The Wiser Financial Advisor: The Most Important Financial Decision #4

What do you think the most important financial decision you can make is? Picking the right stock? Starting a 401K? Josh explains the most important financial decision you can make and helps you with options so that your decision really is the best financial decision for you. 

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Transcript

Wiser Financial Advisor – The Most Important Financial Decision

Hi Everyone, and welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services, a wealth management firm. Let the financial fun begin!

Today, we're going to talk about what is the most important decision with regard to your own personal money. I think everybody out there is looking for a magic bullet—looking for one simple thing to do that will result in becoming wealthy or at least achieving some level of financial security. 

Of course, our financial outcomes are determined by a lot of decisions along the way, but this one decision we’ll be talking about will impact all of the others. What is it? It's deciding to be an investor versus just being a consumer or spender. 

The average American, in my judgment anyway, is spending all their money, all their earnings. Income is getting spent versus saved or invested. The good news is that if you start early, you don't need to put away that much as far as a percentage of your pay. Here at Keystone Financial, we have been interacting with hundreds of people over the years, and something I've heard again and again, especially as people get older: “We wish we would have started earlier. We wish we would have started out with good financial habits early on.” 

Most people fall into that pitfall of spending all their money, all their income, all their earnings in those early years, and sometimes people never kick that financial habit. So really the most important decision that any of us will ever make comes down to one thing: What percentage of our income will we NOT spend, and instead invest for the future? I'm going to say that one more time: The most important decision that we will ever make is what percentage of our income we will NOT spend, and instead invest for the future. 

Doing that means saving systematically. We need to save in an automated fashion. That's so crucial with regard to this principle, because I don't know about you, but if I have to think about manually transferring money once a month, it's probably not going to happen. There will be months that something happens. The furnace goes out. There's some kind of opportunity to take a special trip. There's an opportunity or challenge or problem that ends up coming up, and it will just suck that money right out of any plan I might have had to transfer money into an investment. However, if I have that money automatically going out from my paycheck or my checking account in some automated way, it probably is not going to get messed up because I don't have to think about it. The key here is that we don't have to think about it, and over a long period of time, saving or investing that way can accumulate hundreds of thousands or even millions of dollars. I’ve seen it happen over and over again in people's financial situations that I've worked with over the years, both in group formats and in individual formats. It's been fun to be able to hear people’s stories. I can also tell you that you'll never be able to out-earn poor financial habits. 

We could come up with a lot of examples brainstorming all the big names over the years that earned tons of money, from professional athletes to celebrities of various types. Think about Mike Tyson, Johnny Depp, Floyd Mayweather, MC Hammer, Quentin Tarantino. These guys over the years made gazillions of dollars in their careers, but then blew it all and went into some level of financial distress, even bankruptcy in many cases. Isn't that crazy? Look at Mike Tyson, who at one time was the winningest boxer of all time. He had hundreds of millions of dollars earned from fighting, and he blew every single penny. So, you will never be able to outdo or out-earn poor financial habits, therefore it's important to start on the right foot. Now, you might say, “Well, I didn't start when I was 18 or 20 or 23,” or wherever your career started. Okay, well, it's never too late to do the right thing, which in this case would be to pick a percentage, any percentage. It doesn't matter what it is, although it should be at least 1%. 

I'd encourage you to start with something. As an example, although it’s a bit gross: There's a right way and a wrong way to boil a frog. The wrong way is to heat up a pan of water, get it boiling and throw the frog in. Well, the frog is just going to jump out immediately. He's just going to react to something that's painful. The right way to boil a frog is to put the frog into a pan of water and then gradually turn up the heat. Then the frog will not jump out and it'll be too late by the time the water boils. It actually works on the positive end too, if you gradually do this with your own money. Say you start at 1%, and then put it in your reminders that maybe every month or every quarter you bump it up. Go from 1 to 2% and then 2 to 3 and 3 to 4. 

What's the ideal percentage as far as what you should be putting away? I don't like the word “should” because everybody's situation is different. Everybody's values are different. I don't want to be the one who judges that for you. Certainly we could do some math and we could figure out what it is that you're trying to accomplish—and that's a lot of what financial planning is about. It’s getting really clear on where we are, where we want to be and then figuring out the plan and what needs to happen to make that work. And a big part of that math, of course, is figuring out what percentage is wise to put away for you. 

The old rule of thumb used to be that if you wanted to retire in your mid 60s with Social Security and a pension and so forth, you need to be putting away somewhere between 10 to 15 percent of your income if you start early. If you start late, then you'll need to bump that up and put in larger percentages. That was the old rule. What's happened since then? How many people get a pension these days? Not many. There aren’t many people who get a pension unless you work for the US government or maybe you're a teacher. There are a few employment situations out there where people actually do get a pension, but most people do not anymore. And Social Security is a bit sketchy, isn't it? I don't know about you, but I don't think the government is always the best at handling money and certainly not following through on promises. I don't want to bank my financial future on something that could be changed or adjusted. So I am going to highly recommend that you choose a higher percentage than 10—probably 15, ideally 20% of your earnings going towards the future. 

Now, you might say, “That's too painful. There's no way I can go from doing nothing all the way to 20%.” Well, remember the boiling frog analogy. If you gradually turn up the heat, you won’t even notice. I've done this with a lot of people from young to old and in between. We've just chosen a percentage, whether 1%, 3%, 5%. And in every case, after they started doing that with a couple paychecks, they all said the same thing: “Josh, I don't even notice it's gone.” And that starts to feel really good because then they realize they can go higher—up to 4%, 5%, 10%. In my mind, 15 to 20% would be the ideal for putting money away towards the future. Some of that, of course, will be towards our Freedom Fund aka Retirement Fund, which is what will eventually be the money we can use so we don't have to work unless we want to. 

To me, financial freedom means that we get to do what we want whenever we want, with who we want. It’s to live the life that we want without having to work. And if we don’t prepare for that, then we're destined to fail, meaning be forced to work forever. I don’t know about you, but although I love my job, my career, my business because it’s very gratifying to have a positive effect on people’s lives, I don't want to be required to do this forever. I want to be able to choose to do it forever if that’s what I want. Possibly I'll be one of those guys that works well into their 70s, 80s, maybe 90s, like Warren Buffett. These are guys that love doing what they are doing and so they continue doing it even when there isn’t any requirement to do so. Warren Buffett probably could have retired a long time ago. He just chooses to do it because he thinks it's fun. I want to be able to do this as well, as long as my clients will have me and as long as it's fun. If it ceases to be fun, then maybe I’ll hang it up at some point. Who knows? Things may change. It might also be a situation where you've got to stop for some reason. Maybe for health reasons or a family situation. I've seen that happen time and time again. People may plan to work for many more years, but then something happens and it isn't a possibility. Back in the 2000s, I worked with a lot of high tech workers that were laid off from their company where they’d worked for years and years. They were laid off unceremoniously, even in situations where they were one of the highest performers in their group and highly ranked with patents, all kinds of stuff. But they still ended up at the wrong place on the spreadsheet and got cut. Of course, many of those people pivoted into something else, but in some situations they didn't—or maybe they were so close to retirement that they just wanted to be done. Those with a Freedom Fund built up to the point where it could generate income for life, or at least have a strong possibility of generating income for life, were the people with financial success and happiness as far as being able to do what they want to do. 

Again, the real key here is in choosing a percentage and putting it away no matter what; not thinking about it because it's automated and it's happening every single month. How is this done? Let's talk practical. Many people who work have an employer. In that situation, almost always there’s some kind of retirement plan unless it's a very small business. There is probably some kind of a 401K or 403B or something. You know, we've got all this alphabet soup of different retirement plans, but more or less they're probably going to offer you some type of automated way that you can take a percentage of your paycheck every single pay period and put it away. Sometimes they will offer matching dollars. They'll offer matching contributions and that's fantastic. I would consider that gravy. 

Sometimes people ask the question, “Well, with my target percentage, I'm choosing 10 or 15%. Do I count the company match in that?” My answer is no, because I've seen it happen many times that when a company goes through some struggles, they may cut the match to zero. So, I think it's better if you can count on those dollars just being your own and consider the company money a bonus that puts you in a better situation overall. Sometimes retirement plans also have vesting periods, meaning that if you don't stay with that company for long enough, you'll end up losing that match money. So again, good idea to count on the money that you're putting in. 

What if you don't have an employer plan? What if they don't offer that or if you're self-employed or a business owner? You've got all kinds of scenarios where there just may not be a company retirement plan set up. There are other options: traditional IRA's, Roth IRAs or normal brokerage accounts, investment accounts that you can be plugging money into. And I would highly recommend it that you set it up in an automated way, just as if you were getting it taken out of a paycheck. Have it deducted in an automatic transfer from your checking account. Banks and credit unions can all set it up as an automatic transfer, and it's usually free and easy to do, easy to adjust as well.

 If you're one of those that think you cannot do this; you’re in a different situation; you don't have any extra money, please humor me and choose a percentage, even if it's just 1%. Start with something and see what happens. You'll start to see your wealth build. You'll start to see your Freedom Fund build. And ultimately, you've got a bucket of money someday that's going to produce enough income to live on. That's the goal. We're trying to build up this money machine. You want to build up to the point where it will produce income that you won't outlive. The goal of financial freedom is to be able to get that set up for yourself. And you'll be able to take an immense amount of pride in the fact that you built up wealth on your own without becoming like Mike Tyson and having to get beat up to go out and earn your wealth.

I believe you’ll find that it's a lot easier than you think. If you start early or even if you start today, however old you are. Starting today is the answer, and starting in an automated way. Choose that percentage. And then also think about who else you can teach about this. Is there someone younger than you who could use this information to better their life? I can tell you that almost everybody I talk to that's accumulated wealth, whether they are in their 40s, 50s, 60s, 70s, can pinpoint who and what got them started. 

That's it for today. Thank you so much for tuning in. As always, we want to hear feedback. So e-mail me at josh@keystonefinancial.com with any feedback you may have, especially if you have any topics or things that you want addressed in the future. Also help us get the word out by doing two things. Number one, rate us five stars on whichever service or directory that you're pulling this up on, whether Apple or Google, whatever it is. Number two, if you would subscribe, that helps us out as well and it also helps you out because it gives you the updates when new episodes come out. Thank you so much. I appreciate you taking the time to be with me, and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered by Keystone Financial Services, an SEC registered investment advisor.