In this episode, we’re covering strategies to help you work toward achieving financial independence, no matter where you are in your journey. We then discuss the Federal Reserve’s upcoming rate cut and provide three money moves to consider beforehand. Dr. Dan Pallesen also joins this episode to discuss behavioral finance and routines in an interview you won’t want to miss.
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 your host, John Hagensen, and on this week’s episode we’re talking about the one thing that we all strive for, financial independence. Whether you’re still working toward that goal, or you’ve already achieved it, I’ll look at what strategies support whichever phase of the journey you’re in. Also, the three money moves you can make before the Federal Reserve’s rate cut, and my conversation with Dr. Dan Pallesen on the value of routines. Now, join me as I help you rethink your money.
Well, the big news of this last week, was Fed officials signaling that they expect to reduce their benchmark rate once in 2024, and four additional times in 2025. Now, I should have prefaced that was the big financial news. Clearly, there were all sorts of other big news when looking outside of finance, like a presidential candidate nearly being assassinated, as well as one of the more historic announcements of a sitting president declining to run for reelection. But everything from private student loans, car loans, mortgages, credit cards will be impacted once the Fed starts lowering interest rates. Before I provide you with three practical money moves ahead of these lower rates, I want to begin with my regular public service announcement as to why it’s dangerous to base your big picture financial moves, your personal finance strategies on any sort of forecast.
If I tell my wife that we are going to have a date night, and then I cancel it, and then I do the same thing over the course of several years, countless times, at what point does she stop expecting a date night. Even when I tell her it’s going to happen, at some point she says, “Sure, buddy. Yeah, I’ll get right on buying that cocktail dress for our date that isn’t going to happen.” At this point, that’s kind of how I see the Fed announcement. Remember the six rate cuts we were going to have in 2024? Have you ever thought about the Federal Reserve and its role within our economy? Let’s take a quick dive into it, and don’t worry, I’ll keep it high level and I’ll be quick.
The Federal Reserve, or the Fed as we like to call it, was created back in 1913, so been around for a little over 100 years. It came about because the US needed a central bank to stabilize the financial system, which was at the time, in the early-1900s, very unpredictable, very chaotic, with banks failing left and right. Essentially, Americans were losing their savings, and losing faith in putting their money at the bank.
I mean, this time period, along with the Great Depression, is why you had that generation, even in their older years, cutting holes in their sheet rock and hiding cash, putting it under the mattress, burying it in the backyard. There are reasons that those expressions exist. The main job of the Fed is to manage the money supply and interest rates to keep the economy stable. But here’s something you might find surprising, the Fed is packed with incredible brainpower. It consists of about 400 PhDs. These are some of the smartest economists around, but even despite all those smarts, and their ability to manipulate the money supply, they’re really inaccurate. It shows just how dynamic the economy is, like how many thousands of variables that are unknown, impact outcomes. So this isn’t a direct knock on the Fed, it’s an example of how tough it is to predict the economy or the stock market.
So the next time you hear someone making bold predictions about where the market is headed, please, just chuckle. Say what my wife would say in the canceled date night example, “Sure buddy. Got it. I’ll get right on selling my large cap stocks and putting them in cash. Yeah, I’ll rotate entirely into small caps, or private investments.” But with all that to say, if rates do in fact come down, and inflation is cooling, what should you be thinking about with your life savings? Number one, sort variable and fixed-rate debt. With this rate cut, the prime rate will lower too, as will the interest rate on variable rate debt, such as credit cards, adjustable rate mortgages, and some private student loans, which would be a good thing. It would reduce your monthly payments. This would be especially helpful for those carrying credit card debt. We know that consumer debt kills financial success, especially when interest rates on those credit cards are at record levels.
Household debt is also up. When looking at debt for the American consumer, here are the categories: mortgages, which are at over $12 trillion, by far the largest, followed by auto loans and student loans, which are almost tied, little bit over $1.5 Trillion. So a huge dropoff, as you’d expect, between the amount of debt out there on mortgages and the next category, about eight times as much. And this is one of the biggest reasons why we, here in America, have come out of the pandemic in a better situation than other countries. Our mortgages are fixed-rate, and that’s unique, just locking in a rate for 30 years, very unique to America. Imagine if all $12 trillion of our mortgage debt was bouncing around on variable rates, and all of a sudden your house payment was twice as high as it was three or four years ago, it would certainly impact consumer spending.
So here’s my tip, rather than wait for a small adjustment in months ahead, look to switch right now, to a zero interest balanced credit card. If you have credit card debt, they’re out there, they’re available, consolidate and pay off high interest credit cards with a personal loan. Second money move you can make ahead of likely rate cuts, lock in your savings rate. Just discussing this with a family member who said their bank called them because they had a fairly high balance in their checking account, and offered to sweep it into a 4.4% interest high yield savings account, and that’s certainly better than leaving it in an account earning next to nothing, especially in this interest rate environment. But I would take that a step further, because these lower interest rates will hurt savers. It’s called reinvestment risk. You have no assurance that that rate is going to stay in force, which is the same benefit to variable-rate debt such as credit cards.
You benefit from that as a consumer, but if you’re a saver with a variable rate that you expect to go down, obviously it’s the opposite, it hurts you. So I suggest you look to lock in some of these higher interest rates for a longer period of time. So sort your variable and fixed-rate debt, understand the differences, lock in your savings rate for a longer period of time. And the last tip, put off large non-essential purchases. I mean ultimately, this is one of the ways the Fed creates the oft-mentioned soft landing. How do we cool inflation without spiking unemployment and causing a significant recession? Well, you hope that people slow on some of their spending, especially on high borrowing cost items like a home or a car, and as you see that data coming in, you begin lowering rates. As the saying goes, generally inflation cools, because the fix for inflation and higher prices, are higher prices. We stop spending as much money when we think things are too expensive. So timing your purchase to coincide with lower rates can save money over the life of the loan.
One goal in personal finance, year after year, in every single survey is do I have enough money to not run out of money? Essentially, am I financially independent? Now, many of us think of financial independence as simply having enough money to retire, but it’s so much more than you leaving your job and just riding off into the sunset. It’s about planning. It’s about transitioning, and making lifestyle changes that align with your personal goals and your personal values. So how do you know if you’re financially independent? Have a plan and run the projections. Of course, there will be variables over the coming decades. Of course, those projections will ultimately be wrong, but you have to start somewhere. I define financial independence as you being able to do what you want to do, when you want to do it, with whom you want to do it, for as long as you want to do it.
Basically, you’re not relying on anyone else, namely a boss, a customer, a paycheck, to support your life. So the very first step in seeking financial independence is to figure out if you are on track, it’s the star on the map at the mall you’ve never been to, that says “You are here,” but that’s helpful before you start heading right or left, when my wife goes to smell all the candles in Anthropologie. I’ve met with literally thousands of people going through this process over the course of my career, and the common reaction is, “Wow, I’ve never seen this before. This is really helpful.” A lot of firms like us at Creative Planning, will build that for you at no cost. So if you’d like to get this, it’s absolutely available, and it’s not just from Creative Planning that that’s offered. Also a great question to have answered, is what rate of return will you need to reach financial independence at that defined date? How much will you need to save to hit it?
And here’s what’s really neat about that, it might even mean that you can decrease risk, or you can not work as many hours, or take a job that requires you to be away from your family more and travel more, because it makes you a little bit more money that you don’t need because you’re on track, or you’re overfunded. Maybe conversely, the negative side of this is you see in advance, I can’t invest this conservatively unless I want to work into my 80s like US presidents do. You see, personal finance is far more personal than finance, but it’s impossible to strategize for financial independence without first knowing your current location and path. And one of the great benefits once you are, in fact, financially independent, is that you have excess to advance other important priorities in your life.
See, the biggest challenge that I found once you are, in fact, financially independent, as many of our clients at Creative Planning are, the challenge can be to actually start spending money. The people that achieve the greatest excess, and of the most financially independent, often got there by established habits of spending a lot less than they’ve earned. But it’s helpful if you get crystal clear on your priorities, because money’s just a tool. That can help you change your mindset, because if you’re taking those withdrawals in the context of things that you really care about, and you have a great advisor updating your plan and reaffirming that you’re not going to run out of money, you’re still financially independent. Even if you pay for this vacation for your whole family, you’re golden, here are your projections. It’ll get easier and easier as that spending pattern is normalized. At the end of the day, you want your money to lower your stress, lower your anxiety, and knowing that you have enough, or a plan to get there, is one of the best ways to achieve it.
Have you ever thought about how much your routine ultimately shapes your success or failure? It’s kind of wild when you break it down. I used to think routines were just boring, kind of repetitive things we do because we have to, and some are, but then I realized they’re really the backbone of our lives. You are where you are today, due to the result of the millions of decisions that you have made, many of which are driven by those routines. If you’re like me, some routines are positive, some are not positive, and in different seasons of life, they may be easier or harder to accomplish. As Americans, we don’t always have the healthiest routines. We drink too much, we don’t sleep enough, and on average, spend seven hours per day on a screen. So what does all of this mean for you, and how do you make improvements on it? To answer that very question, and to discuss this further, I’m joined by a special guest, Creative Planning wealth manager Dan Pallesen is a doctor of psychology and a certified financial planner. Dan, thank you for joining me back here again, on Rethink Your Money.
Dan Pallesen: Ah, so great to be back, John. How are you doing?
John: I’m doing well, Dan. Well, this is great timing for our discussion, because I have a bunch of kids, I know you have a couple at home, and they’ve been out for the summer, and I’m off my routine, and I need to figure out how to get back on it. Because whether it’s our lives in general, or how we handle our money as investors, we need healthy habits and positive routines.
Dan: Oh, my goodness, this is so timely. And I don’t even think we have to say it, I love my kids. I know you love your kids, but my kids’ school starts pretty early, so they’re back in school now. So I am back in a routine, and oh, my goodness, it is good for everybody.
John: Yes, it is.
Dan: Everybody, my kids included.
John: How can routines aid in their success?
Dan: We tend to wake up around the same time, do the same thing, eat the same type of breakfast, brush our teeth the same way, drive to work in the same route, and they’re really important, and it goes back to our brain’s capacity to make decisions throughout the day. If we had to mindfully choose every single thing in front of us, it would overwhelm us, we wouldn’t get anything done. So routines are automatic, but also really valuable, they help us get through the day. A good routine is just that, it brings about really good outcomes, and a bad routine can bring about really bad outcomes. What I’ve explored with my financial planning clients, how are the routines, or what are the routines that are bringing value to financial outcomes?
John: But you make an important point, because if you’re not careful, because many of these routines are automated and on autopilot, it’s easy to fall into some negative routines as well. Before you know it, you’re going to bed at midnight because you’re bingeing on Netflix, and now you’re not getting up in the morning to do your workout because you’re too tired, or you’re overspending and running up money on a credit card. And all of a sudden you wake up one day and say, “I’ve gotten in some bad habits.”
Dan: Absolutely. And that’s the whole thing about an action, or a decision, it’s rare that you feel the direct outcome in that moment. Staying up late to binge Netflix one night, you’re a little tired the next day. But no, you’re absolutely right, over and over and over again, when it becomes a routine, and when it becomes a system or a habit, we can see the negative outcomes of that. Back to finance, clients that for the most part, are doing great, they’re working hard, they’re putting money away, but part of their routine is maybe every evening they’re consuming financial news, and a lot of it, right?
John: Well, that’s really good for peace of mind. You can figure out all the right stocks to buy, and when to get in and out of the market, and which way it’s moving next, and what’s happening with the economy, just spend all that time, all day, watching CNBC.
Dan: Yeah, they have that informational advantage that’s not available to anybody else out there. No, but you watch this, maybe you’re interested, you watch it a little bit here and there. You may not act out of it, but when you’re watching it, consuming it every single day, you’re much more likely over time, to tinker with your investments, with your accounts. And we’ve seen study after study show that the more you tinker, the more unfavorable your outcomes are. And so that’s a really good example of a small act that becomes a habit, that then can turn into some pretty detrimental impacts on your finances.
John: We don’t often feel the negative impact immediately, in some cases, even for several years. And this is classic in the financial world of compound interest, we understand how that works. The same is true with our decisions, those that we make today, what’s the compound impact 20 years from now? In fact, this past Sunday in church, our pastor had a quote that I pulled out my phone and jotted in my notes because I thought it was so good, and it applies to what we’re talking about today. He said “Sin would have far fewer takers if the cost was paid upfront.” Same is true with our money. We wouldn’t make the same choices today, myself included, if immediately you felt the full effect of it. So how can we counteract that, Dan?
Dan: This might be my favorite quote of all time, James Clear, Atomic Habits, and he says, “You do not rise to the level of your goals, you fall to the level of your systems.” And to your point, we don’t get that immediate feedback. If I go work out, I don’t then take my shirt off right after the workout, and see ripped abs. And if I did, and if anyone else did, they’d be working out all the time, you couldn’t get people out of gyms. Everyone that I work with have really lofty goals, or admirable goals for their lives, for their retirement, for their finances. Everyone wants to do well, so it’s not a goal problem, it’s a systems problem. We’re not great at creating systems, and to your point, John, it’s because we don’t have that immediate feedback. But getting into those routines, those systems that give us a little advantage every day, really, really adds up.
John: Oh, I love that. I’m going to say it once more just to make sure no one missed that. And by the way, fantastic book, Atomic Habits by James Clear, “You do not rise to the level of your goals, you fall to the level of your systems.” That’s brilliant. Dan, let’s transition over to the impact that retirement has on disrupting routines. We spoke about our kids being out of school, and it’s only a couple of months, but that certainly disrupts the normal flow of a family. Retirement though, isn’t a couple of months, it can be 30 years. And from the normal cadence of life of the previous few decades, it’s very different. How do you see that as a routine disruptor, and how can retirees not only guard against that, but thrive in that new dynamic?
Dan: I like how you asked that, and I like how you threw in that word at the end, thrive, because there’s this buildup to retirement, especially if someone has a retirement date. And what happens is there’s a lot of time freedom, abundance of time, but you lose the routine. A lot of people lose the work, that added value it added to their identity. And so when they retire, yeah, they have more time to do the things they want to do, but they start to lose the sense of who they are. So social psychologists, and other psychologists, have run a lot of studies, and basically, we’ve boiled wellbeing, or thriving, down to three areas: pleasure, connection, relationships. And then the third one would be meaning or purpose. And in retirement, a lot of people focus on pleasure. When I retire, I’m going to go travel, I’m going to hit my bucket list items, I’m going to golf, I’m going to do all these things that I want to do. I’m going to play pickleball.
So they’re excited about the pleasure, but they lose the routine that has brought about relationship and connection to coworkers, but also losing your identity and connecting to something larger than yourself. What I see in retirement as the most important thing to do, is to build a routine where you are intentional about maintaining connections and relationships with others, and also pursuing something greater than yourself, whether this is spiritual, or part of your community, or making sure that what you’re doing a little bit, every day or every week, is adding to your sense of, not just pleasure, but connection and purpose.
John: You are absolutely right. There’s such an emptiness. I’ve seen it firsthand with clients, they love to golf, but once they’ve golfed six days per week, for two years straight. Now, I know, I digress here for a moment. You and I love golf, and we have a bunch of kids and other responsibilities that don’t allow us to play as much as we would like. So in a way, it sounds amazing, right? But even the most avid golfer, and I’m just using golf as an example, insert whatever else in here, you oftentimes wake up a couple of years in, and think to yourself, “I feel a little unfulfilled even though my handicap is dropped. This isn’t providing me with a satisfaction that I thought it would when I imagined retirement.” And I’ve seen it create anxiety, and even depression, due to that lack of purpose.
I remember seeing a quote from Will Smith in his biography, where he said “I was unhappy, but I thought it was because I wasn’t rich enough and I wasn’t dating the right people and I wasn’t quite an A-lister at the level that I wanted to be.” And then he said, “You want to get really depressed, achieve all of those things, and have everyone around you telling you that you’ve reached the summit. And you look around and you’re still unfulfilled, you’re still not happy, that’s when depression really sets in.”
And that can happen in retirement, because you’ve delayed and delayed all of this gratification, saved money to provide for financial security, and then you get in retirement, and you’re six months in, or you’re a year or two in, and because you’re seeking pleasure, which I think is very common in our society, it’s not surprising to me at all, that people wake up and think to themselves, “Isn’t there more?” And then they sit around with all this additional time that they weren’t used to having in their routines, and they talk about the good old days and the craziness of raising kids. It’s just another reminder to enjoy every season because each has its pros and its cons. And finding healthy routines that advance the purposeful meaningful parts of your life, is really where you’re going to find ultimate peace. So specific to routines, Dan, how can people improve them?
Dan: Work backwards. If we’re playing with this idea that the good life includes pleasure, connection to others, and connection to a greater purpose, then examine what are you doing every day, and the things that you’re doing, are they enhancing one of those areas? So back to the easy example, that in retirement, a lot of people naturally pursue the pleasure because they put it off, but what are you doing on a daily, or weekly basis, to increase your connection. When you retire, are you still calling the friends, the colleagues that you’ve made along the way, and keeping that connection there? When you get in the car to make your coffee run in the morning, in retirement, are you shooting out a text, or calling someone because you have some time? Again, doing that one time, it might feel okay. But creating the habit of intentionally connecting with others, or joining an organization, or joining a church that is alignment with what you believe, these are the things over time, that can really increase and enhance your wellbeing, especially in retirement.
John: That’s great. Be intentional, because in retirement, it takes more intentionality, due to the fact that you likely won’t have as many organic connections and opportunities at interactions. You’re more isolated. And to your point, build that into your routine. I love how you said that in a way that’s doable and repeatable over time, to maximize true joy. These are great tips, fantastic to reflect on the value of our routines, even the ones that we’re not paying attention to, and the impact that they have, either positive or negative, on our money. Thank you for sharing your wisdom, Dan, as always, with the listeners and myself, on Rethink Your Money.
Dan: Yeah, thanks John.
John: One of these lines of conventional thinking that I heard this past week, is that you should always pay your bills first and take care of your necessities, and then whatever is left can go into savings. Now, it’s not entirely wrong, but let’s rethink this together, approaching it from a different angle. How often do you hear about self-care? There’s this big push, which overall is great, to be more mindful of taking care of yourself, whether it be physical or emotional, mental, stress, going to counseling, doing the work. You hear it referred to, “Hey, get a massage or go get a facial, do a cold plunge, meditation, growing spiritually, having mindfulness,” which again, are all great things. And maybe I’m overrating the personal finance role in your peace because I’m a financial planner and that’s the world that I live in, but I’m convinced one of the number one ways to take care of yourself, is to steward your finances well.
Almost nothing causes stress like intuitively knowing you’re in a bad financial situation, buried in debt, spending more than you make, not having enough saved, no emergency fund, whatever it might be. I know that in my past, when I was broke and a newlywed, it was stressful. And that’s why even though I think Dave Ramsey’s investment advice is often very suspect in some of the assumptions he uses for withdrawal rates and assumed rates of return and asset allocation, I don’t agree with. But his Financial Peace University, helping people budget, get out of debt, prioritize their saving over their spending, was named perfectly, peace. And one of the easiest ways to gain peace, is not by supporting your lifestyle, and then saving what’s left over, that almost never works. Instead, I suggest you adjust the order of operations.
Picture a pie chart displaying the various uses for your money. Now, whether you’re Elon Musk, or you’re making minimum wage, there are only five slices to the pie. You can either spend money, save it, give it, or you owe it, either in taxes or to creditors. Those are the five uses, that’s it. So let’s look at the typical American. They pay their taxes, hopefully, and their creditors, because they don’t want their wages garnished by the IRS, and they don’t want their family evicted, living on the street, so most people take care of those things at a minimum. Then what’s left is used to support their lifestyle. At the end of all of that, if there’s anything left over, they save it. And if there’s anything left over after saving it, they look around, and say, “Who else could I help? Where could I give money?” There’s one huge problem with this order, lifestyle will consume pretty much everything if you’re not careful, and that’s not just for low or middle income earners.
You can be making a half a million dollars a year, and have almost nothing left over to save or give, if you are not mindful. So here’s the better order for financial self-care, after knocking out what you owe in taxes, transition over to debt, but attempt to get that slice as small as possible over time. You see the pie is only so big, and all of these pieces of the pie, are competing with one another for your dollar. And debt mortgages your future, it encroaches on your giving and your saving and your lifestyle. So after you’ve minimized debt payments, or gotten rid of them entirely, you’ve taken care of that, now you’re onto step three, which is where I want you to swap the order entirely.
Don’t start with your lifestyle, plan out your giving. That’s the next step. You say, “Well, how is that going to help me have more peace financially?” The answer is that nothing will break the power of your money, and the stress associated with it, like generosity. Nothing else signals to your brain that you are okay and you have enough, like helping others with your resources. Next, automate a savings plan that is aligned with your broader financial priorities. And then here’s the key, here’s the big difference, with whatever is left over, build your personal budget and lifestyle to fit within it. I caution you, this is counter-cultural. This is going to look weird to those around you. This is going to potentially feel weird for you. And if it does, you’re on the right track. Do you know the percentages of your pie chart? Do you know exactly how those five categories break down in your life, and what is your order?
My next piece of common wisdom, it’s a very common one, everyone else is doing it, so I should too. And one of those money moves involved suggestions around fixed and variable debt. The $12 trillion of mortgage debt is a category in my mind, entirely of its own. It’s oftentimes fixed for 30 years, it allows you to have stability with your family formation. Most people can’t save up a half million dollars, and then pay cash for a house they’d be renting for decades. That’s different. The 42 million Americans with student loans that have an average balance of over 30 grand, that account for a total $1.6 trillion, well, even depending upon the unique situation, that may make sense. You’re going to have to go into debt unless you have wealthy parents to get through medical school, that might be a worthwhile investment. Now, obtaining a degree from an out-of-state, or private school in underwater basket weaving, and taking on six figures of debt, probably doesn’t make economic sense, so that category is a little bit more varied.
But how about the next category that’s virtually tied with student loan debt, auto loans, also $1.6 trillion of total auto debt across our country. The amount of $70,000 SUVs cruising around the road, that are driven by someone who borrowed $65,000 to buy it, it’s really suboptimal, and hurts financial independence, which is the overarching theme of today’s show. Then you have another $1 trillion-plus of consumer debt, like credit cards, which universally, we agree that’s a great way to crush your financial future and potential for independence. Definitely, don’t be making choices that look like others if you want to have financial success. The median net worth in America is $192,000, and that includes, by the way, home equity, which isn’t readily available. So let’s just suppose it was, you could tap the entire net worth. At a 5% withdrawal rate, you could drive about $750 per month of income.
Can you live on nine grand a year? Of course not. It’s not enough saved. Speaking of following the herd, we saw the tulip mania in the 17th century, and more recently, a more modern day tulip mania were these NFTs and random celebrity-endorsed cryptocurrencies that are unsurprisingly worth nothing mostly today. But less obvious herd stampedes were things like over concentrating into tech in the early-2000s, before the dotcom bubble burst, and then the NASDAQ dropped around 80%. Or borrowing at high leverage in 2007, to acquire eight more rental properties. And right now, we’re in a similar, maybe less obvious situation, with tech leading the way, a high concentration of well-known household names, accounting for substantial portions of the market returns. While international and small cap, and other asset categories and sectors, are getting lapped over the last 14 years.
The herd is moving into US, but remember, there’s one massive detriment to following the herd, the herd always operates on a lag. The market’s forward-looking, tax strategies should be proactive and strategic, looking into the future. You win by being ahead of the herd. You want to be three minutes in front of the 10-car pile up on the freeway that delays traffic for two hours, you don’t want to be behind it. And so to accomplish your goals, you’ll have to do things differently than the herd, and that’s counter-cultural, that’s counterintuitive. It’s against our human nature, which finds safety in numbers. But just because everyone else is doing it, so you should too, now, that’s an idea that you should rethink.
Does earning a high salary make you wealthy? Financial author Morgan Housel says that wealth is what you don’t see. See, there’s a big difference between being wealthy and being rich. A high salary is about how much you earn, while wealth is about how much you keep and grow. Being rich is reflective of your cashflow, like your own personal P and L, wealth is about your balance sheet, assets and liability, and those two things are very different. According to the personal finance site, SmartAsset, what makes someone wealthy can vary widely. For example, if you have $1 million of liquid assets, you’re generally classified in the cohort of high net worth. Now, to be considered very high net worth, you need assets ranging from five to $10 million. And if you’d like to be considered ultra, ultra high net worth, that would require $30 million or more. These figures underscore the subjective nature of our financial classifications.
Frankly, by the way, they don’t matter at all. It’s kind of interesting to look at, but I’m not sharing those numbers because they’re constructive or actionable for you. But when it comes to being rich, let’s establish the income baseline first. $71,000 per year is the median household income in the United States. Now, to be in the top 20% of all Americans, you need to almost double that number, and earn $130,000. So if you make, between you and your spouse if you’re married, north of $130,000 a year, you are in the top 20% in terms of income, in terms of being rich. Now, you might make $135,000 and live in the Bay Area, and say, “I don’t feel rich, John, at $130K.” But spanning across the entire country, that puts you in the top 20%.
As I alluded to, this varies dramatically from state to state. If you are in Mississippi for example, you need only $100,000 to be in the top 20%. If you’re in New Jersey, you’d need to nearly double that. What about the top 5%? I know you’re wondering, “Am I in the top 5%?” You’ll need a lot more, because the percentages skew exponentially due to the massive wealth and income disparity. And by the way, I’m using median numbers, not average. Average numbers are even much higher, because now you have to factor in Zuckerberg’s billions into the equation, and all the concentrated wealth at the top pull up the numbers. So median, which is simply the middle point of a line of people, that’s a more useful figure. But even the median, if you’re in Connecticut, to be in the top 5%, you need $600,000 of income, and that’s not to be in the top 1%, that’s to be in the top 5%.
Now, maybe that discourages you a bit. You’re not making a million dollars a year. I’m not in the top 5%, maybe not by that comparison, but as Americans, we’re incredibly wealthy and incredibly rich compared to the rest of the world. Consider this, the median net worth in the world, so that middle point of wealth distribution among adults, according to UBS, is 7,000 US dollars. By the way, I wasn’t talking about annual income, that is net worth. If we’re looking at income worldwide, it’s only about $1,000, that’s it, $1,000 per year.
So back to you, looking at this through that lens, if you make $41,000 or more per year, you are in the top 3% of all income earners across the entire globe. America is not a perfect country, but wow, how blessed are we to have the opportunity, from an economic perspective, to be a part of the most prosperous nation in the history of the world? So comparing yourself to hedge fund managers in the Hamptons, or your wealthiest family member, you might not look so hot. You might feel a little discouraged. But you consider your place in the financial line with a family in Papua New Guinea, you’re in phenomenal shape. And this is yet another great reminder that your contentment and your peace of mind, broadly in life, but more specifically in this case, around your financial situation, will be found far less in your circumstances, and far more in your perspective.
Did you participate in Amazon’s 48-hour Prime Day event? If you did, you contributed to a record setting $14.2 billion in spend. It’s time for this week’s one simple task, where I’m not focused on the record sales number, but rather what the ripple effect of that will be, returns. Millions of people will receive millions of items, that even though it had a five-star review, it isn’t what they want. I’m convinced by the way, that my mother-in-law returns more items in a 12-month period, than I’ve purchased, probably in my entire life. I hate returning things, I despise it. And I’m feeling a little better about myself, and you should too if you’re in the same camp, because you’re not alone. In fact, I ordered something for $12 a week ago on Amazon, couldn’t use it, but due to my schedule and where the closest UPS store was, it’s going to take me 45 minutes of my day, and probably more than $10 in gas to return this item. And so I still have it, and it will sit in my garage and accumulate, until at some point, I do spring cleaning.
Taking a page back from my interview with Dr. Dan Pallesen earlier in the show, make returns part of your routine, that is this week’s one simple task. In fact, in a recent study, 50% of people said they would rather give things they bought, away, like just donate them, than making a return on an item that they don’t need. 36 said they’ll keep them as a backup, and 29% said resell them. But think about how much money that could be costing you, the efficiency and ease of ordering online, and just hitting purchase, one-click ordering, shows up two hours later on your doorstep, tends to leave us with items that we don’t need, we don’t like, or something completely different than what we originally thought.
So again, get in the habit and routine of returning items you don’t need. Maybe it’s just once a month. So in my example, it wasn’t practical to return that item. Set it aside until you have a few other items that equal a higher dollar amount, and find a time to handle your returns before the window closes. All of 2024’s one simple tasks are listed on the radio page of our website at creativeplanning.com/radio if you’d like to reference back to them.
And it’s now time for listener questions. Britt, one of my producers, is here to help. Hey, Britt, who do we have up first?
Britt Von Roden: Hey, John. Up first, we have Morgan from Washington, and she’s wondering how do you choose your client’s investments?
John: It’s a great question. So a lot of what you’ll see elsewhere, and what you’ll read, and what a lot of advisors still do, is they figure out about how much risk you’re willing to take, and they put you in a certain investment, or they look at your age, and in light of that, you should be in this type of portfolio mix with stocks and bonds. We don’t believe that’s the right way to do it, because you could have a very low risk tolerance, but that might mean you also almost assure yourself of not achieving a high enough rate of return to accomplish your goals. Or you have a very high risk tolerance, but that also leads, because of your plan, into a high probability of also not hitting your goals, if you’re too aggressive.
And when speaking of your age, you may have two 68-year-olds, one should be aggressive and one should be conservative based upon figuring out how much money they have, and are they independent already? Do they care about volatility? Do they about making an inheritance? Do they have outside income that maybe is going to continue for a long period of time, so income-oriented investing doesn’t make sense for that person. So while the majority of the investment industry tends to do things based on risk or age, I like to think of it more as needs-based investing. A good financial planning firm, as I, of course, believe that we are at Creative Planning, will spend a lot of time with where you are and what you’re trying to do. And once I know where you are and what you’re trying to do, in your other income sources and in your tax bracket, are you going to move? And will that state have a different tax bracket environment? Are you going to spend more time in the first 10 years of retirement traveling? What do you expect for healthcare costs? What’s your current health situation?
But then maybe those costs are going to go down because you’ll have Medicare, and you won’t travel as much, and so on. And so once we’re able to understand where you are and what you want, and all of these other details, hundreds that I didn’t mention, then we’ll build a portfolio with the right investments that provide the highest probability of making that outcome happen for you. The specific deployment of dollars into investments is really one of the final steps in the planning process, or at least it should be. Thank you for that question. Britt, who do we have up next?
Britt: Up next, we have Kelsey in New York. Kelsey has a CPA, but feels like he’s really only doing her tax prep. She’s wondering what the right questions are, that she should be asking him, and when and how often she should be meeting with him.
John: Kelsey, that type of CPA is fine if your goal is to delegate your tax prep, and you don’t mind paying a little extra, versus using TurboTax, or trying to get it done on your own. Some situations are complicated, and so you need to hire a CPA just to accurately prepare your return. For most people, especially non-business owners, that’s not necessarily the case anymore, and so paying for that is probably of marginal value. I don’t know your situation specifically, but the difference of planning and preparation, when it comes to taxes, boils down to which direction you are looking.
Planning is about being strategic. Being strategic means you’re looking out the windshield, it’s forward-looking. Preparation is accurately accounting for what already happened, that’s the word, accountant. It’s simply reporting the past. If you’re looking for proactive tax advice, that would have nothing to do with the filing of your return. And I prefer two meetings per year, once early in the year, late January, first couple weeks of February, before your CPA gets slammed, working 80 hours a week during the height of tax season, but it’s early enough in the year, where you are able to establish some proactive strategies for the year based upon the assumptions from the previous year. Should I max out my Roth inside the 401k this year, instead of the deferred side now that I’m expecting to be in this tax bracket? What should I be doing between now and April 15th, if there are any retirement accounts that I should be funding prior to filing?
This allows you to establish the foundation for not only year, but also out over the next three to five years, maybe even longer, depending upon what variables are known and which are not. That will drive how far out into the future it’s practical to look. The second time during the year, would be late summer, early fall, August, September, October. Because now you have a pretty good idea of how your year isn’t theoretically going to look, but how it actually looks, but yet you’re not at December 31st with the hourglass out of sand and no time to make adjustments. So those are the two different scenarios I’d be looking from a deliverable standpoint, a mock tax return is fantastic in at least one of those. And then some longer term tax projections as well, comparing and contrasting different options and strategies.
If your CPA was never coming to you saying, “This tax credit’s available, have you considered this? Maybe this would be an idea,” well then you’re not getting tax planning, you’re probably getting the more traditional tax preparation service from your CPA. Thank you for those questions today. If you have a question similar to these, email them to [email protected].
If you have a negative attitude and you have poor expectations, you can’t expect to one day have the world in the palm of your hands. However, being optimistic and being positive can, in fact, help pave the way to financial success. Stop the doom and gloom, stop the fear of the future. I understand what bleeds leads. It gets our attention, but it doesn’t help us prosper. It’s optimism that breeds success. A research study found that when it comes to money, optimists are more likely to make smart moves and reap the benefits. For example, 90% of optimists have put money aside for a major purchase, compared to only 70% of self-proclaimed pessimists. Nearly two-thirds of optimists have started an emergency fund, while less than half of pessimists have done so. Optimists reported that they stressed about finances 145 days fewer each year, not an insignificant amount, as compared to pessimists. They also make more money, and are more likely to be promoted.
The good news, even if you slant toward being the challenger on the Enneagram, you’re someone who’s more of a skeptic by nature. Optimism is just like a muscle, and you can build it. Start the day by practicing gratitude. We had our kids do a gratitude journal this summer, it’s a two-minute daily practice, rewired elderly pessimists to become more optimistic after just two weeks of the exercise. Send a two-minute email each day, to someone new and different, praising them, thanking them, focusing on the way that they’ve blessed your life, the impact they’ve had on you. Social connection is the greatest predictor of happiness, and social connection is strongly correlated with optimism. These small habits can help you take back 145 stress-free days each year, not to mention fuel your happiness and work success as well.
It doesn’t mean you’re always happy, everything’s rainbows and unicorns. I don’t see anything that’s going wrong in the world or my life. Ignorance is bliss, whatever tagline you’d like to use. But it does mean that you possess the ability to assess a situation, even if it’s challenging, you can envision possibilities beyond the difficulty. So here are three positive habits. Number one, focus on what’s working. This will help you build optimism. Number two, seek progress not perfection. Expect to fail, but are you getting a little better each day? And lastly, and most important, meaningfully connect with others. So the conclusion here, develop an optimistic spirit, and get paid for being positive. 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 Higginson 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 this 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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