There’s one overarching rule we should all follow when it comes to building wealth. Find out what that rule is and how it can supercharge your savings on this week’s episode (2:45). Plus, we compare the performance of cash vs. stocks in a recession (28:50) and explain how you can get a tax break with a 1031 exchange (40:55).
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 today we have a thought-provoking lineup that will reshape the way you view money. We’ll dive into the world of financial vices and spending habits exploring the impact they have on your wallet.
Plus a fascinating peak into the financial behaviors of the ultra wealthy individuals with 9 and 10 figure net worths, uncovering applicable insights for us all. Additionally, we’ll tackle the age-old question, is cash really safer than stocks during a recession? Now, join me as I help you rethink your money.
All right. Let me tell you a story about my kindergartner Jude. Now, this little guy is something else and maybe I feel like that because people say he’s a lot like me, so, very headstrong. My wife says she can relate perfectly with him. She understands him because he’s a mini John. And of course he frustrates me because he’s a lot like me.
I tell you, he has this obsession with hockey. The kid wears a different NHL jersey every single day of the week. It’s like he’s on a mission to sort of represent every team. This past week, Jude came up to me with this serious look on his face and he said, “Dad, I want to know all the rules of hockey.” I couldn’t help but chuckle at his determination. I mean, he’s six years old, but he’s already craving to understand all the intricacies of the game.
Unfortunately, I’m not a hockey expert. I didn’t grow up playing hockey, but I know the basic rules and I figured it was time to share with him off sides, icing, why do they pull the goalie at the end of the game? He couldn’t understand that. Why would they have no goalie, it’s going to be so easy to score. Well, because they’re down two goals with two minutes left, they’re okay losing by three.
And so I basically gave him crash course Hockey 101. But you know what got me thinking about how important it is to know the rules of any game, whether it’s hockey or Pinnacle, you can’t effectively play if you don’t know the rules. And I think we’d all agree, it’s incredibly frustrating when you’re in the dark about rules. But it’s not just about games, it applies to life as well.
There’s this famous quote I once heard that says, “Knowing the rules is vital to success,” and it’s true. Understanding the rules of any situation can lead us to better outcomes and certainly fewer frustrations.
And of course, this same principle applies to personal finance. So unlike more complicated games that have rule books that are pages long, there are only two primary rules when it comes to personal finance. Really only two that truly matter.
Rule number one, spend less than you make. It’s simple, but oh so crucial. When you spend less than you earn, you can avoid debt and have the freedom to give and have the freedom to save and invest. It’s like scoring goals in the game of personal finance.
And rule number two, have a financial plan. Picture this, you want a comprehensive financial plan that’s as solid as a brick house. You need a roadmap for your financial future. So first thing’s first, I recommend that you get some help in building out this plan from a credentialed fiduciary.
It’s like having a financial guru by your side who’s legally bound to have your best interests at heart, no shady business, not getting sold, random, high commissioned products that you don’t need. We will help you build out a financial plan here at Creative Planning at absolutely no cost.
Other firms similar to us will do the same, but if you’re not sure where to turn and you’d like to meet with one of our financial advisors here at Creative Planning, visit creativeplanning.com/radio now to meet with one of our local financial advisors.
But it’s important to note that a good financial plan, a real financial plan, as I would put it, should have a few key ingredients. It’s like baking a delicious cake. You need the right mix of ingredients to have that sweet outcome. So here’s the recipe when it comes to a comprehensive financial plan.
First and foremost, start with your goals. Now, I know that sounds sometimes kind of whimsical, like let’s talk about our dreams as we prepare for retirement. No, it doesn’t need to be two people in a stock photo holding hands walking down the beach in their sixties, but you do have to know what you’re aiming for.
You may be saving for retirement. Someone else might want to sail around the world. Maybe it’s buying a house, putting kids through college. Maybe you never want to retire. So your financial plan should align with those objectives, which are unique to you. It’s why personal finance is so much more often personal than it is finance.
After you’ve sorted through what the intention even is with the money, you move on to budgeting. I know it’s the dreaded B word, but hey, it is incredibly important. You have to track your expenses, reign in those impulsive purchases and make sure you’re spending within your means.
It’s what I just mentioned as the first rule. Think of this as portion control for your wallet. Here’s a quote that’ll make you chuckle. “A budget is telling your money where to go instead of wondering where it went.”
Next is saving and investing that surplus. It’s time to grow that dough and a good plan will help you figure out where to save from a tax standpoint, how much to save and exactly how to allocate and invest those hard-earned dollars. It’s like planting seeds and watching them sprout into giant money trees.
It reminds me of that famous Buffet quote that says something to the effect of, “You’re sitting in the shade today because someone planted a tree years ago.” And I totally butchered that. That’s not the quote, but you get the idea.
Next, you look at risk management. Life is full of surprises. Let’s face it, some are good and some are not so good, but a solid financial plan should have strategies in place to protect you from the unexpected. It’s like having an umbrella ready for those rainy days.
Then you want to optimize for taxes. Nobody wants to pay more than their fair share, right? A good plan will help you navigate the complex world of taxes and find ways to legally minimize your tax burden.
And the sixth and final component to a comprehensive financial plan is estate planning. Now, I know what you’re thinking. Estate planning, isn’t that for rich folks with mansions and fancy art collections, John? Well my friend, no, estate planning is for everyone. Back to our hockey analogy. It’s like being the goalie of your financial game. Making sure your assets are protected and passed on to your loved ones smoothly.
You see, estate planning involves creating a will, setting up trust, naming guardians for your children, having powers of attorney, pour-over wills, and it’s all about making sure your wishes are carried out when you’re no longer in the game.
So there you have it. A comprehensive financial plan should consist of goals, budgeting, investing, risk management, tax optimization and estate planning. Find yourself a trusted financial advisor. Follow that recipe and you’ll be on your way to financial success.
And remember, it all starts with knowing the rules, whether it’s hockey or personal finance. So lace up your skates, grab your stick, I’m really playing up this analogy, aren’t I? And take control of your financial game by getting a comprehensive financial plan or a fresh perspective on your current one.
Don’t let uncertainty be the opponent that keeps you from reaching your goals. Get clarity today. We here at Creative Planning want that for you. If you’d like to sit down with a local wealth manager here at Creative Planning just like myself, visit creativeplanning.com/radio today to ensure that you are on track. One more time, that is creativeplanning.com/radio.
My extra special guest today is Jessica Culpepper, and I’m not sure where to begin in introducing Jessica, but I’ll do my best. She’s an MBA, a CPA, a CFP. She’s a fellow partner of mine here at Creative Planning and she works on our ultra affluent team helping some of the highest net worth families at the entire firm.
She’s been featured in Barron’s as one of the top 100 women advisors in 2019, ’20 and ’22, and as one of the top 100 independent wealth advisors in America in 2018, ’19 and 2022. She’s also listed in Working Mother magazine’s Top Wealth Advisors Moms in 2020 and in Forbes as the best in-state wealth advisor in 2022. And without further delay, thank you for joining me here today on Rethink Your Money, Jessica.
Jessica Culpepper: Of course. It’s my pleasure.
John: Well, your resume is really impressive. You’ve done a lot of different things. As I mentioned, you have a background in tax as well as financial planning, and through your extensive experience working with ultra affluent families here at Creative Planning, how do you see high net worth families investing differently than others?
Jessica: So most investors will tell you that performance is the absolute most important thing to them, and that’s a great comment and it certainly is important, but what’s more important than just raw performance is what does an investor keep after things like taxes and fees?
So the more affluent families are more attuned to this because they generally pay significantly larger dollar amounts of taxes or in higher tax brackets, but that’s certainly something that’s relevant to investors at any level, particularly if they have taxable accounts, so funds outside of IRAs and those traditional retirement plans.
So for our affluent families, controlling taxes with efficient tax management in the portfolio is certainly top of mind. Families in those top tax brackets between the federal and state, they can erode over half of their return if it’s not managed efficiently. So we put a great focus on that.
John: That’s great insight and I talk often on the show about risk management and I think for anyone whose plan’s going to work, barring a huge loss, not always is maximizing performance the number one priority.
And I would certainly imagine with an ultra affluent type of client, am I right in saying that maybe there’s a focus on managing risk and downside even more so maybe than looking to hit the home run on all of their investments?
Jessica: Absolutely. We have a lot of clients that have hit that home run. They have accomplished everything that they could possibly want and then some. So their goal is to make sure that they don’t lose that wealth for not only themselves but generations to come.
So that’s why we lead with planning. We want to understand what are their goals. They’re financially independent. We don’t do a plan to simply understand well, do you have enough money to live on? It shifts more to what does that look like generationally from a charitable and tax planning and even a state tax planning standpoint.
And we craft their portfolio in a way to make sure that they’re never going to run out of money. And if they’re ultra-conservative, we don’t have to take on as much risk. But we’ll have clients who are very aggressive, but because they have such a large surplus, we can afford to take on more risk and incorporate more alternative investments that potentially bring more reward to the table, but have some terms where we can’t get to the funds for 10 or more years. So it gives us more flexibility.
John: You mentioned families and generational planning. I mean this is a big priority for anyone who is financially independent and going to have enough to last beyond themselves, that’s magnified with someone that’s in the affluent category. How do they treat their kids and maybe family differently from a planning perspective and what do you think us normal people can learn from that?
Jessica: I think high net worth clients generally feel a higher level of concern over future generations and a big responsibility to prepare them to handle wealth. And that can look different for families depending on their dynamics.
So $20 million dollars looks a lot different than a $100 million, but they’re both very affluent. The age when they became wealthy is different. If you became wealthy in your forties and your kids are all young and they’ve experienced wealth and lavish vacations or a higher standard of living at a young age, that’s different than someone whose parents are coming into wealth when they’re in college or older.
So there’s a lot of different dynamics here. Someone who has five kids versus two kids, again looks very different. The asset makeup looks different too. If someone sold their business and there’s been a large liquidity event or the business is continuing versus someone who just has a lot of liquid assets or real estate, it can look differently and preparing the next generation can look differently based upon all of that.
I would say though that clients are more willing or ask a lot of questions about, “Should I bring my kids into the planning process to prepare them for what’s to come?” I see that a lot with parents who’ve got kids who are in their twenties and thirties. And the one thing I really caution families about, depending on their kids, their life stage, their maturity, is someone can’t unsee something.
So if you’re sitting down with your kids and they’re 25 and you’re like, “Hey guys, we’re worth $30 million.” That child can’t unsee that and that’s going to mean something to them and how they interpret that no one can really predict. Are they going to be responsible and feel a sense of stewardship and shepherding what their parents have accomplished? Or are they going to have a downside where you know, “We’re out dinner with mom and dad and they didn’t offer to pay for that? Gosh, what?” That’s a really tough dynamic.
So we want to caution our clients at least disclosing and really thinking hard about showing numbers. What we really like to say is at a minimum, if they do want to involve the next generation, maybe start with an estate planning discussion at a very high level.
“If something happens to us, uncle Ed’s in charge. He understands where everything’s at. We work with Creative Planning and he knows that we’ve got this great binder that’s going to help him figure things out, Creative Planning and Uncle Ed are going to take care of our charitable requests and we’ve got 10% going to our church because we really care about that. And then the rest is going to be available to you guys. Uncle Dan’s going to work with you until you are 35. He’s going to really help you make some decisions. And then when you’re 35 or 40 or 50, whatever that number is, you really have the full control.”
So very high level.
John: Love that.
Jessica: We know what’s going on involving the family where you can, but I really have a strong caution or thinking very hard about numbers because you can’t undo or unsee that.
John: Wow. I think that’s such a fantastic approach. And obviously we’re painting with a broad brush and every family dynamic, to your point, is a little bit different. But for myself as a parent, and I know you’re a mom as well, Jessica, trying to instill in our children the value of a dollar can be a challenge.
I mean, this just happened last week, I think it was a hat that we bought and my son couldn’t believe that it was $42 for this New Era baseball hat. He wanted two, I was already buying him one and I said, “Well, you can purchase the other hat with your own money if you want a second one.” And he asked how much it was and I told him $42, and he couldn’t believe it because that would basically empty what he had saved.
And so not only did he not buy a hat with his own money, but he appreciated dad a little bit more for buying him the hat. And I imagine that you start disclosing some of these very large numbers to anyone, but especially children that are in their twenties or even younger and it potentially sets in reverse teaching the value of a dollar.
The way we’ve grown and the way our children ultimately will grow is through challenges and struggles and working hard. So you don’t want to rob your children of that opportunity because it may hinder them from becoming the best version of themselves because they really don’t need to because they know what’s out there.
Jessica: That’s absolutely correct, and I am pretty confident I have said those exact words in client meetings. It’s so true.
John: And I’m speaking with Creative Planning, wealth manager, Jessica Culpepper. What are some considerations that affluent families are thinking about that others might not be?
Jessica: So I think as someone’s level of net worth grows, they become more attuned to asset protection, and if they’re not, we certainly bring this to their attention. And it doesn’t have to be someone who’s worth $20 million, this could be someone who’s worth $5 million dollars or a million dollars. Asset protection is very important, no matter where you are, you’ve worked really hard to accumulate your level of assets, and so you want to be careful to make sure that they aren’t unnecessarily exposed.
You could have hit that home run, sold the business, or your portfolio has grown to a level and you want to protect it. Well, if your teenage child is driving a car that you own and they’re in an accident and it’s their fault, well goodness sakes, it doesn’t matter if we had 8% last year or 10% or even zero. If someone could take it at the drop of a hat because of something completely unrelated to the portfolio, that’s a problem.
John: How about giving back? This is a conversation that we have with all of our clients once they’re financially independent and going to have something left over, what do you want to do with that?
Obviously the ultra affluent families that you are working with, it’s a given, assuming that they plan well, they’re going to have something left over and in many cases it’ll be a lot left over. So what’s been your experience working with these families in terms of their desire to give back and some of the things that are important to them?
Jessica: My overall experience with my clients is somewhat contrary to what I think the general public may think when they view wealthy people. The clients that I work with I think are some of the kindest, most humble and generous people that I know.
John: Wow.
Jessica: They represent the top 1% of the wealth in the country, but you probably would never know that if you met most of them. You wouldn’t think that they have that stereotype that they’re ultra wealthy. They do amazing things.
I’ve had clients fund full ride scholarships for high schoolers who’ve had economic setbacks, foster kids or have a parent in jail. I’ve had families build entire youth camp buildings to make sure camp could continue and have the best facilities for families and kids who want to go at camp together. They funded children’s hospital endowed chairs, university scholarships, building entire churches.
They do amazing things and obviously these are big things, but I’ve got people who give on an annual basis to really cool causes. And if they involve their children in these, their children I think get to see what’s possible, not just spending their money to buy things, but they see their parents set an example of how they can give back with their wealth and it usually leads to happier people. Some pretty cool things.
And I think one thing I just want to touch on too here that would impact the 1%, but for clients who are single and worth about $13 million, or married couples who are worth about $26 million, they hit the tier where they’re going to be paying some estate taxes to Uncle Sam, which they might be okay with, but there are planning tools they can use to avoid or reduce what might go to the government or that estate tax.
So basically when you’re worth, as a married couple, about $26 million, any level of growth above that, basically every dollar has 40 cents earmarked going to the government. And when you tell a client that really every dollar you make from now on, 40 cents on it is earmarked for the government, that perks their ears up a bit.
So that invites a conversation again for the ultra affluent, but ultimately talking about ways where we can reduce what might go to Uncle Sam and it can include giving more weight to even their kids now to get appreciation out of their estate. And there’s a lot of great tools that our estate planning team can talk to them about to reduce the level of appreciation that’s in their estate.
It can also involve charitable giving strategies, whether it’s giving now to charities directly or through donor advised funds and charitable trusts or even private foundations where appropriate. Those are all tools we talk to at length with our clients and can help them set those up as well.
We also have advanced strategies where if we want to make sure as much as possible is going to the next generation, we can use tools like Second-to-Die Life insurance owned within trusts. We can also use, again, many fancy tools like GRATs and GRUTs and Charitable Trusts.
So this sky’s the limit here, but there are tools that can be used. If we don’t like the idea of more money going to the IRS, we can really get in the weeds with our clients here to figure out which strategies and levers they can pull to reduce that number over time.
So those are strategies that aren’t applicable to most clients, but in 2026, the government’s going to cut those numbers in about half. So in 2026 as a married couple, if you have about $13 million, the estate tax is going to kick in, so that’s going to impact a lot more people than it would today.
John: Well, let’s face it, most people, even if they think their kids are a little bit of a knucklehead, still normally like them, even a little more than the IRS. So that’s a great tip. Jessica. As we wrap this up, do you have a favorite story or maybe moment from your time here at Creative Planning?
Jessica: I think one of the coolest stories is a client who was really helped in a nominal way as a young adult to get a scholarship to go to college, and that impacted his life so much that he created a scholarship program to fund full ride scholarships for kids who are underprivileged, very, very cool, that will impact lives for many generations that he will never know about.
And I know other people on your show have said this, but it’s much better and more fun to give with a warm hand than a cold one. And when our clients are charitably inclined or have a passion, it is so much more fun to pursue that while they’re alive and see the benefit it has to their family and to their community when they do that.
I’ve had a family who is really leaving everything to charity when they’re gone, they don’t have any children. And they’re charitably inclined now, and when we talk through some of the benefits of doing the giving now, they have such a large surplus. Let’s take more action now so we can even get a tax benefit and said, you know what, why are we waiting? Why are we going to let someone else control who benefits from this money? Let’s do more. Let’s do it now and let’s get intentional with this. And then they can see all the really great things that their wealth can do now while they’re alive.
John: Yeah, that’s so cool. The ripple effect of kindness and being able to pay it forward so often that long-term impact of some of those choices that we make, unfortunately we never actually get to see them in their entirety. Sometimes we do, and it’s really neat when we’re able to, just another example of how kindness can spread far further than you’d ever think.
And it may be thought of, well Jessica, you’re helping the wealthiest people in the whole country with their money, isn’t that trivial or superficial? But then you start actually understanding when money’s aligned with things that we care about, it has incredible power to make a difference in the world.
And so what a valuable opportunity for you and for all of us here at Creative Planning to be able to have a seat at the table helping people do great things with the resources that they’ve been blessed with. Thank you so much for joining me here on Rethink Your Money, Jessica.
Jessica: It’s my pleasure. Thanks, John.
John: That was Creative Planning partner and ultra affluent wealth manager, Jessica Culpepper. If you have questions and would like to speak with a local wealth manager like Jessica or myself, visit creativeplanning.com/radio now to schedule your meeting.
It really is amazing how much Americans spend on things that can really hurt our wallets. I mean, we all have vices. There’s alcohol and cigarettes and junk food, the obvious things, but some of them not only affect our health but also drain our bank accounts.
Take lottery tickets for example. I was sharing this with my wife Britney as I prepared for the show and she couldn’t believe it. Did you know the average American spends a whopping $17 per week on those elusive dreams of hitting the big jackpot? And it doesn’t stop there. We’re also guilty of indulging in takeout and restaurant food way more than we should. I mean, DoorDash loves me, no question about it.
According to a recent survey, the typical American buys takeout or eats out 2.4 times a week. And let’s not forget also those prepared beverages. Growing up in the Pacific Northwest, I grew up in coffee shops, Starbucks was a way life. And we’re chugging down an average of two and a half of those every week. And all these little expenses can add up quickly.
Now, I’m not trying to spend shame us here, but I think it’s important that we all understand the eye-opening numbers around some of these expenses. We spend as Americans is staggering $3,000 per year on what I would refer to as these financial vices, lottery tickets, eating out and prepared beverages.
And it’s not just about the amount of money but how it varies across income brackets. Those with lower incomes, earning around $30,000 a year, spend 13%, it’s crazy, of their income on these indulgences. On the other hand, higher income earners making $74,000 or more per year spend a mere 2.6% on these same vices.
Let’s talk about credit card debt. Brace yourself for this one. Americans collectively owe over $925 billion on their credit cards. That is a mountain of debt right there. On average, each person carries around $6,500 in credit card debt, which costs about $1,642 in interest alone per year.
It’s like throwing money out the window. And what’s funny, and I’m as guilty of this as anyone, where we’ll complain we don’t have enough time, yet I somehow find time to browse through my ESPN app. Maybe for you it’s getting lost in social media. And our money can be the same way. We don’t make enough. Well, let’s pause. Are we being as effective in optimizing the dollar we actually do have?
And so here our few takeaways for you. The first and most essential step toward financial success is having positive cash flow. And that means you spend less than you make. It’s as simple as that. Cut out unnecessary expenses. If you are struggling with positive cash flow. Take a look at all your subscriptions. We all sign up for these auto-renewing subscriptions without even realizing it half the time. Are you paying for something you don’t even use or need?
We were on a road trip this past week. My wife was on our credit card app and made phone calls during the drive to a couple of places that we had subscriptions to and never used. And circling back briefly to social media, a big contributor to overspending is that we get caught up in everyone else’s highlight reel and we feel the pressure to keep up. It can lead to unnecessary spending.
And it’s so it’s important to remember that happiness and fulfillment aren’t going to come from material things or certainly not comparing ourselves to others. So identify the things that truly bring you joy, maybe a few of those vices that are worth it, and focus your spending on those, but be wise and choose where you can cut back and save. Because in the end it’s about living within our means, having control over our finances and creating a better future for ourselves.
As Benjamin Franklin once said, “Beware of little expenses. A small leak will sink a great ship.” So let’s ensure we plug those leaks as we sail toward financial success.
If you have questions about your money and you’d like to speak with a local financial advisor just like myself here at Creative Planning, we’ve been helping families since 1983 as we manage or advise on a combined $210 billion. Why not give your wealth a second look at creativeplanning.com/radio.
It’s time for Rethink or Reaffirm, where together we’ll examine conventional wisdom and determine whether we should rethink it or reaffirm it.
I want to start with the notion that cash is safer than stocks in a recession. Don’t get me wrong, I understand the allure of cash. It’s like that trusty comfortable blanket, like my kid’s little blankie or a Snuggie. Those things were pretty cool. But let me tell you, when it comes to a recession, cash might not be that knight in shining armor that you think it is.
Picture this, raising children. If you’re a parent, you know how unpredictable kids can be, right? Well, recessions are a lot like that. They’re like those turbulent teenage years where you never can’t quite predict when they’ll happen, how long they’ll last. So here’s the thing, if you wait around for a recession to materialize before you make your move, you might end up missing out on some incredible opportunities.
Now, let’s break down some numbers for a moment. The National Bureau of Economic Research has recorded 30 recessions since 1871. And if we take a look at how the S&P 500 performed six months before each of those recessions, guess what? This might surprise you. It showed a positive return 21 of the 30 times. That’s right. So even if you had a crystal ball, which you don’t, you had these perfect recession predictions, staying in the market would’ve served you better than cash on hand.
But let’s take this one step further. Let’s say you’re clairvoyant and can accurately predict the start and end of each recession. If you sold your stock six months before and then stayed out of the market until it ended, you’d still only have a 50/50 chance of outsmarting the market.
It seems counterintuitive, but stocks produced a positive total return in 15 of those 30 recessions. Here’s an eyeopener. The stock market and the economy don’t always dance in perfect sync. And the reason is that the market mainly focuses on publicly traded companies while the economy encompasses both government and private businesses.
So while the economy might be going through a rough patch and you’re thinking, oh, this is a terrible time to be investing, the stock market can still sore a new highs. And you know what? The stock market has this amazing talent, which is that it’s forward-looking.
So trying to time the market based on the economy’s present condition is a battle that you won’t win. As the great Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.” Wise words to keep in mind. You have to embrace the uncertainty and stick to a long-term investment strategy and then trust that stocks do in fact have the potential to beat cash even in the most challenging economic times.
So let’s rethink this notion that cash is always safer than stocks in a recession, shall we? Let’s move on to another piece of financial wisdom that has been floating around for a long time, and that’s the idea that you need to pick the right stocks, the right fund manager to do well in investing. Well, guess what? I’m here to tell you that you can rethink this one as well.
You don’t need to stress yourself out trying to outsmart the market like some financial wizard. In fact, you might be better off without any of those fortune-tellers and astrologers that we call money managers.
Let’s look at the facts. According to Charlie Munger, the 99-year-old billionaire and vice chairman of Berkshire Hathaway, most money managers are just dragging money out of their client’s accounts. And you know what? If you look at the facts, he’s got a point, a staggering 79% of fund managers underperformed their benchmarks last year in 2022.
It’s like hiring a so-called expert to guide you through a maze only to find how that they’re leading you around in circles. It’s like, wait, this isn’t working very well, but don’t worry, there is a light at the end of the tunnel. If you had made a $10,000 investment in the Russell 3000, just basically the universe of stocks back in 1980, you’d now be sitting on a cool $1 million. That’s mind-boggling, $10 grand to $1 million. And guess what? You didn’t need some fancy fund manager to achieve that. You simply stayed the course and let the market work its magic.
So can we please put this myth to rest once and for all? You don’t need to stress over trying to pick the perfect stocks or finding that elusive fund manager. Trust in the power of long-term investing, diversification and low cost index funds.
Our third and final piece of common wisdom that’s been making the rounds lately is the notion that college just isn’t worth it anymore. Now hold on just a minute before you dismiss the value of a college education, okay. I’ve got some numbers for you that might make you reconsider.
First off, let’s talk about the cost. Yes, college is incredibly pricey these days, there’s no doubt about it. The average cost of attendance for a student living on campus at a public university comes in at around $25,000 per year. It totals just over a hundred grand for a four-year education. And if you’re an out-of-state student, well brace yourself for an even higher price tag that’s $44,000 per year or $176,000 over four years.
Well, how about private schools? They can set you back on average $54,000 per year, which adds up to a total cost of over $200 grand. Ouch, right? You may be thinking, well, John, this is why I don’t think it’s worth it anymore. But if you’re feeling that way, you’re not alone. 56% of Americans don’t believe college is worth the expense.
Despite the rising costs, the data simply doesn’t support that. According to the US Bureau of Labor Statistics, if we compare a hundred people with a college degree to a hundred people without one, those with the degree have a significantly higher probability of earning more income throughout their lives. In fact, the single biggest indicator of income differentiation amongst peer groups surpassing all other factors is in fact a college degree.
Now of course, this can get muddied because not all degrees and not all universities and not all careers are created equal. So you do need to be selective. But the median weekly earnings for someone with just a high school diploma stand at around $800. For those with a bachelor’s degree, that number jumps to over $1,300 per week. It’s a pretty big difference.
And when we’re talking about lifetime earnings, individuals with the high school diploma can expect to make around $1.6 million while those with an associate’s degree see an increase to about $2 million. And those holding a bachelor’s degree can rake in a whopping $2.8 million in their lifetime.
But beyond the money a college education can provide you with more than just a piece of paper. Of course, it equipped me with some crucial skills and social capital and 71% of college graduates would agree with me, saying that their college education provided them with the skills they needed to excel in their first job.
So before you write off the value of a college degree, consider the long-term benefits. Sure, it’s going to come with a hefty price tag and that continues to go up, but the potential for higher earnings, valuable skills and expanded opportunities is definitely worth a second thought. As Mark Twain once quipped, and I love this quote, “I have never let my schooling interfere with my education.” So let’s rethink this idea that college isn’t worth it and recognize for many it can be a ticket to a brighter future.
And there you have it. Remember, personal finance is not one size fits all, and it’s crucial to reevaluate common wisdom to ensure that you’re making the best decisions for your financial wellbeing. If you have additional questions, speak with one of our local financial advisors here at Creative Planning just like myself by visiting creativeplanning.com/radio.
It’s time for listener questions and my answers. If you have questions, email those over to [email protected].
Our first question comes from Robbie in Rapid City, South Dakota. “I’m 45 years old but haven’t done a lot of in-depth planning since I’m still years away from retirement. What percentages do you recommend people save?”
Well, it’s a great question. When it comes to the percentage you should be saving, obviously there are many personal considerations to take into account. It’s almost like trying to find your spouse. There’s no exact playbook on what color hair you should look for and their personality type and their height and how they dress, what their career is obviously because we all want different things and certainly the same is true with our money as well. So here on the show, I won’t be able to help you find the perfect match so to speak, but let’s find something reasonable that works for you.
General rule is to save around 15% of your pre-tax income each year, so that includes contributions from an employee match program. If you’re fortunate enough to have that. Uncle Sam can lend a hand to Robbie, so make the most out of the tax advantage savings opportunities. If you have a traditional 401K or an IRA or depending upon your tax bracket, maybe a Roth, and mixing and matching some of those savings options from a tax standpoint can provide flexibility moving forward.
Now, to take this one step further, I’m going to give you what I call the 1% challenge, which is increasing your savings rate by just 1% every year. And if you do that over the next 20 years until you’re 65 years old, it can make a significant difference in your total savings. You will thank yourself later when you see the impact it has on your retirement nest egg.
Now, of course, as a certified financial planner, I’m going to tell you that while saving a percentage of your income is a great starting point, reverse engineering the exact amount can provide a lot more clarity. So I encourage you, build out a comprehensive financial plan.
If you don’t know how to or you don’t want to or you don’t have the time to, that’s why you hire an experienced firm like us here at Creative Planning to help you complete and then monitor that financial plan. Because that’ll take into account your specific goals and your expenses and then determine the precise amount you need to save for retirement, not an estimated percentage. And always remember, the value in a financial plan is not in building it’s in changing it. The plan needs to be adaptable and adjustable as circumstances will change along the way.
So go ahead and take that proactive step toward building a solid financial plan. If you’re not sure where to turn and you’d like to meet with a local advisor there in South Dakota, go to creativeplanning.com/radio. Now to schedule that visit.
Darren in Charleston, North Carolina asked, “Hello, I’ve really enjoyed listening to your show. It’s very thought-provoking. I was wondering if you could share your favorite financial or money related reads with me.”
Well, thank you for the kind words, Darren. I’ll give you four off the top of my head. The First Psychology of Money by Morgan Housel is my favorite financial book ever written, and it’s not that old, just a fantastic writer covering an array of topics and a lot less focused on financial strategies and much more on the way we think about our money.
Creative Planning president Peter Mallouk has a fantastic book titled The Five Mistakes Every Investor Makes. Tony Robbins, Unshakeable. And I’d also like to throw in the Total Money Makeover by Dave Ramsey. We’ve been talking a lot about spending less than you make today. That is a fantastic book on budgeting, spending within your means and having a system with which to do so, so eventually you have a surplus and can begin investing toward your future.
Jessica and Gilbert, Arizona asks, “I have a vacation home that I’ve been thinking of selling and I’ve heard about a 1031 exchange. Can I do that on a vacation home that wasn’t rented?”
Great question, Jessica. In short, the answer is no. You cannot 1031 exchange a vacation property that was not used for investment purposes. If you’re listening and unfamiliar with a 1031 exchange, it’s a tax deferred transaction in real estate where you can sell a property and reinvest the proceeds into another property, deferring capital gains taxes on the profit. What it allows you to do is swap properties and potentially grow your investment portfolio without any immediate tax consequences.
But I’ve seen these trip people up, so let me share with you a few key things to keep in mind if you think this might fit for your situation. First, you need to make sure that both the property you’re selling and the property you’re buying qualify for the exchange. So one common reason for disqualification is if the property in question is used solely for personal purposes, as in Jessica’s case, she never rented it. Because remember, the IRS wants to see an investment property, not just a personal getaway.
Another factor that could disqualify disqualifying exchange is if the replacement property is of lesser value than the relinquished property. The IRS also wants to ensure that you’re not trying to cash out and reduce your overall investment without paying taxes.
Second, there are strict time limits involved. This throws a lot of people off. You have only 45 days to identify potential replacement properties, which basically like you’re speed dating for real estate, and then you must close on the replacement property within 180 days. So it’s definitely a bit of a race against the clock. You can’t be the type of person that takes six trips to Spencer’s before you finally settle on the perfect TV.
And lastly, remember that the primary purpose of a 1031 exchange is to defer capital gains taxes. You’re not avoiding them, you’re not eliminating them, you are pushing them to the future. Now, in fairness, that can be effective if you’re older and plan on holding the property until death. Yeah, then your beneficiaries would receive potentially a step of invasive, but it’s simply getting a temporary tax break while you level up your real estate game.
And while I mention this often, this in particular, very important that you consult with a qualified professional to navigate an exchange like this and avoid any unexpected consequences. If you have more questions on this, Jessica, you are in my neck of the woods, actually in the East Valley of Phoenix. You can talk with myself or one of our 100 CPAs by going to creativeplanning.com/radio.
And thank you to Robbie, Darren and Jessica for those questions. Again, you can email questions to us by sending them to [email protected].
As I wrap up today’s show, I want to touch on something that’s often overlooked when it comes to money. We think of numbers and strategies, taxes, but there is an undeniable link between the outcomes of our money with our mindset.
Money is not just a numbers game, it’s a behavioral topic, and frankly, it’s primarily a behavioral topic, and maybe the most impactful behavior is humility. It’s acknowledging that we don’t have all the answers, and thus being more open-minded and seeking help from those around us. As the saying goes, there’s great power in knowing what you don’t know. Mother Teresa and Mahatma Gandhi are two iconic figures whose humility is what made a profound impact transcending their lack of material riches.
Mother Teresa dedicated her life to serving the poorest of the poor, bringing hope and compassion to those in the most desperate need. Despite her global recognition and the numerous awards she received, she remained incredibly humble, considering herself merely an instrument of God’s love as she put it. Her humility allowed her to connect deeply with people from all walks of life and inspired countless others to follow in her footsteps, spreading that ripple effect of kindness and love.
Similarly, look at Gandhi, the leader of India’s non-violent independence movement demonstrated incredible humility throughout his entire life. Gandhi lived a simple and frugal life. He renounced all material possessions, and I’m certainly not suggesting you have to do that, but his focus was on advocating for the welfare of the marginalized and the oppressed. Gandhi’s humility would eventually lead to India’s independence.
Both of these figures can show us that true greatness lies not in our material wealth or our status, but in the humility and compassion with which we live our lives. I just find their legacies to be such a powerful reminder that humility really does have the power to change the lives of those around us.
And so while we probably won’t end up being Mother Teresa or Mahatma Gandhi, what can we learn from them in particular when it comes to our money? Well, that humility impacts our thinking, our making, and our spending habits. If we believe that we have all the answers and our ways the right way, then how can we truly evaluate new ideas or listen to different possibilities?
Humility allows us to question our goals when it comes to our money. It allows us to align our spending with our values and ensure that our loved ones would be financially secure if anything were to happen to us. Having humility also means recognizing that you and I can’t predict the future, especially in the financial markets. Humility leads us to save as much money as we reasonably can, knowing that returns are uncertain. Humility brings contentment to living within our means and sticking to a budget, helps us avoid that comparison trap and the fear of missing out.
And instead of judging others for their spending habits, we focus on our own financial wellbeing and progress when we have a spirit of humility. Ultimately, as the great Morgan Housel put it, humility’s a powerful tool for limiting risk. It reminds us that not all risks are worth taking, especially if they jeopardize our families and financial security.
I encourage you to embrace humility as you navigate your financial journey because it may be the single most important attribute toward you finding contentment and securing a brighter financial future.
Until next time, take care and stay humble and remember that we are 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 podcast.
Disclaimer: The proceeding program is furnished by Creative Planning an SEC Registered Investment Advisory firm that manages or advises on a combined $210 billion 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 for 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.
Have questions or topic suggestions?
Email us @ [email protected]
