned history, though. I’d like to stay there for a moment. Is history really the best predictor? I mean, what about the idea of don’t fight the Fed, or a recession’s looming, or this time is different? How much do you balance the current environment with historical data?

Kenny: This is kind of always the refrain, saying, look, it’s different this time. And that absolutely is correct in that this looks different than when the market dropped due to COVID, which looked different than the subprime or the dotcom or any of the ones we’ve seen in the last 20, 30 years. And the relevant answer here isn’t that it’s the exact same, it’s that history gives us an understanding of what markets do once they drop. But again, the salient point here is, okay, the markets dropped 20, 30, whatever percent, depending on what markets you’re in. When we’ve seen that level of drop in the past, what has followed that? Over the last 100, 200 years that we have good market data, there have been all kinds of different things that have driven the market down, but inevitably it has recovered.

John: Well, that’s for sure. I want to pivot to a discussion on bonds now. The Fed’s raised rates consistently over the last year and they’ve signaled that they’re going to continue to do so here in the upcoming quarters. We’ll see if that actually happens or not, but what does that mean for investors in your opinion? Does it change how you think they should be investing in particular with fixed income?

Kenny: Honestly, the interest rates affect everything, not just bonds, but all asset prices and stock prices. And going back to your last question, should we fight the Fed? What does that mean? Do we have this recession looming? And this is one of those important topics to hit in saying, the Fed has said that they are going to raise rates in the future. That’s built into the price of bonds, it’s built into the price of stocks. And so are we going to fight the Fed? It doesn’t mean that we think the Fed’s going to do something different in the future in order to want to invest in stocks or to feel good about investing in general. It’s saying, look, they’ve announced what their strategy is here. That’s already baked into the price of all of these different assets. And so we’re going to go off of that and build our portfolios around the idea that all the notable information is already priced in.

And so when that relates to bonds, this is actually a little bit of a time for a reset for us. For the last several years we’ve looked at bond prices and interest rates have been near zero and it’s been hard to recommend bonds in a portfolio. It’s still an important piece, but when they’re not paying much, it’s more difficult to stomach having some portion of your portfolio allocated to that. But this is actually a good opportunity now yields for bonds are a little bit higher. Well, let’s revisit what our allocation is between stocks and bonds with that in mind. And this is one of those great questions. If you haven’t had this conversation with an advisor, say, okay, is it time to re-look at putting bonds in a portfolio [inaudible 00:18:48] taken them out, or just looking at what that overall structure looks like.

John: So what about inflation, Kenny? It doesn’t show signs of slowing substantially in 2023, although recently we’ve seen some positive data that it’s coming down a bit. And we haven’t seen levels like this at all in the last 40 years. How do you think that should inform what investors are doing?

Kenny: This is one of those topics within finance that everyone has an opinion on because they can go to the grocery store and they feel it when they’re buying eggs or buying bread or whatever that may be. And so I think the important factor to keep in mind when looking at inflation and investing is saying, okay, what part of my investment is going to have the purchasing power hurt by inflation versus which parts are going to potentially keep up with inflation or be at least a good hedge against inflation?

And the part where we see this be a big concern, definitely for a lot of retirees, if you have some large percentage of your portfolio in a pension or annuity or something that is not resetting with inflation. And if that’s the case, if that really rings home to you, well, that might be an opportunity to say, okay, let’s look at my assets outside of that big pension or that big fixed asset and say, what else can I do to potentially fight inflation? Or maybe I need to be a little bit more aggressive with these other parts of the portfolio. On the flip side, those that own stock or own real estate or hard assets, those are going to move in the long term with inflation.

John: I’m speaking with Kenny Gatliff, chartered financial analyst and an investment manager here at Creative Planning. Well, Kenny, we’ve talked about inflation. We’ve talked rising rates, the fact that we had one of the worst stock-bond mix environments in 40 years this past year. When you look at all of these factors and the numerous others that we haven’t discussed here today, what’s a good way to put a bow on this conversation from your end in terms of what investors should be thinking about more broadly as we move forward here in 2023?

Kenny: There’s always something to be scared of as an investor. This time we have the high interest rates and inflation and this looming recession. Other times there’s subprime or there’s tech crash or any number of things that can cause us to think, is this time different? And I think there’s two really important points to remember about stock market investing. The first one is proper time horizon. And I think we get caught up. We live day to day, month to month. And if we have a bad six month or 12 month or even two years of stock market returns, we tend to think this feels very long, when in reality, anytime we meet with clients or investors, we say, anything invested in a stock market, you should have a five to 10 year time horizon for that. So I think that’s point number one is saying, look, our time horizon isn’t what’s going to happen in the next month or two, because we don’t know.

We don’t know where the bottom’s going to be. We don’t know what may happen that’s going to move stock prices in the short term. But we do feel pretty confident, based on what history has shown us, that if we give it enough time, if we give it five to 10 years, those returns have been historically positive. The second thing to consider is there’s always this bad news around the corner that could drive stock prices down theoretically, or there’s bad news already in existence that is causing us to fear what stocks might do in the future. One thing to understand is that the economy with these high interest rates and looming recession is not the same thing as the stock market. They’re obviously related, but they’re different sides of the same coin. What I mean by that is the economy oftentimes takes a long time to filter in some bad news or supply chain issues. GDP doesn’t go down overnight because of an interest rate going up by a quarter percent.

The stock market, on the other hand, reacts very, very quickly to whatever news has already occurred. And so if we look at what the stock market has done over the last year when we saw 20 to 30% drops, that’s in anticipation of what the Fed’s going to do. That’s in anticipation of a looming recession, because all of those things were already known and they were on the table. And the stock market is a leading indicator of the economy, not the other way around. So it’s not an easy thing to time which direction it’s going to go, just by looking at some other economic factors.

John: Really good points, Kenny. And for most people, when the market drops they’re more fearful. But if we can lean into that a bit and remind ourselves that as history has shown us, it’s a better opportunity usually moving forward as far as future returns are concerned to make money coming out of bad markets. Again, assuming you have the proper time horizon. But if you’re looking for someone to shoot flares up in the air and tell you the coast is clear, there’s no more uncertainty, every variable has been lifted, the market’s going to go up, now’s the time to invest, you’ll be on the sidelines for the rest of your life. Appreciate your insights here and for joining me on Rethink Your Money, Kenny.

Kenny: Yeah, thanks for having me, John.

John: Again, that was Kenny Gatliff, chartered financial analyst, investment manager here at Creative Planning. And if you’ve got questions around your asset allocation, your investment mix. Do you have too much risk, or maybe you’ve been too conservative? Whatever the questions are that you have around your money, we are here to help as we’ve been doing so since 1983. Visit us today to speak with a local advisor by going to creativeplanning.com/radio for your complimentary second opinion. One more time, that’s creativeplanning.com/radio.

As a former airline pilot, one of the things that I really miss were the views sitting up in the cockpit. The perspective that I would gain flying right through a cloud at several hundred miles an hour, just looking out the windshield, was incredible. I mean, think about when you’re a passenger on a flight and the pilot gets on the overhead, sometimes this was me, and I’d say, “Ladies and gentlemen, from the flight deck off to the right side of the airplane, you’ll have a fantastic view of the Grand Canyon.” Everybody who doesn’t have noise canceling headphones on, or isn’t sleeping and annoyed that you just came on to tell them about sightseeing, looks out of their window. But the reason you look is because it’s a unique perspective. It’s totally different than if you’re standing right next to the edge of the Grand Canyon, which is also amazing, but it’s different seeing it at 35,000 feet. The size, the scope, the length is something you see there that you cannot see while on the ground.

important the perspective that we have shapes our view of reality, and how one small tweak of that perspective can dramatically change the way we feel about the very same circumstances. Now, I’m going to span this with a football analogy. Stetson Bennett, back-to-back national champion at Georgia, quarterback of the Bulldogs, very solid college quarterback, but most NFL scouts question whether he’ll be an effective player in the NFL. And at first thought, I think anyone who watched his games would say, were they not watching him just shred the SEC and roll through the college football playoff two years in a row? No, they did, but Stetson Bennett is 25 years old. How do you think NFL starting quarterbacks in the playoffs this year, like Justin Herbert, who’s 24, Trevor Lawrence, who’s only 23 years old, Brock Purdy, 23 years old, Jalen Hurts, 24 years old, would have done if they were still in college playing against college players rather than in the NFL?

Well, you see, you start thinking of it that way, you’re like, man, yeah, Herbert, Hurts, those guys would be dominating if they were able to go back next year and be in college again. Patrick Mahomes, who’s 27, is set to break Hall of Fame quarterback Kurt Warner’s post-season passing yards record in a game or two. And it was pointed out on Twitter that he’s only 27 years old as well, to which Kurt Warner tweeted a response saying, “Haha, I didn’t start my first game until I was 28 years old.” Basically saying, well, yeah, Mahomes is amazing, but of course he’s going to break it way younger. I was stocking shelves at a grocery store and playing in leagues you’ve never heard of when I was Patrick Mahomes’ age. And so that perspective is meaningful when considering the facts. Here are two of the biggest data crimes, in my opinion, that slant the narrative to make it seem like something is what it really isn’t when it comes to your money.

First, back-tested annuity and life insurance illustrations. When you go to buy a permanent life insurance policy or some high commission long surrender charge variable annuity contract, oftentimes it comes with, here’s a hypothetical illustration. You may as well use it for kindling. Just get rid of it. Because the reality is, if you torture the data long enough, it’ll tell you whatever you want to hear. A better page to look at, by the way, when it comes to those contracts and evaluating whether you should be buying it or not, is not the hypothetical non-guaranteed illustration. No, no, no. Go to the page that says guaranteed rates. That’ll provide you with better perspective. Oh, and by the way, if you read the fine print, most of those contracts also come with a disclaimer. Many of the assumptions that you’re banking upon regarding interest rates and future rates of return come with the caveat that they can be adjusted throughout the contract.

Second financial example where perspective really matters, back-tested mutual fund or money manager performance. We’ve all heard the same: past performance is no guarantee of future results. And this couldn’t be more true when it comes to specific fund or manager performance. Approximately 85% of active professional money managers will lose to their benchmark over a 10-year period. Now, you might be thinking to yourself, well, that’s fine. I’m going to find the 15% that will win, or my advisor will, that’s why I’m paying them. Well, unfortunately, there is no mechanism to do so because the previous decades’ top 15% are statistically no more probable to remain in that top quintile than any other manager in the universe of funds. Now, can past performance of an entire asset category broadly over decades and decades inform at least a framework of expected risk, ballpark of returns? I mean, we know that the stock market’s probably not going to make 30% a year for the next 30 years.

We also thankfully know that it’s pretty unlikely historically speaking that it will lose 30% per year for the next 30 years. We’d have serious problems if that were the case. But the market’s made about eight to 12% a year for a hundred years. We understand the level of volatility that often occurs when invested broadly in the markets. We understand the risk and return broad expectations of things like US government bonds. You’d almost always be far better off investing in index funds and being on the winning side 85% of the time. It’s why the late Jack Bogle of Vanguard said it best when he said, “Why search for the needle in the haystack when you can buy the whole haystack?” Gaining another perspective, getting to 35,000 feet and looking down at the Grand Canyon, you may see things and become aware of things that you never knew standing on its edge.

And that is what a great financial advisor can do for you, a fresh perspective. Request this now by going to creativeplanning.com/radio. As we continue on with this theme of another perspective, let’s play a game of rethink or reaffirm, where I break down common financial wisdom or a hot take from the headlines. And together we’ll decide whether we should rethink it or reaffirm it. My first piece of common wisdom is when thinking about your investment mix, percentages of stocks and bonds, simply subtract your age from 100 to determine your stock percentage. So as we unpack this, let me say that age is just a number. My mother-in-law is a retiree. She doesn’t act like a retiree. She walks miles and miles per day. She’s got more energy than the Energizer bunny. Sometimes when we’re sitting in church and she’s up and going and getting a cup of coffee, and then she’s coming back in and then she’s looking around, I’m thinking she’s going to be doing lunges down the middle aisle in the middle of the sermon.

She’s got more energy than I do. And so you can’t make blanket rules for, well, if you’re this old, here’s what your lifestyle is going to look like. This is obvious, because you understand you’re not the same as your neighbor. Your preferences are different, your goals are different, your concerns and fears are different, your life history is different. And so let me just say I don’t know who came up with this rule. It’s probably one of the dumbest. So to tip my hand on whether this is going to be a rethink or reaffirm, you already know where I’m going with this. But age has absolutely nothing, and I repeat, nothing to do with your investment allocation. Now, I’m not disagreeing that when you are older, you are often in a situation where you are more likely to take withdrawals out of your account than if you’re 30 years old and it’s in your 401(k) and you have 30 more years before retirement.

But how about this example of an actual client of ours? She is a 75-year-old widow who spends about 4,000 a month. And between pension, social security and rental property income has over $15,000 a month of income coming in every single month. She’s incredibly legacy-minded, has a few kids and several grandkids, and never intends to rely on her liquid investments, which are over a million dollars, to sustain her retirement. Why would that 75-year-old want 75% of that million dollars, 750 grand, in bonds if the time horizon on that million dollars is well over a decade? Conversely, if someone’s 45 years old, retires really early, but needs significant withdrawals from their accounts to sustain themselves, they probably shouldn’t have even 55% of their portfolio potentially in stocks. And so to be clear, your financial plan, that written, documented, measurable financial plan that looks at your tax situation, your estate planning, your income needs, your retirement projections, your other life goals, your legacy concerns, when you’re going to take social security, do you have a pension?

Are you going to inherit money or be helping an aging parent? How much equity do you have in your current home? Do you plan to stay there? Do you plan to move? Do you want a second home? Do you plan to travel in a motor home? All of these things impact that investment allocation and absolutely none of those correlate to any silly formula of subtracting your age from 100 to figure out how much you should have in stocks. And so the verdict on this is a resounding rethink. Common wisdom number two: It takes money to make money. We’ve all heard this saying. What if I told you that the vast majority of American millionaires made their money themselves? In fact, over two thirds of individuals with a net worth north of $30 million are considered self-made. Fidelity’s recent study revealed that these self-made millionaires’ top sources of assets were investments and capital appreciation, compensation, employee stock options, profit sharing, and business ownership.

Many of these people worked very hard to achieve the financial success they had. Probably got a little bit lucky, had some fortunate bounces that they took advantage of, but had the smarts and savvy to put their new wealth in the right places. And so if I stop there, you might think to yourself, well, all right, so you’re saying that that is a rethink. Yes and no and not so fast. There is absolutely some truth in the data that there is huge disparity when you actually start the race. There is a fantastic YouTube video that you can search for this. And I’m paraphrasing, but basically the host of this video has a bunch of people lined up on the goal line of a football field for a 100-yard race. And he starts saying things like, “Did you grow up in a two-parent home? If you did, move forward 10 yards. Were your parents college educated?

“If yes, move forward five yards. Did you go to a private school? Move forward five yards. Did you have at least two mentors in your life outside of your parents? If yes, move forward 10 yards. Did your immediate family suffer from financial hardship or were they riddled with debt? If yes, go back 10 yards.” And you get the point. He goes through all of these different questions. And before the race starts, you had people at midfield and you had other people still standing on the goal line. Now, some of the people that were maybe 10 yards behind or 15 yards behind were really fast and really capable, and they were still able to catch some of the people in front of them, which is a testament to their hard work. But it was also a very clear reminder that there are advantages and disadvantages that are all baked into our financial success or struggles.

And this is leading me down the road of why the verdict for it takes money to make money is actually a reaffirm. It’s not that we can’t be self-made, but the reality is when it comes to investing and growing your wealth, which is what that Fidelity study revealed, growing your money, compounding it, making wise decisions with it, you do need some money to start. I’ve had folks come to me and sit in my office and say, “Hey, I’ve listened to the radio show. Can you help me?” And when we start diving into their situation, they’re spending 60,000 a year and they make 35,000 a year and they have $50,000 of credit card debt and they have no prospects or opportunities to make more money. There isn’t a lot even the absolute best financial advisor or attorney or CPA can do for that person. And so I want to encourage you, if you’re still in your working years, outsource your investments and place everything related to your retirement on autopilot and then focus your energy on your human capital.

Get a promotion, go back to school and increase your education that will allow you the opportunity for a higher paying job. And invest in yourself, because the reality is it does take money, whether you make it yourself or you inherit it. It does take money to make money. The verdict for that is a reaffirm. My final common wisdom that we’ll rethink or reaffirm is that your credit score is a ranking of your financial health. And for this one, I would say it’s a part of your financial health, but it’s not all of it. Remember, a credit score is just that three-digit number designed to represent the likelihood that you’ll pay your bills on time. Here’s the information that is used to calculate that score and included in your credit reports: your payment history, the amount of credit used vs. the total amount of credit that’s available, the types of credit accounts that are in your name, the length of your credit history, and the number of your recent requests.

This reminds me of when I first graduated college. I was a first officer at a regional airline, making very little money, living in a crash pad. I know, don’t be jealous. I know you’re jealous of me right now. Don’t be. I was absolutely broke, but I used a credit card to build credit just for gas, and then I’d pay it off every month with the tiny bit that I was making. My credit score was phenomenal. I loved it. I’d look at my credit score, I’m like, man, I’ve got a good credit score. That was not any sign of my financial health. I had about a thousand dollars in my 401(k), a little bit in the bank, and that was it. Conversely, you’ll see people leverage up for business ventures that have a huge net worth. Their credit score would’ve been a lot lower than mine.

I would’ve swapped places with them financially every day of the week and twice on Sunday. So again, while your credit score is part of the picture, it certainly doesn’t provide a comprehensive look at your financial health. And speaking of a comprehensive look, if you’ve never sat down with a firm like us at Creative Planning, a law firm with 50 plus attorneys, a tax practice with over 85 CPAs, over 300 certified financial planners, we are managing or advising on $225 billion in all 50 states and 85 countries around the world. Take me up on our offer to meet with a local fiduciary advisor, putting your best interests ahead of their own, selling you nothing, committed to answering the most important questions on your mind as it relates to your life savings. Go to creativeplanning.com/radio now to request your second opinion.

Well, it’s time for listener questions and my answers. Remember, you can email your questions to us by submitting to radio@creativeplanning.com. My first question was not submitted via email, but rather from my dad who was visiting us. We were sitting in the hot tub and he said, “John, what the heck happened with Bitcoin and this big scandal? Can you explain that to me?” So let me briefly walk you through what happened, and if you’re really interested, Derek Thompson on his podcast, Plain English, interviewed one of the most knowledgeable journalists on this subject. You can go reference that if you want to take a deep dive. But here’s the summary. FTX was/is a crypto trading platform that was affiliated also with a hedge fund called Alameda Research. Both of these companies, the trading platform and the hedge fund, were run by this crypto wonder kid, physics major from MIT, both parents are Stanford professors, named Sam Bankman-Fried, often referred to by his initials SBF.

So essentially what happened was after a slew of bad press, there was effectively a run on the bank at FTX. Customers asked for their funds and the money wasn’t there. Now, the reason it appears, by the way, the money wasn’t there is because SBF had diverted client funds from that crypto trading platform at FTX into his own hedge fund to cover losses that Alameda Research was experiencing due to negative performance. Oh, but don’t worry. He replaced the money that he took basically with IOUs, like Jim Carrey and Jeff Daniels did in Dumb and Dumber, but rather than just pieces of paper, he used his own crypto tokens that FTX had created, which of course plummeted in value, were probably, regardless of what was said, never really worth anything.

And then there was no liquidity, which forced them to file bankruptcy. And I should point out by the way that he is innocent until proven guilty, but the reports that are coming out are unbelievable. Like him with a business that at one point for a round of funding was valued at over $30 billion, were doing their financials for the company on QuickBooks. But here’s practically the impact on Bitcoin and other notable cryptocurrencies. FTX, this company that filed for bankruptcy, they were just the trading platform and custodian that was holding the money. And so them going bankrupt didn’t mean that Bitcoin went bankrupt. In fact, Bitcoin, shockingly, I mean, the bull case for potentially Bitcoin, which by the way, I would never invest in it unless you’re totally prepared to lose everything potentially. But the bull case is that despite all of this going on, it’s still alive and kicking.

So Ethereum’s still there, Bitcoin’s still around. But one of the largest exchanges that held those coins is being accused of essentially one of the largest financial frauds in the history of the world. And we’ll see how it all plays out, but here’s a practical takeaway for you whether you are into crypto or have no interest in speculative assets like crypto. You need to verify, verify and verify who is holding your money and understand where the risks are to the best of your ability. Our next question comes from Ed in Indianapolis, who asked, “My children are getting older but are still a number of years away from college. I’d like to be able to help them with the cost. Is it better for me to invest in a Roth IRA or a 529 plan?” So Ed’s asking the right thing, and it’s actually a debated topic even amongst financial advisors.

So rather than me answering definitively one way or the other, let me just outline the pros and cons of each, because this is an example of where personal finance is far more personal than it is finance. And if I could see into the future, obviously, I could answer this definitively. So let’s start with the benefits of a 529 plan. And if you’re not sure what those are, they are specific accounts designated for education. One of the biggest benefits of the 529 over just continuing to fund your own Roth IRA that could be used eventually for education is that the state limits for contributions, they vary a bit, but they’re around five to 600,000. You could say they’re around 529,000 for the 529 plan vs. having an annual restriction on the contributions for your Roth at around $6,000. You can also frontload contributions into the 529 plan and put five years worth of gifts in all at once. And it doesn’t decrease your estate exclusion.

Now for most people, because right now that’s over 12 million, this isn’t a factor, but it may be down the road as that will sunset and be reduced in 2026. Next benefit to 529s is for someone like me who has seven kids, I still have the same Roth restrictions. It’s not like I can take the $6,000 or so contribution and say, well, I have seven kids, so I can put 42 grand into my Roth. It’s still the same limit, where 529s I can put money in for each child. Another benefit, if you’re a grandparent, which we often see grandparents wanting to help grandchildren, but if you’re a grandparent, one of your concerns is, well, I also don’t want to stick a bunch of money into an account that they can use for anything when they turn 18 years old. I don’t want them to squander it. The 529 allows a grandparent to feel more confident regarding the actual purposes of those dollars.

Another benefit to the 529 plan is that while you don’t receive any sort of federal tax deduction on the way in, most states, and you need to check on this with your state specifically, do provide you with a state income tax deduction. So if you’re in a state like Washington or Texas or Florida, you’re shrugging and saying, who cares? We don’t have state income tax. But if you’re in Hawaii or California or New York or some other state with a high state income tax and they offer this deduction, that can be a big benefit as well over the Roth. And if there are leftover 529 dollars, thanks to the Secure Act 2.0, up to 35 grand can be directed into a Roth IRA for that child, assuming that several other rules are upheld. So it’s not certain that you’ll have to pay tax or the 10% penalty if not used for education.

There is a lot of nuance to that that I won’t get into. But so now Ed’s thinking, well, thanks, John. I’m doing the 529. I mean, that seems like the obvious winner. What’s the debate here? Well, the biggest benefit for the Roth IRA is that it can be used for absolutely anything. It’s a wonderful funding vehicle if you want flexibility because the contributions themselves, not the growth, but the contributions themselves are never taxed or penalized. You have access to those. I mean, you can use all of your Roth contributions and throw it all on your Super Bowl winner. I wouldn’t advise it, but it wouldn’t cost you any taxes or penalties if you took out your contributions and ran to Vegas. But from an estate standpoint, Roth dollars can be paid directly to the school on the distribution, and that won’t count toward any annual gift as well.

And so while the 529 has a multitude of specific benefits, the Roth benefit over the 529 is really one thing, and that is extreme flexibility. You can use it for your retirement, you can use it for education. You can take a distribution to the contributions and help your child start a business, or with the down payment on a house if they don’t go to college. And the big challenge can be in many cases that you’re trying to make that decision when your kid’s five years old. So you simply don’t know, what are the scholarships that are going to be available? Is the government going to subsidize more state colleges where this isn’t needed? And so it can be difficult, but let me encourage you, whether you’re saving in a Roth or a 529 toward your children’s education or for your retirement, the important thing is that you are being proactive and intentional toward your financial goals.

Thanks again for that question, Ed. And if you have similar questions, you can email us at radio@creativeplanning.com to get those answered by yours truly. Well, I want to conclude today’s show with a reminder that I had while in a meeting with one of our clients who’s a business owner, who’s been very fortunate to build an awesome business. He’s selling that business. There are a lot of moving parts financially. And I was in a joint medium with one of our tax attorneys, who specializes in complex tax situations. While we’re having this visit and we’re collaborating on the impact of the taxes on the financial plan and the estate planning strategies and how all of these puzzle pieces fit together, I was struck by just how valuable it is that I have other knowledgeable professionals with tremendous experience on my team.

And not just for the obvious benefit of our client, who’s technically able to minimize taxes and use the right entities and build the right estate strategies, and how all of that is coordinated with their financial plan, but also how much I benefit as a wealth manager here at Creative Planning, having the opportunity in a meeting like that to sharpen my sword on very technical, nichey, specific elements of financial planning, in this case specific to tax on large liquidity events.

It just makes me better. And it’s like my wife Brittany and I tell our children regularly: Show me your friends, I’ll show you your future. You can’t change the people around you, but you can change the people that you choose to be around. And so if you want to grow in any area of your life, one of the best steps that you can take is to surround yourself with other people who’ve already gotten there. You want to grow spiritually, find a spiritual mentor, find somebody with tremendous character, someone with integrity that you respect. You want to be a better parent, go find the best parent and pick their brain and spend time with them. You want to grow financially, find others who have wealth. You want to strike better balance in your life, find someone who’s balanced. Do you want to be healthier? Spend more time with those around you who are in the best shape and have established healthy habits.

You want to drink less? Don’t go to the bar with your friend who’s an alcoholic. Iron sharpens iron as the Good Book says. And so I want to encourage you, associate with people that lift you up and inspire you, people that challenge you to strive for more, people that make you better. Don’t waste your valuable and very limited time with people that aren’t adding to your growth. Your destiny is far too important. You were created with a unique purpose. And so let’s all keep that in mind as we remember that we are the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoyed the podcast, please subscribe, share, and leave us a rating.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on $225 billion in assets. 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. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.

Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. 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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