As wealth managers, our primary focus is helping you grow, protect and transfer your wealth. The ultimate question underlying every stage, though, is “what’s the most effective way to generate wealth?” We give the answer on this week’s episode, plus we explore the intersection of luck and success (and how happiness plays into the equation!) and share how we’re helping business owners weave together business growth with personal wealth.
Episode Notes
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen. And ahead on today’s show, we’re exploring the intriguing intersection between luck and money. What the best way is to create wealth and where does happiness play into the equation? Now, join me as I help you rethink your money.
When I was in middle school, I loved playing golf in the summer at our local municipal course. In an effort to get kids interested in the game, they would allow us to play for free in the late afternoons. All they needed from us was to agree that we’d volunteer for tournaments throughout the summer. So a couple of buddies and me would have one of our parents drop us off in the morning, and they’d pick us up just as it was getting dark. We’d hit buckets, we’d putt, we’d eat french fries or whatever else we could buy for the $5 that was in our pockets, but this was in Seattle. And even in the summer, the weather didn’t always cooperate. Do you think we cared? Of course not. It’d be pouring down rain, clubs flying out of my hand, didn’t matter. The lightning horn would sound, we’d play on.
If I was struck by lightning holding my seven iron on the 14th fairway in the middle of a storm after the course signaled for a stop of play, would you consider me the most unlucky teenager in the Pacific Northwest or the biggest knucklehead? The correct answer is both. I gave lightning a clear shot by standing out there, but so have millions of other golfers over the years and ended up with nothing more than soaked head covers. This is a microcosm of life, of success, and of money, that relationship between our decisions and our skill and luck. Sometimes when we look at the world around us, it’s difficult to tell where hard work ends and where luck begins. You see a friend get promoted and you wonder, was it the right place, right time? Or was this based on their merits? You find yourself face-to-face with a costly home repair, and you wonder, Have I been cursed by the divine above? What’s going on here? Or is it because you neglected smaller maintenance along the way?
The great one, Wayne Gretzky, famously said, “You miss 100% of the shots you don’t take.” I have a few friends who run their family businesses, very successful, lot of money. They’re what’s referred to as gen two. Their parents built the company from the ground up, and I think it’s easy to look at their situation and say, “Well, they’re rich and successful because it was handed to them.” No, I disagree. Were they lucky to be born into a family with a successful business owner parent? Yes, of course. Did that create a foot in the door and an opportunity that they wouldn’t have had otherwise? Sure, but did they work their tails off and grow the company far beyond what their parents ever had? Absolutely. So were they lucky? Yes, but were they also skilled? Yes. You started your personal finance journey in a different place than me, in a different place than your friend or your neighbor or your coworker, but you have to make something out of the cards that you ultimately were dealt.
And if you attribute too much of your situation to luck, it will lead to inaction. What’s the point in working hard if your success boils entirely down to outside factors that you can’t control? But if you attribute everything to hard work, you can find yourself frustrated when things don’t go your way. And remember, perspective is also critical. You might think, “Well, I don’t have rich parents or a trust fund. I didn’t hit the genetic lottery and get a 1600 on my SATs because I’m a genius,” and that line of thinking may result in you feeling unlucky, but conversely, you could just flip that around and remind yourself that you were born in America and live in 2024. And with that perspective, by all accounts, you and I are about as lucky as we could possibly be. And lastly, when thinking about luck and skill, remember your human bias, which will lead you to overemphasize the role skill played in your success while under emphasizing luck. But when you view other people, it’s the opposite.
You’ll generally downplay their role in success while highlighting how lucky they were. It makes us feel better about ourselves. It’s hard to accept someone being smarter than us or working harder than us. So with that said, how do you best set yourself up for financial success in a world that will require both luck and skill? Here are my three tips to getting rich. Number one, make as much money as possible. This may sound trite or even counterintuitive, is it all about what you make? No, it’s not all about what you make, but you cannot get blood out of a turnip. You cannot extract money from somewhere it does not exist. So yes, you should spend less than you earn. That savings rate is within your control and important. You should invest as early as you can to benefit from exponential growth and compounding.
You tell me, which do you think is more important, to increase your rate of return from 7% to 9% because you’re a better investor, and you focus your energy and your attention on investment strategies, or focus your energy and attention on doubling your income over a five-year period? So let’s suppose you’re following with me and you agree, “All right, I get it. I need to earn more. I want to focus on that.” How do you earn more money? Number one, you can increase your skills and your knowledge. That might mean back to more school, an advanced degree, you want to make a half a million dollars a year as an orthodontist, you’ve got to go to dental school. The next step in making more money, do things the right way. When looking at reputation, honesty, and ethical behavior, think of them as the foundation of a skyscraper. They’re the elements that hold everything steady, ensuring that in this case, your personal empire, your personal finances stand tall and proud for decades.
Warren Buffett famously said, “It takes 20 years to build a reputation and five minutes to ruin it.” If you think about that, you’ll do things differently. The long game in wealth accumulation and earning more money, having the success you desire isn’t just about numbers. It’s about trust. Clients, partners, customers, investors, they gravitate toward those they can rely on, and it’s the steadfast commitment of doing what’s right even when it’s not easy. That creates a magnetic pull for opportunity. Over time, these ethical choices, they compound just like compound interest in the market or a high yield savings account resulting in a robust resilient legacy. So increase your skills, do things the right way, and build relationships. This is often the unsung hero of success.
Networking, it feels like a buzzword. Nobody wants to go to a networking event where people are trying to hand you their business card as fast as they possibly can, but in reality, it is the cornerstone of enduring success. You want to make more money, build the right relationships. Remember the classic tale of Apple and Microsoft? Steve Jobs and Bill Gates had a famously complex relationship, but at crucial moments, they recognize the value of strategic alliances. Gates investment in Apple during its financial struggles is a testament to how even competitive relationships can become mutually beneficial, so here’s what I want you to do. Think of every handshake, every morning coffee meeting as laying another brick in the path to your success in that journey to you finding riches and wealth.
In the end, your network is more than just a collection of contacts. It’s not a little roll Rolodex for going old school or contacts in your iPhone. It’s a dynamic ecosystem that when nurtured becomes an invaluable asset in your journey. And after you’ve done these three things toward higher income, delegate to leverage your time. When looking to make your own luck, you’ll need time and space to focus on what provides you the highest ROI. For most people, that’s not learning the tax code, that’s not becoming an attorney so that they can draft their estate planning documents. It’s not waking up before the market opens and watching CNBC and researching stocks and making trades. No, it’s building their skills, doing things the right way, fostering the right relationships while leaving the blocking and tackling to the pros.
Elizabeth Warren is smiling somewhere, I imagine. Now, she’s been pushing hard for a wealth tax now for decades, and the premise is that with wealth inequality dramatically widening, one way to close it would be to tax Americans based upon their net worth and more specifically on holdings that are not yet sold. So for example, if you’re fortunate enough to own $100 million of real estate, probably got a little bit lucky and have some skill, but if you only paid, let’s say, $25 million over the course of your lifetime for that real estate, that’s appreciated, you’re not taxed on the $75 million of growth simply because that’s the value. Unless you sell it. But at a high level, you’d be taxed on income that it generates, and you may be taxed when you die from an estate tax standpoint due to your net worth, but you wouldn’t be arbitrarily taxed on the value otherwise.
On a closely watched case, the Supreme Court recently denied a challenge to a federal tax on certain foreign investments, but they left some questions about whether a wealth tax is constitutional, the case titled Moore versus the United States focused on whether a Washington State couple received income from an investment in an India-based company that didn’t distribute dividends. Not to dive too far into the weeds, what happened was the Moores incurred roughly $15,000 in taxes due to a one-time levy on earnings and profits in foreign entities, and there are some experts who believe that the Moore case may have implications for future wealth tax proposals.
While the Supreme Court’s ruling didn’t issue a red light, their opinion left a gigantic flashing yellow light that may have implications for you as a domestic stockholder, business owner, real estate investor down the road. The court’s opinion said that Moore’s realization of income was similar to other pass-through taxes on foreign companies. And here’s the flashing yellow, the majority didn’t decide whether realization itself is required for income tax. So while the Supreme Court upheld the tax on the Moores, the justices steered clear of the broader debate on whether a wealth tax in general is constitutional. With this being a political hot button, I suspect this won’t be the last time we hear the term wealth tax.
If you’re a business owner, you are no stranger to juggling tasks, whether it’s managing payroll, strategizing for growth, hiring, firing, planning, your next quarter’s budget, your business demands require careful financial stewardship. It’s one of the most challenging aspects of being an entrepreneur, but your personal finances deserve just as much attention because the line between your business wealth and your personal wealth is razor thin. In many cases, it’s one of the same. Imagine you’re planning to sell your business in a few years or maybe you’re quite young and it’s a while down the road. At some point, if it’s successful, you’ll want to monetize that company and all your hard work, whether that’s passing it to a child or another family member, an internal key employee or maybe an outside buyer.
You’ll want to start coordinating as soon as possible. You can structure your business in a way that minimizes after-tax proceeds, you can invest wisely to align your personal goals and even ensure that you’re set for a comfortable retirement, but it’s really about weaving together your business growth along with your personal objectives because your business is a conduit for you. And to continue this discussion, I have an extra special guest today. Adam Tillman is a fellow partner and director of mergers and acquisitions and business consulting services here at Creative Planning. He is a certified public accountant with nearly 20 years of professional experience. He has a degree in accounting from Northern Iowa University. Adam Tillman, thank you for joining me on Rethink Your Money.
Adam Tillman: John, glad to be here. Thanks for having me.
John: Let’s begin by laying the foundation. Broadly speaking, what are business advisory services?
Adam: Hey, you bet. The team, the M&A and business consulting team, technically what we call ourselves, consists of business consulting group and the M&A team. What we do from a mission standpoint is through the understanding of goals, of businesses, and their owners really help them to achieve sustainable success, maximize their enterprise value and successfully exit their business when the timing is right. Inside of that, there’s a lot of things that we do. If I broke it down to a few buckets, consulting and advisory piece would be heavy around management consulting, strategic planning, working with those business owners in a lot of the same way our wealth managers would work with the clients to establish their goals, help to build a plan, create strategy, and really be alongside them as they go through that plan and help them as things change, as new occurrences come up and help to drive sustainable success. Our M&A team works to help strategically go out to market to successfully exit and sell a business when that option is looking at an outside buyer of a company.
John: Which is really important because we know that most business owners have huge amount of their net worth, I mean, I don’t remember the last ad I, but it was like 80 or 90% is the valuation of their business.
Adam: That’s right.
John: So being able to monetize that at some point and understanding the tax implications and the various options of who might potentially buy it, how do they structure the deal, they may be really good at running their business, but what I found as a certified financial planner and working with a lot of business owners is when it comes to that, they’re really looking for guidance. I’ve built this business, I know how to do whatever it is within my industry, but I really don’t have an expertise of how I even identify a buyer. Is it going to be a kid? Is it going to be an outside competitor? Is it going to be an internal deal with a non-family member? And in light of that, how does the deal structure change? What are some of the terms that need to be adjusted? Can you share an example of owner planning so that we can put some color around this for the listener?
Adam: Yeah, absolutely. As you just highlighted, a big part of that, I mean timing’s very important and if not critical, there’s no such thing as too early to start to plan. And a big part of that is understanding what your options are. And so you’ve got like you highlighted internal options where maybe you’re selling to management, transitioning to legacy family members. You have ESOPs, which is hot topic today and seen a lot of success with businesses transitioning on ESOPs. You have private equity and you have strategic buyers and helping navigate through and understanding the goals of the owner is important for that to really navigate towards what makes the most sense based on, again, their goals and the culture of their organization. It’s pretty bespoke or tailored. There is no silver bullet or one size fits all in terms of how these look when we’re working with owners in their businesses to put a plan together.
John: How about an example? I think you’ve worked with… I recall recently a client in Arizona. Share a little bit of that experience.
Adam: Yeah, that one was a little bit unique. The family business was heavily… The underlying asset was land out of state from where the owners live today, pretty significant value. And we were brought in to really not help from a commercial real estate sales standpoint, but helped to just think through strategy on what could a sale look like, being that it was owned inside of a corporation and helping model through or think about implications of structure around tax. And as we were really digging in on that with this particular case learned that the underlying goal was really a transition of wealth from father to children and how would we do that with the sale of the business, which again was primarily real estate.
On that one, we were able to call a timeout from an active marketing standpoint of the real estate and really start to align a process of looking at evaluation, being able to utilize discounts, begin to start gifting the corporation stock now, which then as they go back towards a potential sale of their real estate will help to effectively and efficiently transition a lot of that wealth, which was the primary goal of the owner today.
John: Yeah, I can speak firsthand about my experience in working with you and having a wealth manager in our office running point. It added a lot of value and it was strategies that you have a level of experience on that most even wealthy families don’t have experience. It’s the first time they’ve ever transitioned this business and all the land. And so that was significant in terms of the impact that had for that family and speaks to the value that you guys bring in the business advisory services team. Talk a little bit about some of the strategic development aspects of what you do for business owners.
Adam: With the cases we’re on, it starts with business plan design or clarity of that business plan. A lot of times, there is a plan in play, but the clarity of it doesn’t necessarily go past the ownership group. We look at this in we call building the momentum and the muscle in five key areas, which is clarity. Do the owners know what they want? Do their people understand that? Do they have clarity of that vision that the owners have? Do they know what their business is? What are they doing? And that sounds like a simple question, but sometimes when asked the generic answer is not necessarily the right answer. We work a lot with leadership teams helping provide coaching and education. If you think of that from a risk standpoint and a maximization of enterprise value, having a key leadership team that’s not only cohesive and functioning, but having second level leaders is very important to de-risk a business and maximize the value.
John: So practically, Adam, are you hopping on to Zoom or flying out to the business if they’re not local and you’re sitting down with these teams?
Adam: That’s right, yep. And a lot of engagements we’re meeting physically with them and utilizing Zoom or Teams as the mode for communication, and we do a lot of one-on-one coaching as well. So that can be with owners, with leadership team members and key people to help them continue to be how do they think about their business and how are we layering in as a thought partner? I say when we’re really engaging, we try to zipper in with clients, be augmenting that C-suite, working very closely with the owner and the leadership team on it could be daily matters, comp structure, thinking through whatever issue has come up and being an extension of that team to solve for issues for them.
John: So it could be ongoing or it could be more of a one-time, whether it’s the transition to the business or a transaction or just a unique situation that they’re going through that they want consulting on for a year or six months or just a project.
Adam: It could be project-based, we know an issue and we’re helping solve it, and it could be ongoing recurring work.
John: So let’s say I’m a business owner, maybe I work with creative planning on my wealth management and taxes and estate planning, maybe I don’t, and I’m thinking to myself, well this sounds good. I know I need to sell my business in the next five, 10 years. I’m looking to retire. I do have some unique needs that I’d like some outside counsel on another perspective, first off, how do they engage your team? And then also how do I pay for this? What are the costs?
Adam: How to engage is if you’re working with a wealth manager, all we need is an email introduction and set up time for discovery or-
John: And is that discovery complimentary?
Adam: Absolutely, yep.
John: Perfect.
Adam: We want to learn and understand what the needs are and that way we can put best foot forward and really structuring on how would we help. So that would absolutely be complimentary in an important part to structuring it on our end and making sure we know what the issues are and who we’re engaging and dealing with.
John: And then does your team typically charge just an hourly rate for consulting services or is it a project fee that’s a flat fee that’s discussed? How do you bill business owners?
Adam: Options are important in my opinion. I prefer, if we can, a flat fee structure. So here’s what we’re doing when we’re doing it, what the deliverable looks like and the fees that it will cost to get that done. In situations where there’s a lot of gray, we do at times take a T&M approach to it or a guaranteed max or not to exceed fee structure so there is at least clarity with the owner of the company on what we’re doing and how we’re being paid for it.
John: Sure. Well, and that makes sense. I mean you’re looking to do the most transparent and best solution for the end client.
Adam: Absolutely.
John: So if it’s very clear on what it’s going to cost, why not just put that in place upfront? Everybody knows what you’re doing and what it’s going to cost. If you say, “Well, I don’t know if this is going to be four hours of work or 400 hours of work,” depending upon what goes into it, obviously that can’t be a flat fee because you’d either be overcharging or dramatically undercharging. So it makes more sense in that case to just say, “Here’s what we’ll charge for our time as we go through the project,” and we’ll stay in communication on that.
Adam: And a lot of times if it’s pretty vague or if it seems broad, we’ll try to carve it up into phases. And so phase one is this, phase two is this, phase three is this, and then associate fees at least around the first phase to kick the ball into play and get going and then continue to have transparency. And I believe fees should be non-acrimonious and it’s a two-way street. We want to make sure customers are receiving high value for the work that we’re doing and we want to be fairly compensated for the value that we’re bringing.
John: Yeah, I think that makes a lot of sense. Adam Tillman, thank you for sharing your wisdom and for joining me here on Rethink Your Money.
Adam: John, thank you. I appreciate it.
John: My journey as a financial advisor was a winding one and a bit slower than I had hoped. You see, in my early 20s, I was an airline pilot. And when I decided to make a major career change, maybe it’s not so shocking that investors weren’t lined up asking me to help them with their life savings. It took me a while to get some traction and while this isn’t where I’m headed from a topic standpoint, it’s important to note that the barrier to entry of being a financial advisor is terrifyingly low. You don’t have to go to law school and pass the bar exam. You don’t need to be a CPA. You don’t need to be a certified financial planner. You take a very simple basic test and wham, just like that, you’re a financial advisor.
I remember having gone through pilot training and being type rated on the aircraft, knowing what went into that. It shocked me how quickly and simply I was a wealth manager, a financial planner, a financial advisor and investment professional, a financial consultant, whatever title you want to use. So when looking for a financial advisor know that there is a gigantic variance in experience and competency. We’ve been helping families here at Creative Planning for 40 years. You have attorneys, CPAs, certified financial planners, chartered financial analysts, and those things can be very important to you receiving the advice necessary for you to accomplish your goals. But back to my point here, I was making no money as a new inexperienced financial advisor, but fortunately, my wife was a phenomenal photographer. She was being flown all over the place to shoot weddings.
And while her upside was somewhat limited because while she had a second and even a third shooter with her at many of the weddings, she didn’t want to build a huge company. But the beauty of her business, which we absolutely needed at the time to put food on the table is that it was incredibly profitable. I mean, she had some travel expenses and had some of the best equipment in the industry, but after you’ve done that, paid for some software, there aren’t a lot of expenses. Profit margins were through the roof. When looking at your business and your wealth, often growth is the number one priority. For total revenue, that’s everything. People even will refer to what they make as top line revenue. Would you rather generate $5 million in your business with a 5% profit margin or generate $1 million but with a 50% profit margin?
Well, of course, the latter. Because even though you generate five times as much revenue in the first example, you’re only taking home half, you’re making 250,000 instead of 500,000 with likely far more complexity, a larger staff, more orders, more moving parts in general for what, to make less money? Now, obviously, top line revenue matters for business growth and theoretically if you want to make this more layered, you could sacrifice profits while you’re growing and eventually create efficiencies, reach economies of scale, and then have this fantastic business that’s also very profitable and much larger, of course, but I’ve met with many business owners more than I can count over the years, who 20 years in, we’re still not very profitable. But continuing to say, I’m just about to get to economies of scale, then I’ll be more profitable.
I read a book titled Profit First. Its message, yeah, you guessed it. It’s exactly what’s in the title. In fact, the book proposed open multiple bank accounts to segment profits and fully separate them from your operating account. It was almost a bank account version of the Dave Ramsey envelope system for personal budgeting. And while that may be a bit over the top or impractical for certain business owners to have six different business accounts, the spirit of it is valuable and true and prudent. So here’s what I recommend. Make your target profit your first expense, the most important line item in your budget. As you plan, you must prioritize profits because at the end of the day, I don’t care if your top line is $50 million. If your profits are small or even worse, you are losing money. What is the point? It’s not just about what comes in, it’s what is left over for you to use and enjoy.
Another piece of common wisdom is that a high paying job is the greatest factor in wealth accumulation. Earlier in the show, I spoke of the importance of earning more money, but my point wasn’t that it’s the only thing that matters, but it plays a very important role. Morgan Housel famously said in the Psychology of Money that, “Savings is the gap between your income and your ego.” A lot of people live paycheck to paycheck, but it’s not because they’re not making really good money, and this concept closely resembles the profit first concept with businesses. Prioritize what you need to save and pay yourself first. Automate that out of your account from the get-go, and fortunately, your savings rate is entirely within your control. So what is a healthy savings rate? In short, it’s whatever is needed to accomplish your specific goals. I know that sounds like a cop out, but it could be 5%, it could be 50%, could be zero. Let me explain.
Why would it be 50%? Well, if you are of the fire movement financially independent, retire early, and you’re 30, but you want to retire at 38 years old and never work again, you might have to save 50%. If you’re 68, have $18 million are only working because you love what you do. You spend a hundred grand a year, your savings rate could be zero. You see your savings rate will likely look very different than your siblings, than your neighbors, than maybe your children’s because personal finance is much more personal than it is finance. Generally speaking, 20% is really solid. And for most financial plans, 10% is adequate, assuming that your expenses when you stop working will closely resemble what you’ve been spending while working, but this is ultimately not a question that needs to linger. If you speak with a certified financial planner, as we have nearly 500 at Creative Planning, they’ll ask the questions that need to be answered to put together a detailed written dynamic financial plan, and that plan will determine exactly what your individual savings rate needs to be to accomplish your goals.
Now, I spent a lot of time on the show focusing the relationship of money and happiness, and I had a client come in this past week and said, “John, I really liked the radio show where you debunked this idea that more money makes you happier.” And then they said something that I actually had to correct them on, they said, “Money and happiness, they’re just not related.” And I said, well, as a matter of fact, they are but not in the way that most believe them to be. While wealthy people aren’t necessarily happy, money doesn’t buy happiness. Happiness can, in fact, buy money. You see, it’s the other way around. Happy people are more successful in life. According to a recent survey of more than 1,200 people, Americans say, “$95,000 is what would make them happy.”
In reality, if you make 60,000 and want to make 95,000, get happy first, change your perspective, and this isn’t true of only our money but also other important aspects of our life. Do you want to have better relationships? A Harvard study showed that the happiest people who live the longest prioritize and strengthen their personal connections, and that’s with 80 years of data in that study. So rather than focusing on how to be more successful, focus on how to be happier, then success will follow. I was providing an analysis recently for a prospective client and when I shared with them that their life insurance payout would not be tax-free, they were shocked. They said, “Aren’t all life insurance proceeds tax-free?” As a general rule, yes, that’s the case but not in all circumstances. Taxable life insurance proceeds typically arise when the policy is part of a business transaction or if the policy itself is sold.
In this instance, there was a $500,000 death benefit on this life insurance policy that had the spouse as the beneficiary, but it was owned by the business, and it was used as collateral for a loan which would potentially subject those proceeds to taxation. Similarly, which I also see from time to time, if you sell your life insurance policy to a third party, which is commonly known as a life settlement, something that I will speak of on next week’s show, any gain from the sale over the amount you’ve paid in premiums could also be taxable. This taxation can apply also to disability insurance payouts. Let’s say you have a disability insurance policy provided by your employer. If your employer pays the premiums or if you pay the premiums with pre-tax dollars, so through a payroll deduction plan, any benefits you receive from that policy would be considered taxable income. Conversely, if you paid the premiums with post-tax dollars, the benefits would generally be tax-free. Understanding these types of nuances can help you better plan for the financial implications of insurance proceeds in various scenarios.
It’s time for this week’s one simple task designed to provide easy to implement tips throughout the year to enhance your financial wellbeing. Your task is to decide who will have access to and responsibility for your digital assets. Back in May, I gave you the simple task of getting your digital assets in order, but now I’m taking it a step further. It’s time for you to go through the digital inventory and decide who should access the different items. We live in a digital world. So once you figure out who will have access, you need to clearly state that in your will, in your trust, with your powers of attorney so that they have access to and management ability over each of the digital assets and those digital accounts.
And the question of are digital assets transferable? The answer is yes. As a general rule, digital assets that you own and that are transferable, meaning in the fine print, it doesn’t state that they’re not transferable, they’ll be included in your estate when you pass away. They can certainly include anything that’s worth money but also, sometimes forgotten, they may include things that have more sentimental value. Here are some examples of digital assets that you can leave to a beneficiary. Digital music you’ve purchased, digital photos or videos you’ve kept in an online album, funds in a PayPal or Venmo account, crypto such as Bitcoin, funds owed to you by an online store like Amazon or Etsy, frequent flyer miles, maybe, by the way, depending upon the policy of the issuing company, they may or may not be.
Examples of digital assets that won’t pass through your will are things like your email and social media accounts, subscriptions to Netflix, Spotify, apps on your phone or tablet, and the data that they contain and non-transferable domains that you’ve licensed. On the radio page of our website, I’ll provide resources on the topic if you’d like to explore them further. And of course, if you have any questions specific to your situation, that is also the location where you can request to meet with us. It’s time for listener questions, and one of my producers, Britt, is here. Hey, Britt, how’s it going? Let’s start with Mike in San Diego. I think he had a question somewhat related to digital assets around FinTech bank accounts.
Britt Von Roden:Hey, John. Yep, you got it. And yes, he did. Mike is wondering if his money is really safe in an FDIC-insured FinTech account.
John: It’s a great question, Mike. The basics of FDIC Insurance is that it protects depositors by insuring deposits up to $250,000 per depositor per insured bank for each ownership interest. What this means is if the bank fails, the government guarantees the depositors will be reimbursed for their insured deposits up to that coverage limit. Now, we saw during the regional banking crisis, they stepped in even above those limits out of fear that there would be a run on many other smaller banks, but your question’s an important one regarding safety. Many FinTech companies do not hold deposits themselves, so what they’ll do is partner with FDIC-insured banks. And in such arrangements, your money’s held by the partner bank, and as long as that bank is FDIC insured, your funds are protected up to the $250,000.
Additionally, some FinTechs will use a system where your funds are distributed across multiple FDIC-insured banks, which is a process known as a sweep account, and this can potentially increase your coverage if the total deposits are spread across several banks. So for example, you may deposit with one FinTech company, but then they sweep your $500,000 balance into two different partner banks ensuring each bank is at the $250,000 limit, thereby maximizing your FDIC insurable coverage. This is a great question though, Mike. You’re thinking about the right things because you do want to verify FDIC coverage, always ensure you understand the specifics of how your funds are managed and where they are held. This isn’t just exclusive to FinTech and FDIC Insurance, but custodians in general, even holding your investment accounts, where are they ultimately held? All right. Who do we have next, Britt?
Britt: Up next, we have Jason in Long Island. So John, Jason is wondering what advice you have for someone looking to start investing but is overwhelmed by the options available? Are there some practical steps he can take to begin building his investment portfolio?
John: Absolutely. There are some steps. Like a lot of things in life, the challenge with investing in personal finance in 2024 isn’t finding information. It’s finding the right information while sifting through the mountains of data. You’re not alone in feeling overwhelmed, and this is a bit self-serving, but listening to a podcast like this one can help increasing your knowledge, and there are many other great ones aside from Rethink Your Money, but read books like Money Simplified and The 5 Mistakes Every Investor Makes and How to Avoid Them by Creative Planning President Peter Mallouk or The Psychology of Money by Morgan Housel, Money: Master The Game by Tony Robbins is also a good one and there are hundreds, but those are a few that I’m familiar with and I think are really good. Keep in mind if you know the right things, you don’t need to know everything, just like a lot of things in life. I recommend you find a friend, a parent, a mentor, or call me directly, reach out to Creative Planning and I’ll chat with you, and we can go through the basics of your situation.
A good certified financial planner can provide you valuable information in easy to execute steps for you to make probably a lot more progress than maybe you even realize. A few quick hitter basics. Once your emergency fund is built that three to six months and your debt is gone, then you’re ready to invest. Knock those out first and once those are in place, asking questions like, does your company offer a match? If so, fund that first. It’s 100% return on your money. There’s no other investment that can do that. If not, open an account, Vanguard, Schwab, Fidelity, a lot of custodians out there and create an automated savings contribution and have the money go into a simple index fund that is aligned with your time horizons. Many firms like us at Creative Planning will offer to help you with the initial planning at no charge. I would take us or a firm like us up on that offer so that you feel confident and squared away on the financial moves that you’re making. All right. Britt, let’s go to the bourbon question.
Britt: Yes, I am so glad you picked this one, John. So Blake out of New Jersey is wondering what your take is on investment bourbons.
John: It was once a niche hobby for booze geeks, and now it’s become quite expensive and pretty competitive endeavor. There are annual Pappy van Winkle lotteries. There was a documentary written about the heist there of employees stealing product and then reselling it on secondary markets where I mean a $2,000 bottle of a 20-year ego rare it can leap to 14, 15 grand in a few years. This leads some to believe. Maybe I should be sleeving this as part of my overall asset allocation. Well, I would caution you as doing anything more than a hobby. Investing in collectibles, whether it’s art coins, vintage cars, rare memorabilia, it’s exciting and can be profitable but come with many disadvantages. Collectibles don’t produce any regular income or dividends. There’s no cashflow. Unlike stocks that pay dividends or real estate that can generate rental income, collectibles only have the potential for capital appreciation. You realize a return when you go to sell them and there’s no periodic income during ownership. You’re buying something at a price and simply banking on the fact that someone will pay you more down the road. Collectibles can also come with hidden costs.
I mean, this doesn’t necessarily apply to bourbon, but it could if you had a huge collection. Where are you storing it? Certainly with collectible cars, do you have a storage facility or a garage that you had to buy to house them? Those costs can diminish the overall return. Illiquidity can be a problem. There’s market volatility and unpredictability in the collectibles market that tend to swing even more wildly than stocks obviously depends upon the collectible, then you also have complex valuations. You need an expert to even tell you what they’re worth. There’s the risk of counterfeits and fraud and a lack of diversification. So Blake, if you like the idea of buying a few bourbons potentially to drink, maybe to collect, and it doesn’t ultimately move the needle on your big picture financial objectives, it’s not a sizable position of your plan. You may be able to make a little bit of money, but I wouldn’t have high expectations. I appreciate those questions. If you have questions, email them to [email protected].
Much has been written about loneliness today in American society, that idea that we’re more connected than ever before, yet more disconnected than ever before. Dave Ramsey said, “We buy things we don’t need with money we don’t have to impress people we don’t like.” And here’s my take, you wouldn’t worry so much about what others think of you if you realized how seldom they actually do think about you. My wife shared a quote that stuck with me. She said, “What others think of you is none of your business.” Certainly, social media has played a role in this loneliness epidemic and many other things contribute to it as well. But having money, maybe somewhat surprisingly, is also a catalyst. Why do they say it’s lonely at the top or money can’t buy happiness? Well, because having money isn’t all rainbows and unicorns, it does have a price. Once wealthy, there can be a fear of exploitation. If you’ve got time constraints, might have social isolation or more shallow interactions.
Superficial conversations focused more on money, mismatched life experiences with those around you that you used to have more in common with a lot more focus and time dedicated to professional relationships and trust issues. These all play a role in this phenomenon. Social media is the most practical breeding ground for superficial showboating of money. Even if you’re not on social media like me, if your pursuit is to be seen and perceived as rich, successful, or to garner admiration for your wealth, likes, followers, you’re doing it wrong. Rather than establishing greater connections, which factually tell us, it’ll make you happier. People do not care that you have money. Having money is one thing, being happy is another. Feeling connected is another. Ironically, the more money you have, the harder you will have to work to foster and maintain healthy, deep, meaningful connections. Pursue those and you’ll find happiness and find happiness and success and wealth that may just follow along. And remember, 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 podcasts.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal 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 the show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.
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