As we continue navigating current events and year-end planning, we’re taking a closer look at the unique financial strategies for different income levels, including the lower, middle and upper class. We share practical, quick tips tailored to each group, as the approach to year-end planning differs for each. Also, with October being National Financial Planning Month, we reiterate the importance of taking a proactive approach to secure your financial future, and we welcome Dr. Dan Pallesen back to discuss behavioral finance, a very powerful concept when it comes to making decisions about your money.
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!
Episode Notes
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, John Hagensen. I have a fantastic show in store where I’ll be joined by Dr. Dan Pallesen, Psychologist and Certified Financial Planner, to discuss behavioral finance and how your natural tendencies can get in the way of making smart pragmatic money moves. Plus, we’ll rethink a few pieces of common financial wisdom, including one that I think most people get wrong. Now, join me as I help you rethink your money.
The Pew Research Center recently did a fantastic analysis which broke down what is the middle class? Are you in the middle class? And how that varies based upon where you live within the country. It even takes into account the cost of living for your area and number of people in your household. If you’d like to put in your specific information to see how you fall within your state or even specific metro area, you can go to the radio page of our website at creativeplanning.com/radio, and we’ll post that link to the Pew Research Study for you to personalize the results.
According to Pew’s analysis of the 2022 data, we work a year or two behind on this, 52% of US adults lived in middle income households, while about 28% were in lower income households, and 19% fell into upper income households. But here’s the important point. Whether or not you’re in the middle class depends heavily on where you live. In Jackson Tennessee, for example, you only need an income of around $49,000 to qualify as middle class. But in San Francisco, you need nearly $70,000 to even crack the middle class since the cost of living is obviously significantly higher there than the national average and much higher than a place like Jackson, Tennessee.
So why does this matter? It’s important to understand how your location, where you’ve chosen to domicile impacts your financial standing. And that’s why you’ll see people move from the Bay Area or Southern California or New York or Seattle, high cost of living areas, and migrate to Texas or Oklahoma or Kansas or Missouri where they can stretch their dollars further. Certainly the tax regime of where you live has an impact on your financial situation as well.
But the overarching theme that I want to make sure is not missed. When it comes to this concept of class in America is that it’s dynamic, it’s malleable. You can drift from one to another. This isn’t the same as it was centuries ago. We throw around terms like upper class or middle class. They’re not fixed categories as they once were. Yes, you used to be born into a class, and that was it. If you were a peasant, you stayed a peasant. You didn’t have opportunity to move into the landed gentry. The class you were born into determined your fate. You were either a land owner or you weren’t. You either owned livestock or you didn’t.
But that’s not the case in America, thank goodness. We have class mobility to the extreme. You can start in one class and through education and work and financial planning and taking some risks and applying yourself, you can move into another one and you can move in quickly. In fact, did you know that most upper class Americans didn’t start in the upper class? Sure, there are outliers. Sure, there’s people with family money. But that’s not the typical millionaire in America. They’re self-made. They were paying off student loans. They were scraping by with a side hustle. They were saving up for their first house. But they were able to climb out of maybe the lower class and drift into middle or middle into upper through smart financial decisions and yes, proactivity.
One of my favorite examples of this is Oprah Winfrey. My wife tells me that she used to sit on her parents’ kitchen counter on the island with this little tiny TV that sat on the kitchen counter, and she would watch Oprah and eat unhealthy afterschool snacks until her mother got home. She was an elementary teacher. And she loved Oprah doing her giveaways, and, “You get one and you get one.”
But Oprah, if you don’t know her backstory, she was born into poverty in rural Mississippi. She grew up actually in very difficult circumstances, and by all traditional standards, she should have stayed there. If it was a different time in history or a different country not as great as America, she wouldn’t have had the opportunity to create what she did. Now she’s a household name. She had perseverance, she had education. She possessed a deep belief in her own potential. She created one of the most successful media empires in the world. And her story is a testament to the idea in America that your starting point doesn’t have to be your finish line. And I don’t want you to miss that. You have authority and impact over your future and you have the conduit here in America to provide for that opportunity.
So I want to bring it back to the year-end planning. Depending on where you’re at financially, whether you’re lower income, you’re middle class, you’re upper class, your approach is going to differ. If you’re in a lower income household, making according to Pew, under about %50,000 a year depending upon where you live, consolidate your debt. If you’re carrying credit card debt, see if you can roll it into a 0% interest credit card. That will buy you a little bit of time as you work to pay it down and save you those interest payments. That can be one of the easiest ways to make a big dent on getting that balance paid down. Also, focus on building an emergency fund. Start small, $500, $1,000. But that can make a big difference and then increase your income.
At the end of the day, if you are in a lower income environment, the most impactful thing you can do for your financial situation is figure out a way to make more money. That might be through advancing your education or skill development or side hustles to grow your income potential.
Now, if you’re in that middle income group from about $50,000 to $170,000 of income, everything I just shared applies. But in addition, you may have enough flexibility to maximize your retirement contributions. Make sure you’re at least contributing to get the employer match of your 401k. Look at maximizing tax advantaged accounts like health savings accounts or IRAs, 401ks, maybe a Roth depending upon where your income bracket falls and your marital status. That can offer either immediate or long-term tax benefits. And finally, if you’re middle class, review your insurance. As life changes, so should your coverage. There’s a big difference between making $70,000 a year and being middle class and making $170,000 a year and being at the top side of that middle class. Ensure that your health and your life and your disability insurance is all up to date.
If you’re fortunate to be in high net worth households or high income earners, focus on charitable giving here as the year comes to a close. Not only does this help reduce your tax liability, but it gives you a chance to support great causes that you care about that make a difference. Review your estate plan. Huge changes are coming with the sunset at the end of 2025. Are you prepared for those? Also, what about your beneficiaries? Are those current and reflect your existing wishes? Lastly, consider gifting strategies. You can gift up to $18,000 per year to any individual that you want. If you are married and you have a kid who is also married and you’d like to help them, that allows between you and your spouse to gift up to $72,000 to your child’s family without it reducing your estate exemption.
But let me leave you with this thought, and it’s one that I’ve already hit on several times. Being proactive is key. It’s one of the biggest commonalities I see of those who have financial success. They’re on it. They prioritize it. They’re not constantly reacting. But that doesn’t mean it’s easy. So if you’ve struggled with this, join the club. Sometimes the smallest obstacles or friction points can keep you from doing what you want to do. I’ve been meaning to schedule a comprehensive physical. I’m a little over 40 years old. I think I’m pretty healthy. I try to stay on top of my exercise and my diet. And of course I fall off the wagon here and there, but I try to do a decent job.
A few years ago, I called the Mayo Clinic because I found out about this executive physical where they’ll basically comprehensively go through everything for you. That sounds pretty neat. I’ve got a wife and seven kids, try to stay around as long as I possibly can. So I knew it was important, but the friction was something I couldn’t overcome. They said, “We’re filled up for this year and nothing in Scottsdale, but you can get it done in Rochester. Just give us a call back. About three months from now we’ll be booking for the following year.”
And so I didn’t do it, but I’ve thought about it a few times since then that, “Man, I really need to get this done. I don’t go to the doctor a whole lot because I don’t have anything going on.” Again, reactive versus proactive. That’s one of the challenges with American medicine. We just kind of wait until we go, “Ooh, this is really bugging me. I’ve got a lump under my rib.” And then you go in and get it checked out. That’s not proactive.
Thankfully for me, not to any of my own doing, a proactive comprehensive medical clinic opened in my neighborhood. I have no excuse. It’s owned by someone in my neighborhood who’s been an internal medicine doc and now is a medical director for a huge group and has been doing it for nearly 30 years. So my wife and I got signed up and we’re going through the process.
That’s an example of something that we always wanted to do, but there was friction, that made it difficult for us to execute. And the same thing applies with your finances. You might know, “I need to get a written documented plan. I need to have a proactive tax strategy. I need to update that estate plan. I’m not a hundred percent confident that I’m maximizing my income. I don’t really know the cost of my investments. I’m not really sure if my advisor is a fiduciary all the time.” Fill in the blank. But then, the follow-up question is, “How do I remove friction to make progress? How do I do that?” I suggest you automate as much as possible and find an advisor. It doesn’t have to be Creative Planning, but find an independent, credentialed fiduciary who can run point and quarterback your situation in a way that aligns with your objectives.
As humans, we’re emotional creatures. And if we’re honest, when it comes to our money, those emotions can really get the best of us. It’s almost like we’ve got these two invisible forces sitting on our shoulders. On one side we’ve got greed, maybe the devil, a little bit, that’s the devil side of the shoulder, constantly whispering in our ear, “Go for more, more stocks, more real estate, more gains, yes, even more risks.”
And on the other side, I don’t know, maybe this is the second devil. This isn’t really the angel side either if we’re going devil/angels. We’ve got fear. And it’s pulling us back saying, “Don’t get too crazy. Reign it back a little bit. More conservative, let’s hold onto that cash. You just never know what could happen next.”
And because of this, managing money often feels like juggling those two voices, doesn’t it? And they’ve been with you for centuries. There’s this famous story of Isaac Newton, one of the greatest minds in history. And he couldn’t make sense of this. He was so intellectually smart, he still felt victim to greed and fear. See Newton, he invested in the South Sea Company, and at first he made a great return and he got out. But then, greed kicked in. He just couldn’t help himself. He couldn’t resist. He jumped back in right before the bubble burst and ended up losing most all of his money.
Newton later said, “I can calculate the motions of heavenly bodies, but not the madness of people.” Sound familiar? Think about it. If one of the smartest people ever to walk still succumbed to the impact and challenges of his emotions when it came to stewarding wealth, then we’re probably going to have our work cut out for us as well.
And that’s where today’s guest comes in. Joining me today is Dr. Dan Pallesen, Psychologist and Certified Financial Planner, Private Wealth Manager here at Creative Planning. Dan specializes in helping people navigate the emotional side of finance. How do your feelings of greed, fear, uncertainty cloud judgment and potentially lead to bad decisions? Dan not only knows the numbers, he’s a brilliant financial planner, but also understands how your brain works and why you do some of the things you do when it comes to your money. Dr. Dan, welcome back to Rethink Your Money.
Dr. Dan Pallesen:
Hey, great to be here, John. Not much that I enjoy more than talking about money and psychology, so I always love being on. I appreciate it.
John: Money and emotions, Dan, are like oil and water. How do you help clients make rational, thoughtful decisions with their finances in the midst of emotions?
Dr. Dan Pallesen: I think it’s really important to understand the source and the purpose of emotions. As a therapist, when someone would call me struggling with anxiety or depression, there’s some things that we can do to help calm ourselves, some diaphragmatic breathing and other techniques to help calm yourself. But I think we do a disservice when we jump over why that emotion is there. So as a therapist, it’s important to kind of explore the purpose of that emotion in that moment in time.
And I think it’s the same for financial planning. We can have a lot of anxiety around our money. And we can build out a plan and we can solve and show on paper you’re not going to run out of money. So there’s some things that we can show, but the anxiety is still there, the emotion is still there, and I think the financial planner does a disservice when we ignore the purpose of the emotion.
Anxiety is a very protective emotion. If we feel anxious, it’s because we’re sensing some kind of danger and we’re feeling anxious. We’re signaling to ourself that something’s wrong. And so, if we can get into that and understand why it’s there or almost appreciate its presence, then it takes the power away.
John: Yeah, I totally agree. Most impactful behavioral threat that you see, which is the biggest of all these?
Dr. Dan Pallesen: Well, I think it’s reacting in the moment. So it goes back to emotions. Anytime a behavior is a reaction to an emotion. With our finances, it tends to be the wrong thing. John, we’ve seen this time and time again. The market goes down a little bit, there’s a correction, someone panics. They want to move their investments out into cash on the sidelines, right? And then, inevitably the market recovers. In the moment it felt like the right thing, but over the long term it’s the wrong thing to do. And so, the worst thing we can do with our money and with our behaviors around money is let our emotions lead. If our emotions are unchecked or if we don’t understand the purpose of them or the source of them, then our behaviors are going to follow and they can really disrupt our financial lives.
John: All right, year-end is approaching and everyone’s checking their portfolio. Things have been pretty good this year so far. Why do we focus so much on wins and losses for a calendar year or some random interval that we make; maybe it’s the quarter or this month has been fantastic, and not the bigger picture? Why do you think that is?
Dr. Dan Pallesen: We’ve sort of been training ourselves to get on this annual or quarterly or semi-annual evaluation process since we were kids. I have a first-grader, we just had parent-teacher conferences. So we go in, meet with the teacher, she’s lovely. Scott’s doing great, and she pulls up his report card. And I’m thinking, “He is a first-grader and she already has this report card for first grade.” We have these things in front of us. When you’re school-aged, it’s classes and then you get the grade or the evaluation at the end. Or your first job, you get your performance review on an annual basis. So we’ve trained ourselves to check back in on these quarterly or semi-annual or annual cycles to evaluate how things are going. The financial world is a whole different world. The time horizon has to be much longer when we evaluate success when it comes to our investments.
John: Dan, why is it that people seem to regret many of their money decisions?
Dr. Dan Pallesen: We remember the losses and we feel them to a greater extent than the wins in our lives, whether it’s finances or relationships or sports, you name it. We remember the sting and the pain of that loss. And so, when it comes to our money, we may have made countless good decisions over time that we don’t even realize the impact of it. But that one mistake or that one investment that went down or the house that we lost in 2008 or whatever it is, I don’t mean to minimize these types of examples because.they really impact families, but it’s the loss that sticks with us. And you add the social comparison aspect of just the world that we live in and the visibility we have in other people’s lives and the comparison that comes out of it, and it’s so hard to just feel satisfied and grateful for the journey that you’ve been on without comparing to those around you.
John: Why is it so hard for us to not compare to others?
Dr. Dan Pallesen: I think it’s in our face. John, I haven’t been around for 2, 300, 400 years, 1,000 years, right? I would imagine this has been a problem for humanity all the way back to the first person who was walking. But what I see now is the advertisements, the social media that we’re exposed to day in and day out, the shows that we’re binge watching, the access that we have into other people’s lives through the media. We just see these elevated lifestyles, and it’s hard not to compare our own progress to what we see out there.
And again, it goes back to being adaptive. If the whole point of the human brain is to help us survive day to day, there is some value in looking at what your neighbor is doing. “Oh, my neighbor is gathering extra food for this upcoming winter. Maybe I should be doing the same thing.” So there’s some value in that. But fast-forward to today, I think it just brings so much more dissatisfaction than it brings motivation and helpfulness when it comes to social comparison.
John: Yeah, no question about that. Getting back to our emotions on buying low and selling high and that obviously this has been a fantastic year in the markets for 2024, most people are looking at their accounts and have probably done quite well. How can we keep our cool and stay disciplined in the midst of a really great time in the market?
Dr. Dan Pallesen: I think it goes back to having a good financial plan, John. We work with clients day in and day out where we build out the financial plans. And when I say financial plan, there’s a lot of different aspects to that, but specifically knowing what you and your family might need to be drawing from your portfolio over the next five to seven years, and having a general idea of what that is. And that number we want to make sure is protected. And the temptation in bull markets is to get even more aggressive or growth-seeking with some of the funds that really should be preserved and earmarked with some more safety.
John: Well, and I think it comes back to actually the last couple of things we were talking about: guard against those emotions by really playing your own game, getting back into your plan, “What are our objectives?” Not being a creature of the moment and not comparing yourself to others. Who cares if someone else got a slightly better return last year than you? If you’re comfortable with your risk and you know what your objectives are, and to your point, you have a plan and an investment strategy that synthesizes with that bigger plan to get you from point A to point B and you’re on track for that, let that guide you more so than those emotions. I think that’s fantastic. We all ideally in a perfect world would save more, we’d spend less, we’d invest more, we’d give more. It’s not easy to do. What’s the psychology behind that disconnect from your perspective?
Dr. Dan Pallesen: There’s been studies out there where they offer people, “Hey, we’ll give you a $25 gift certificate today, or if you’re okay with waiting a month, we’ll send you a $50 gift certificate,” so 100% return just by waiting a month. And more often than not, people choose that $25 up front because we kind of have a hard time understanding, “Oh, it’s 100% return if we just wait a few weeks.” So it’s this idea of over-valuating the present moment, so it’s this present bias. Seeking the rewards in the moment as opposed to setting our future self up for success. Spending more now because it feels good or saving less because we want more money to spend, right? Or not putting as much into our 401k because at the time we get our paycheck, we like seeing that bigger amount up front. We’re hurting our future self, but it’s this instant gratification and this reward up front.
John: The best everyday comparison is when it comes to our health. We don’t all walk around with eight packs. And it’s not because I can’t intellectually figure out how to do it; it’s because it requires me to sacrifice that delicious maple bar that we got for our kids, for our kids, by the way, not for us.
Dr. Dan Pallesen: No, of course, not for us.
John: For the kids on a Saturday morning, yeah of course, and go, “Well, no, this actually isn’t better for me.” But in the moment, it’s so good. It’s just delicious. And as long as we remain human beings and there’s money involved, we’re going to need people like you, Dan. So thanks for coming on, joining me on Rethink Your Money and sharing some of your wisdom with us today.
Dr. Dan Pallesen: Thanks a lot, John.
John: One of the questions I receive most often is, “John, how do I outperform the market?” I think there’s this hope, which is normal, it’s logical, that maybe, just maybe there’s a magic strategy that will help you beat the market. We all love the idea of finding that one trick, that one hack that’s secret, that’ll help us crush it every year.
But here’s the truth, and it’s a harsh reality. Outperforming the market consistently, year in and year out is about as rare as finding a $200,000 discount on a condo without anyone else noticing. And I’ll explain what I’m talking about. Let me paint you a picture. Imagine you’re in a 300-unit condo complex, and 15 of those condos are listed for sale or have recently sold. So the general price range of what your condo is worth if you go to sell it. You have the past sales data, you have the current listings. You know the market is relatively efficient. What I mean is if you try to sell your condo way above that range, it’s just going to sit there. And if you list it way below, someone’s going to come in and snatch it up before you even blink.
Now, when we transition over to the stock and bond markets, these publicly traded investments, they’re infinitely more efficient than my condo example. Every day, millions and millions of trades are happening between some of the smartest people on the planet, and both sides of every trade think they’re getting a good deal. There’s no mystery in the market. So trying to exploit an inefficiency, that magic stock, is like selling that condo for $200,000 more than it’s worth, while somehow being the only person who realizes that it’s overpriced, including finding a buyer who’s willing to do that. It’s not happening. And again, that’s a weak example relative to the market.
So there’s this hyper-efficiency where all knowable information is priced in and only new and unknown future information adjusts pricing. But beyond that, with the market looking forward as it always is, there are so many unknowns that exist. Think about your own life and trying to predict just your life over the next 15 or 20 years. Really difficult. Now look at billions of people on the planet and the billions of variables occurring over and over that impact markets.
It’s not that this is unknown, it’s unknowable. It’s not just about predicting the next recession or even knowing when some geopolitical conflict might cause volatility or might come to a conclusion, because once you bake that in, there’s always something else. Did any of us in 2018 anticipate Covid-19? No, it doesn’t matter how smart you are, that was unknown. Nobody knew. The same is true of the Great Financial Crisis. Now you might be like, “Oh, well that Barry guy, Steve Carell on The Big Short, he knew.” Okay, a couple people guessed and got lucky. Look at his history and performance since then. Or the dot-com bubble bursting or a terrorist attack or a trade war or inflation, whatever it might be. These are the kinds of events that make beating the market over a long period of time so incredibly difficult.
My suggestion, instead of chasing the impossible, accept that it’s difficult. Rethink your approach. So rather than trying to outperform, focus on what you can control: things like having a solid financial plan, understanding your time horizons, aligning your portfolio with your goals and staying disciplined. You can control how you react to volatility. You can control not making knee-jerk decisions because there’s an upcoming election. In fact, some of the best investors are the ones who simply control their behavior, not the market.
In addition to rethinking this notion that we can outperform the markets, there are other so-called common wisdoms: things you’ve been told, things you’ve read, things you’ve heard on the peripheral, like “Not sure where, but I’ve just always thought this to be true” that we need to rethink together. And today I’m going to walk you through a couple other common financial myths that might not be as bulletproof as you think.
This one makes me smile. “My portfolio is doing great, so there’s nothing more I need to do.” The reality is, if you look at your investment accounts, especially over longer periods of time, take the last couple of years for example, you’ll see things trending up. And it’s easy to figure that you’ve got it all figured out. After all, if your money’s growing, you must be doing something right. Right? If it’s placed with a money manager or an advisor, you might be thinking to yourself, “Well, I don’t probably need to reevaluate them. I have more money than I started with.”
But here’s the thing. Just because your portfolio is going up doesn’t necessarily mean that it’s optimized. Think of it this way. Let’s say your favorite sports team wins their last three games. Awesome, right? Fantastic. Would that mean the coach wouldn’t need to make any additional adjustments, or that the players don’t need to keep practicing? Of course not. Context matters. Just because things look good on the surface doesn’t mean that there aren’t areas for improvement, and it’s the exact same with your portfolio.
Recently, I had a prospective client who was heavily invested in small-cap stocks, a lot of emerging markets, a lot of international for various reasons. He thought he was crushing it because he was up 15% over a couple year period. “I have a million dollars, it’s at 1.15, I’m doing great. If it ain’t broke, why fix it?”
The problem was if you did a basic comparison of what did the S&P 500, a simple index that’s almost free, how did it perform during that same period of time? It annihilated his returns. It wasn’t even close, at which point he realized, “Oh, maybe I’m not maximizing my returns as well as I thought I was.”
And this idea of context mattering, it applies not just to our finances, but in life. My wife and I were in her hometown, Bismarck, North Dakota. This was a few years ago. And this restaurant we were eating at started bringing us these, I don’t know how else to put it other than tiny, tiny plates where you get about one bite of sort of an artsy type of food and then it’s gone. I was like, “Hey, this is pretty good, but I don’t get it. I’m going to need to go through a drive-through at Taco Bell on the way home just to be full.” And then, I realized that was the idea. They were called tiny plates, and you’re supposed to get 20 of them to sample a bunch of different things. I’m like, “Oh, okay. All right.”
You see, context shapes your experience of what’s happening. And the same goes for your returns. Don’t look at your returns in a vacuum. You might be making money or maybe you’re down a little bit and you’re thinking, “I’m doing terrible.” But actually, relative to your risk and what’s going on in the broad markets, it might not be that bad. You may need to rebalance. You might need to tax loss harvest. You might need to adjust risk or just review how your assets are allocated in general. Even in the event that you think, “I’m good because my portfolio is up in value.” And by the way, if you’ve been throwing darts the last couple of years, your portfolio is probably up in value. That does not also signal and correlate to your portfolio being as efficient as possible. I’ll say it one more time. Don’t just look at the numbers on your statement. Dig a little deeper.
Have you ever thought to yourself, “I’ve got until April 15th for taxes, so I’ll worry about it next year.” You’re not alone if you’ve said that. It’s the old, “I’ve got time” mentality. “Taxes? Oh, no problem. I’ll deal with that in April. If I don’t want to do it, then maybe I’ll just extend, give myself even more time.”
But here’s the thing. A lot of the most important financial decisions need to be made by December 31st, not April 15th. Waiting until April means you’re playing defense. You’re just reporting what’s already happened. It’s like trying to win a game after it’s already over by critiquing the final score. Great strategy. No, that doesn’t work.
The difference of being strategic and not is which direction you’re looking. Strategic means looking through the windshield, focusing on the future, strategizing what you can do today to minimize taxes down the road rather than just putting the right numbers in the right boxes or gathering all your tax documents, pulling up TurboTax, and reporting everything. That’s not strategic, that’s not proactive, and that is not tax planning. That is tax filing, which is completely different.
I had a prospective client come in this past March who was ready to make some moves. He explained to me that he wanted to max out his 401k, he wanted to make some Roth conversions, and throw in some charitable donations. Here was the problem. He missed the window for all of that by a couple of months. Roth conversions, you have to have those done by the end of the year. Charitable contributions, sorry, same thing. Maxing out a 401k the next year, nope. See, he was used to making SEP IRA contributions. He previously was a business owner and he was used to being able to make those contributions in concert with his filing deadlines. So he could even have beyond April if he filed an extension. No, that’s not how the 401k works. And Roth conversions, no. You can make contributions but not conversions.
And this is where the details really matter when it comes to taxes, really broadly your financial planning, but especially with taxes. It reminds me early in our marriage when I would be just cursing the sun because my wife would bring home another piece of furniture to build from Ikea that had 17,000 pieces. “Well, here goes my next night or two.” You know the kind. You know exactly what I’m talking about. They come with instructions that are basically a couple of drawings: a guy holding a wrench, a question mark with an 800 number to call. Clearly not going to be helpful. But if you don’t get every single detail correct, you have to go back. The piece of furniture doesn’t work. All of a sudden, you’re on one of the final steps. You’re pushing in one of the drawers that you just built. “Wait, why is it not? Oh, no. 17 steps ago I put that one piece on backward.”
It’s funny how missing just one small detail can turn the entire project upside down and taxes are no different. Miss the deadlines and you’ll be left with fewer options and a whole lot of missed opportunities. This Trump tax reform, think about this. It went into place in 2018. We’re in 2024. So a really good question to ask yourself is, “What have I done the last six years? What proactive tax moves have I made since we’ve been in the lowest tax environment we’ve seen in decades?”
It sunsets in a year. We’ve got $35 trillion of national debt. Who thinks taxes are going down over the next 10, 20, 30 years? So be proactive with your taxes. I don’t know if it’s retirement contributions, Roth conversions, structuring your business and strategizing to ensure that that’s as tax efficient as possible. Saving in the right places, investing in the right places so dividends that are taxable aren’t flowing through to your return when they could be stuffed away like a bond fund in a retirement account. I’m just listing to a few that are top of mind right now, but do not wait until April 15th or a week before to be that historian who is accurately reporting what already happened.
It’s time for this week’s One Simple Task, and that is to create a holiday budget. I know you’re like, “John, the holidays aren’t here yet.” Well, in my family they are. We’re already driving around our neighborhood looking at Halloween decorations. And our ever lights, those LEDs that are on your house all year round, I finally turned them back on. They are purple and orange. So in the Hagensen home, it is the holidays. But the expensive ones yeah, those aren’t quite here yet, but they’re coming fast. And if you’re anything like most of us, it’s easy to get caught up in the spending whirlwind of the holiday season. So before you start thinking about Black Friday sales or which gifts you’re going to get your kids, set a game plan. All right?
So here’s the idea. Sit down and be realistic about what you’re going to spend. Create a holiday budget that doesn’t require you to put money on a credit card or rack up more consumer debt. So many families, they dig a financial hole during the holidays by overspending, and then as a result, they start the new year already behind. I don’t want that for you in 2025. The stress, the debt, it’s not worth it. Instead, determine how much you’re going to spend now for the holidays and then stick to it. Having that discipline will make the new year feel so much smoother, and you’ll begin with your head above water. You’ll start with a good foundation. You can find this One Simple Task along with all others from 2024, we have one for each week, on the radio page of our website at creativeplaning.com/radio.
All right. Well, it’s time for listener questions. And as always, one of my producers, Britt is here to read those. Britt, I think we had one on October specifically. Let’s go there first.
Britt Von Roden: Yeah, for sure. So we have a question here from Mike in New Orleans who shares that he has heard of the September effect. But now he’s hearing of the October effect. So he’s wondering, John, should he be worried?
John: There have been a few major events that occurred in October that caused significant downturns in the market. So we’re talking about things like the Panic of 1907, the Stock Market Crash of 1929, Black Monday in 1987, and the downturn related to the 2008 Financial Crisis, it just got clobbered in October of that year. And since all of those events occurred along with a few others in the month of October, it’s caused some people to believe that October in particular is a bad month for the market and I probably shouldn’t be invested.
But here’s the key point. Those people are making an enormous leap. Correlation does not equal causation. You can find connections between just about anything. It’s like saying, “Hey, the last five times I’ve worn a green shirt, it’s rained.” Now did my green shirt cause the rain? Of course not. But because it happened five times in a row, I might be tempted to think, “Oh man, these are related.”
And the same goes for the October effect. Sure, there have been some bad Octobers, but that doesn’t mean you should be jumping out of the market every fall. The market’s highly efficient, and here’s something you want to keep in mind. With millions of smart participants on each side of the trade, if this were truly predictable, October was a bad month to invest, market returns would not be good, or in fact they’d be negative. That would all be priced into the market, which looks forward.
The truth is, being out of the market is often riskier than being in the market. Over time, the market trends up, even in October. So if you were to jump out of the market every fall, you’d be missing out more often on good months than bad ones. Nothing is certain in investing. There are no free lunches. The stock market’s made 10% a year for nearly a hundred years in part because there is risk and you’re receiving that risk premium, but play the odds. Investing is about giving yourself the highest probability of accomplishing your goals, and that means staying invested for the long run. Great question. All right, let’s go to Kelly in Iowa.
Britt: Kelly shares that she has been working on building her emergency fund for some time and understand its importance. She wants to know what key factors she should consider asking before she decides to use it so she can ensure she’s making the right choice when it comes to accessing these funds.
John: Well, an emergency fund is absolutely critical. It’s foundational to a good financial plan because it helps you remain out of debt. And I’ve heard people say, “Well, it’s just such a drag. I have this money sitting in cash and it’s not really earning anything. I need to go deploy it.” No, no, it’s not the highest returning investment certainly in your plan within a vacuum. But if it ensures that you’re never paying 20% interest on a credit card when something inevitably unexpected comes up along the way, then what really is its value? What is its rate of return? It’s significant.
So here’s the bottom line. Your emergency fund is for true emergencies. It’s not for a vacation, it’s not for upgrading your TV when you walk into Costco and they’ve got those amazing TVs and somehow they’re not that expensive. I’m telling you, they tempt me every single time along with the samples. Don’t even get me started with the samples. I love free stuff. I’m eating all kinds of things I’m allergic to and stuff that I don’t even like. It’s not healthy. My wife’s looking at me going, “What is wrong with you? You don’t even like them.” “It’s free. It came with my membership. Oh, kids, you’re not going to have one? I’ll take a second one of those. Is that all right? Can I have a second one?” I know I’ve got issues. Pray for me.
But I digress. That’s not what your emergency fund is for. It is circumstances where you have a large medical bill that’s not built into the budget or car repairs or you lose your job. And the key is, when you tap into it, aim to replenish it as quickly as possible. Think of that emergency fund as your safety net. It’s there to support your lifestyle. It’s there to protect you when life throws you that curve ball. A fully funded emergency fund, which by the way is somewhere between three and six months of your expenses, generally closer to six months if you’re a solo income household or one spouse makes significantly more than the other, and maybe closer to three months if both spouses work and have similar incomes. And then, outside of the emergency fund is where you save for shorter-term goals like, “I want to buy a new car in two years” or you do want that awesome TV from Costco.
All right, Britt, we’ve got one here in my backyard of Phoenix. Let’s finish up with that question.
Britt: Yep, we do. And it’s a very timely question from Brent who shares that he’s been tuning in to ensure he’s prepared for year-end, so love that. He says that he wants to make the most of the end of the year and get a head start to 2025. His question for you, John, is if there’s one single most important thing he or actually really any of our listeners need to do above all else, what would you say that is?
John: Well, Brent, if you’re serious about getting a head start, the single most important thing you can do is to get a detailed financial plan. You want a written comprehensive plan that covers all aspects of your financial life, so your goals, your taxes, your investments, your estate planning, your insurance, everything.
Now I know I sound like a broken record every week on Rethink Your Money because that ultimately is the baseline for all financial decisions. Most other questions become answered within the context of that detailed financial plan. Most people, even that have $1 million dollars plus invested and look at their asset allocation and their pie chart and their investment returns don’t have a true comprehensive, what I would define as a certified financial planner, as a financial plan.
And here’s the real key about that plan. Don’t just go anywhere to get the plan, because many financial plans are a duly registered advisor or broker or insurance salesman building a plan that weird, all roads lead to this product sale that generates a high commission. “I ran your plan and you might run out of money, so let’s buy this long-term annuity that pays me a 7% commission in three days.”
So all financial plans are not created equal. Find an independent fiduciary who isn’t charging commissions, who isn’t selling proprietary funds, who isn’t getting third-party kickbacks, who’s focused and legally held to a standard of care that places your interests ahead of their own at all times. You want to know that every single dollar that you’ve saved is purposeful in its strategy and its intention.
Now, the fact that you’re even asking me this question, Brent, tells me that you’re probably ahead of most people. You probably do have a plan in place. So I recommend for you, get a second opinion. Go find a certified financial planner, ask them to review what you’ve got. Maybe everything looks great, or maybe there are a few adjustments that you can make to improve your chances of success. Either way, that second opinion will provide you increased peace of mind.
Thank you for those questions. And if you have questions about your personal finances, I’d love to hear from you. You can submit those by emailing me at [email protected].
Let’s talk about why any of this even matters. Why go through the trouble of getting a financial plan in place or listening to a show like this so that you have more money in an account or you reduce your taxes or more effectively and efficiently gets to the next generation. Why does any of that even matter?
Well, there’s a quote I love from Eleanor Roosevelt where she said, “It takes as much energy to wish as it does to plan.” Think about that for a moment. You can sit around wishing for a better financial future. Or the alternative, you can actually start putting the pieces in place to create one. You’re not in the back of the airplane holding onto the tail just hoping you get to your destination. You are the pilot.
This is a lot like exercise. You might dread going for a run or at least kind of think, “Ah, it’s going to be tough.” The idea of lacing up your shoes and hitting the pavement sounds like the last thing that you want to do. But once you’re out there, if you’re like me, once you finish, you feel amazing. The endorphins are flowing, my stress is relieved, I’m mentally clear. Essentially, the work that you put in, it feels worth it when it’s done.
The exact same thing is true when it comes to your money. It’s easy to think incorrectly by the way that a plan or putting off decisions is somehow going to save you energy. It’s not. In fact, making a plan often makes life way easier, not just in the long run, but sometimes even in the short run.
Think about setting up automatic bill payment. If you’re still writing checks, licking a stamp and licking your envelope and addressing it, why would you do that? It’s so much harder. You set it up, it takes a little bit of work initially. You have to create a login, and then you’ve got to verify your email account, and then you got to set up your payment account. All of these different things that take a little bit of time, maybe a little more than licking that envelope and mailing out the check the very first time. But then suddenly, you’re not scrambling to pay things on time every month. It’s all set up. It’s automated. You spend a little time creating a budget, and now you’re not stressed out on how much money you’ve got left at the end of the month.
Here’s another example, the most extreme one that’s front and center anytime I travel. A few years ago, I finally got my TSA pre-check. My wife and I went and did it. I think it was $50-$100, and you would have it for five years. It probably took an hour of our time in total. So a little time, little effort to go through the process, had to be proactive. But now for five years, every time I travel, I don’t have to take off my shoes. I don’t have to take a laptop out of a bag. How nice is this? It’s amazing. I took one small proactive step, and it continues to save me time and stress every single time I travel.
And again, this is the same principle with your money. Set up a financial plan right now. I don’t know if your priority is retirement, tax planning, or investment efficiency, that budget for the holidays I just mentioned, figuring out where you should be saving money. Can you increase your retirement income if you’re already in retirement?
But I’m telling you, this can save you stress down the line, and most importantly can help you achieve the things that really matter to you. Whether it’s more time with your family or less financial stress, maybe a combination of the two or the ability to retire when and how you want. I’m guessing that you’ve had some tough times in your life, you’ve battled through some adversity. Maybe it was the loss of a loved one, a health crisis, job loss. Life can be hard sometimes. It’s not easy. And financial success isn’t always easy. It’s not a straight line up and to the right for most people. And that’s why planning ahead and being proactive can make it a little easier to handle those inevitable curve balls that life will throw at you. 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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