I was extremely honored to have a chance to jump on the phone last week with a very respected individual in the financial community.
Carl Richards is a CERTIFIED FINANCIAL PLANNER (™), the creator of the weekly “Sketch Guy” column for the New York Times, a columnist for Morningstar Advisor, and an all-around nice guy. He’s been featured on major sites like Oprah & Forbes, and is also keynoting the Financial Blogger’s Conference this year.
I want to thank Carl for taking the time to sit down and answer some real questions I had around personal finance and his new book. I also want to thank FinCon and the XY Planning Network for sending over some copies of Carl’s new book, the One Page Financial Plan, to review. You guys rock!
The book is really eye-opening and I highly recommend it for people struggling to get the whole “financial planning” bit down.
I tried to ask some of the more pressing questions that would relate to the millennial community, as well as most other people in general. Here goes!
A lot millennials took jobs after college that aren’t exactly in the field they thought they were going to pursue. For example, I am a Geography major, but I work in an E-Business department helping my company with online marketing. I know you weren’t planning on getting into the financial industry, but do you mind telling us a little about how you did get into the financial industry?
Haha, yea it will be almost of no use, but it’s certainly an entertaining story. When I was in college, I was an undeclared major and recently married. My wife had a job and I came home one day and she was looking in the help wanted ads, and I said ‘what are you doing?’ and she said she was looking for a job, and I said well you have one, and she said ‘I’m looking for you!’. I said what have you found and she found what we both thought was a security guard job. So I went to apply for what I thought was a job in security. I made it through the interview and realized it was a job in “securities”, not security. And I didn’t know the difference.
But luckily I ended up with the job anyway, and that tells you a little bit about the applicant pool that day. It was quite by accident.
I got into the industry by accident, and now of course I’ve stayed on purpose. Because I just have found this intersection of emotion and behavior with spreadsheets and calculators to be endlessly fascinating. But I got in by accident and the rest of the story – the New York Times and the book and speaking – all that stuff, is a lot similar. I was just sort of out playing in traffic and hoping to get hit, and things happened through a series of what I like to call “happy accidents.”
The idea behind the One Page Financial Plan is quite interesting. Personal finance, budgeting, and investing can be quite scary and overwhelming for people. How did you come up with the idea to put together a book that basically says “hey, you can put this all on one page and still have a healthy financial plan”?
Yea, that was the exact reason I did it. Most of us when we think of money and particularly financial planning, we think overwhelming, confusing, complex, 2-inch thick books that end up collecting dust on a shelf. I’ve watched that happen for twenty years and I thought there has got to be a more approachable way – to produce something that you use. Right? That’s not about the plan, or the 200 pages of paper, but something that encourages us to engage in the process, like the ongoing process of planning. That’s why I did it. Most people think it’s got to be this complex, scary thing and it doesn’t have to be.
I know that you’re one of the people that advocates for passive investing. Why do you think it’s so important to be passive when it comes to investing your money.
Well, let me be clear. I don’t think it’s so important. I think it’s so important to behave, when it comes to investing your money. What I like to say is the investment strategy that you choose only matters to the degree that it influences your behavior. I just happen to believe that the data and evidence behind passive investing makes it easier to behave over the long-haul.
But to be really clear, it’s easy to misbehave with passive investments, too. You can cut your own fingers off with an index fund just as fast as you can with an actively managed fund. So, do whatever it is that will give you the ability to behave. For me that happens to be passive, and for a lot of people it is too. There is some evidence that investors using passive investments behave better than investors using active investments. To be honest, I don’t really get carried away with that. I just want to focus on the more important picture of behavior.
I am definitely a passive investor. I like to put money in there and not worry about it too much. I’ve heard of too many people getting carried away and lose it all.
For sure, if all you did every month was plug money into the Vanguard S&P 500 index fund every single month, you’d be better off than 90% of your neighbors if you did that for 30 years. So, what’s wrong with that plan?
Do you think there are any other areas of personal finance where people can benefit from doing the initial research and then being confident enough to just leave it alone?
I think that’s an interesting question. There are a lot of areas of personal finance where you do the work up front, and then you let it be. Because it’s got to work over the long haul. Like automating your savings decisions, for example. If you decided you need to save $250 a month towards your kids education accounts. Don’t make that decision every month. Don’t force yourself to write a check and address an envelope, put a stamp on it and drop it off in the mail.
Instead you automate those decisions. Once you’ve done the hard work of automating it up front, let it go. The same thing with the One Page Plan. It’ s alot of work upfront to create a single, simple document called the One Page Financial Plan. And then it’s not going to require you to change it every month, maybe you change it every couple of years when your circumstances change. But that investment of work up front will pay off, let’s say, 10-fold, in terms of the savings of cognitive and emotional energy, and time. You won’t have to think about it every time, you can just say oh yeah, I have it all written down right here.
I think there are a lot of things like that, you put a little work up front and then let it go.
I wanted to ask about a concept you talk about in the book, that people can be so afraid of making the wrong decision, that they paralyze themselves with fear and do nothing. For people who might be experiencing this exact thing, do you have any suggestions? How can they get past the fear of it all?
What a great question. That’s one of my favorite sections of the book. I feel almost like you’re walking up to this big pile of “stuff” that scares you. As you get closer and closer you feel the fear because you’re looking at the whole pile. My thought is, just for a minute just stop, give yourself permission to relax. Realize this is a process not an event. You don’t have to get it perfect. Doing something is better that nothing. So make a guess, take a step forward, make a new guess, take step forward. Just relax a little bit.
Someone else asked me today, “when do you think you can call your financial plan successful?” And I said “well, when you die.” Haha, it’s a process of continually working on aligning it, that’s why all of us our working to help each other. I’ve still got lots of work to do, for sure.
You don’t have to get it right. It’s about positive momentum. It’s like riding a really heavy motorcycle, it’s really easy when it’s moving. But man, when it stops, keeping it upright can be really hard. And so that positive momentum can be super helpful.
There are a lot of human aspects to this whole thing, just from personal experience, seeing people go through this whole experience is like watching a train crash in slow motion, and the person in charge does nothing to change course. For instance, someone spending above their means goes out and gets a credit card, then they carry a balance from month to month, and soon they are in $20k of debt. What are some good ways people can go about getting around, or even just preparing for their own “human” imperfections?
I think one way to do that is have someone else involved. Whether that’s a friend or family member, your uncle who will speak frankly to you. Or finding yourself a real financial planner. Having someone else involved that can see your blind spots and say “what were you thinking??”. Maybe they are even softer than that. Maybe they say hey, have you thought about this. I don’t understand why that happened, can you explain this to me? Or maybe they are really harsh and tell you what you did was ridiculous. I think having someone there to be able to see your blind spots is really valuable.
The quote that touched me most throughout the entire book, was that “We don’t often think that money spent on a new car can be directly translated into time not spent with our kids – but when we forget the make room for the intangible things in our financial planning, we pay the price.” That is POWERFUL stuff. I don’t even have kids and that hit me like a ton of bricks. That was the huge takeaway I had from the book. Can you talk a bit more about this concept that most of us don’t recognize?
I just think we fail to take the time to make that last calculation. Often we say “time = money”. Let’s say you continually say “I’d love to spend more time with my daughter”. Yet every time soccer season starts and you get asked, they say “hey does anybody want to help coach the team your daughters on” and you always say you don’t have time. This is obviously painful, but this is why it’s a process. We start recognizing the inconsistencies in what we say is important to us, compared to what we actually do with our time and money.
So back to the daughter example, let’ say it’s 2 hours a week, it’d be great because you’d be with your daughter and you’d also be helping. Everything you say is important to you is wrapped up in this decision, but you just don’t have time for it because you’re at work. And then you do the quick math and say “I want to get a new car, and the extra lease payment happens to be the equivalent of 2-3 hours a week of work. If I just didn’t work those 2-3 hours a week and got a cheaper car, I could coach the soccer team.”
Look, that’s really painful to make those calculations, but it’s the process of living an examined life. And often it helps to start thinking about these things, so slowly you can get more alignment with what you said was important and what you’re actually doing with your money and your time.
I think many millennials struggle with the concept of instant gratification. I see this pattern happening with a lot of friends and peers. You say that without question, this is one of the biggest issues that stops us from saving. Do you think that this need for instant gratification fades with age, or is it more of a mindset that seems to stick with people longer and longer these days?
That’s a really good question. I think you could say that as you get older those decisions that use to be way, way far away are closer. Just by the function you’ve gotten closer to the decision. My daughter just turned 18 and got accepted into the university she wanted to go to and suddenly paying for college is right there. We look back and say “how did this happen so fast??” but it’s been 18 years. We’ve known we’re going to have a daughter go to school for 18 years now. It’s no longer delayed gratification that we are worried about because it’s tomorrow. We have to pay tuition checks.
I don’t know if it’s a personality thing. I have read some research that some people never get over the idea that they need to delay gratification. That goes back to the whole marshmallow test. My wife is that way, she always eats the top of her muffin last. And I asked her about this early on when we were married. She sets the top to the side and eats the middle and then eats the top last. ‘Why do you do that?’ She said ‘because that’s the best part.’ I said ‘I know that’s why you eat it first!’ She said ‘no, that’s why I wait!’
She was clearly one that delayed eating the marshmallows and I was clearly the one that ate them immediately.
You mention in the book that because credit card companies make it so easy to take on consumer debt, we treat it very casually. We all know that we will eventually have to pay this money back, and deep down that this isn’t our money, but we spend like it is. Why do you think people are so addicted to credit cards these days?
Because everyone else is, right? It’s just so easy. I think that’s the big problem. We’re too busy living other people’s lives financially. We haven’t taken the time to stop and think, “hey, you know what, more unnecessary plastic crap isn’t going to make me any happier.” Just pausing long enough to notice that would be a huge step in the right direction.
Everytime you go to pull out your favorite form of money – whether it be credit cards, debit cards, bitcoins or cash – just take a second and pause. I’m not even telling you to stop. It’s something I’m working on right now, I call it the “30 days in 3 seconds.” For 30 days, just take 3 seconds every time you spend money. I don’t care if it’s before or right after. It doesn’t really matter. I’m not asking you to stop spending, just take 3 seconds, take a deep breath, count to 3 and say “interesting.”
No judgment. Just simply notice what you’re doing. I have a thesis that if you did that every single time you spent money for 30 days, at the end of the 30 days you would be making behavioral changes you didn’t even know you were making, because of your increased awareness that you’ve developed around money.
Do you think that credit card debt is one of those things people turn to when they are having a rough time? Do you think it gets worse and worse before it gets better?
Everybody else is doing it. I think here’s one part of the problem, and Stephen Covey used to say this is – ‘it’s a lot easier to say no, if you have a much deeper yes.’ And often we don’t have a deeper yes. We’ve never taken the time to define why we are doing what we’re doing with money. What’s important about money to us. If we do define it, if it’s on your One Page Plan, it becomes a little easier to say no. But if you don’t, you’re just running around filling financial prescriptions without any diagnosis.
I wanted to thank you for including a lot of statistics in the One Page Financial Plan. Specifically the fact that two-thirds of working households ages fifty-five to sixty-four with at least one earner have retirement savings less than one time their annual income. That’s amazing, but doesn’t seem to surprise me. Do you have any suggestions for those people who are older and may not realize they are very far behind?
Yeah, and it’s hard so I empathize and understand. At the end of the day we just have to get over it. We have to get clear about reality and start telling ourselves a new money story and it’s called the truth. Get really clear about where you are today. ‘Face the music’ as they say. I’ve had to do this and it’s painful. But you already know something is wrong, you may as well just get rid of that low-level, underlying, constant hum of anxiety that you’re feeling. Make it really loud, really painful for a while so that you can start addressing it because it’s not going to do any good to ignore it.
I think that last piece of advice goes for anyone – young and older. If you have that underlying feeling that you’re doing something wrong financially, why wait any longer to actually make the change? Bite the bullet and just do it. Give yourself a shot at freedom in the future.
Do you now see why money mindset is key here? Carl is a genius when it comes to putting these difficult rationalizations and ideas down on paper. Don’t just take my word for it, pick up his book over on Amazon.
Thanks again to Carl for taking the time out of his day for providing us with some much needed answers!