05. How To Become A Millionaire - Greg Welborn

Life is full of things to worry about, and a surveys show that two-thirds of people are more afraid of running out of money in retirement than they are of actually dying.  That may seem surprising, but it can be a real possibility – and therefore a very legitimate fear – if you haven’t planned properly.  Now, we assume you’ve done some planning.  If not, well, that’s the first place to start.  You need to put together a retirement plan;  don’t leave this to chance.  But assuming you have a plan, the trick is to make sure you’ve done it properly.  This episode covers ten preventative steps to help you avoid running out of money in retirement.

Parents and students all across the country continue to wonder how they are going to pay for college. Over the last thirty years, the cost of college has risen astronomically. Since 1987 we have had over a 500% increase in the cost of college tuition. In that same time frame, college tuition has risen at a rate 2.5x that of home prices, over 3x that of medium income, and 4x that of general inflation. Because of this, we often have parents who come to us wondering how they are going to afford the rising cost of college tuition. Luckily, there are numerous tools and loans available to help pay for college. Here is our suggested order of operations for how to pay for college.

Can you DIY your personal finances? By now, most of us are familiar with the term DIY or “do-it-yourself”.  The idea behind DIY is essentially that anyone can figure out how to do something by spending a few hours on YouTube or on the internet. We make our own home improvements, fill out our own taxes, and make our own car repairs.

• But what about the more complex situations?
• What if your home needed a serious paint job?
• What if your car needed to have its’ tires replaced?

There are some situations in which we could DIY our own projects, but the key difference comes down to the time and process involved in doing so. The same goes for your financial life and planning your financial future. You can certainly do it yourself or, you can consult a certified financial professional. The outcomes may be similar but again, it comes down to the time and process involved.

In this BenchTalk, we are going to help you decide whether you can DIY your finances or if you would be better served speaking with a financial professional.

How A Financial Planner Can Help

One thing we do know for sure is that money is a necessity in our lives. Money helps us pay for where we live and put food on our table. For some, money is the end all be all and means everything to them. Others view money only as a means to accomplish other goals. It’s a wide spectrum and wherever you happen to fall on that spectrum one thing’s for sure, it’s incredibly important to plan your finances and be responsible for your money. This is where a financial planner can be invaluable. Financial planners help the client understand their situation, establish goals for the short-term and long-term, and develop and implement a plan to make sure they arrive where they need to be financially. Sure, you can DIY your finances by following the same basic formula. However, for most, it all boils down to three key components: time, ability, and desire.

How to DIY Your Finances: Time, Ability & Desire

These three things are absolutely necessary to DIY your financial future. If you have the time, the ability, and desire to DIY your finances then you are on the right track. But if you are lacking in even one of these areas, it might be time to consult a financial advisor. If you decide that you might need a financial advisor’s help, we encourage you to reach out. As always, we provide 100% independent and objective financial planning.

Can A Financial Advisor Help You?

Can a financial advisor help you in a meaningful way? The short answer is yes but, we do in fact have the data to back it up. In today’s Bench Talk, we’re going to discuss how a financial advisor can help you in a meaningful way.

Let’s start with a quick example. Most of us reading this have probably tried to do our own plumbing or electrical work at some point in time. When you finished, hopefully, the lights turned on and the sink worked as intended. But did it work as well as it should have? Probably not, and in fact, you may have even ended up blowing a circuit or ended up with a leaky sink. So, would you have been better off using the services of a professional? Probably so, and the same is true in the financial realm.

Working with a financial advisor can help you in a meaningful way. In fact, there are a couple of different areas where this really stands out.

Customizing an Investment Plan

A financial advisor specializes in reconciling your assets, liabilities, and cash-flow into a plan that fits your specific needs and goals. Knowing when to put money in and where to invest it is crucial in building your investment plan. Without the help of a financial advisor, data shows us that the majority of people’s portfolios would not perform as well as they should. Similar to electrical or plumbing work, we aren’t experts and our results will probably be significantly less than that of a professional.

Minimizing Risks and Taxes

Both risk and taxes can be detrimental to your investment portfolio’s health. A financial advisor can help you mitigate risk by diversifying your assets into different portfolio mixes with lower risk. We can also pick tax-deductible investment vessels to ensure that your money stretches as far as it can when saving for your retirement.

Using Dynamic Withdrawal Strategies

A financial advisor can help you give thought to the best place and time to make withdrawals in retirement. This can be crucial when protecting you from taxes. It can also be especially important when it comes to providing an objective opinion in times of potential market downturns.

Properly Managing Liabilities

Not all liabilities are bad, and not all liabilities are good. Knowing which ones to maintain and which ones to pay off can save you and your family a significant amount of time and money.

We live in a technology and media-driven culture. We are bombarded with information every day and not all of it is accurate. Knowing how to filter through the noise and determine what to do and when to do it is where a financial advisor can really help.

The Data We Promised

Vanguard Study

Vanguard did a study of their “Advisor Alpha” which is an extensive piece of research on how advisors can add benefit to their clients. The study is extensive and too long to cite here but in summary, they concluded that working with a financial advisor represented a real improvement of 3% per year. Justin Wagner from Vanguard uses a great example that is worth sharing:

“Suppose the overall market return is 8%. Without good financial decision making, the combined impact of fees, taxes, and poor investment decisions is around 4%. This leaves a net return of 4% to the investor. However, for someone working with a capable advisor, they eliminate poor investment decisions, minimize taxes, and only pay the 1% fee, leaving a net return of 7%. That is the Advisor Alpha. The value added by good advice can greatly exceed the fees.” 

This quote by Justin Wagner is using a hypothetical example to describe the “advisor alpha”, or in short, the benefit that an advisor can add through their expertise that exceeds the total amount of their fee structure. A 3% improvement may not sound like a lot but keep in mind over a 22-year span that represents a doubling of added value.

Morningstar Study

Another study done by Morningstar reviewed the value of good decision making. They had a slightly different approach to their research and ended up estimating the return was about 1.8% to 2% per year.

Used Financial Advisor vs. Did Not Use Financial Advisor

The last study we will include was a long-term study done on K-12 teachers. In this study, they studied those who used a financial advisor and those who did not. The study concluded that those who worked with a financial advisor had double the retirement assets over the teachers who did not.

Working with a financial advisor represents a real and significant improvement over what you might be able to do yourself. If you think there may be room for improvement in your financial life, we would love to talk with you.

What is investing? We all hear about the great investors like Warren Buffett, Jack Bogle, and Benjamin Graham. Hollywood portrays these investors and the likes as shrewd investors who outsmarted the market. Investing can oftentimes seem like a difficult or foreign task when you hear these stories, but it doesn’t have to be. Here is the investment checklist that we look at before deciding if someone is ready to start investing. Read more at - https://firstfinancial.is/investment-checklist-step-one-got-cash-flow/. 

Investment Checklist 1: Cashflow

How much money do you make each month and how much are you spending? When we talk about investing, we are talking about putting money away for the long run. For this reason, it is crucial that we make sure that you have all of your current obligations met and that you don’t need to dip in and out of the money. The goal is to make sure that you have a positive cash flow each month.

Investment Checklist 2: Evaluate Your Personal Financial Situation

Evaluating a financial situation will differ from person to person but the metrics we look at stay the same. What do you own? What is it worth? Do you have any liabilities? Credit card debt? These are just some of the metrics we use to determine where your money can best be used. Investing is important, but it is crucial to make sure that all other financial duties are met before investing.

Investment Checklist 3: Solid Foundation

Before jumping into the investment world, it is crucial that your financial foundation is sound. Emergency funds are an important part of this. Your rule of thumb typically is to have 3 to 6 months worth of expenses covered. Insurance is also important. Do you have the proper life insurance and health insurance in place? We want to make sure that a catastrophic event does not derail your financial plan.

If you can check all three of these boxes, you are ready to become an investor. At this point, it is important to have a game plan with goals, benchmarks, and a disciplined approach.

1. Cash Flow
2. Personal Financial Situation
3. Solid Foundation

The great Yogi Berra once said, “If you don’t know where you’re going, you will end up in a different place.” When planning for retirement, Yogi’s words are spot on. Today, instead of lecturing you on retirement we thought it would be easier to ask two main questions.

1. Are you saving enough for retirement today?
2. How much is enough?

Its important to know what you need to be earning on your retirement assets in the next 20, 30, or 40 years to ensure that you can retire comfortably and meet your goals. Navigating risk is important in retirement as well. What funds you will invest in. What insurance or long-term health care will you need and have when you reach retirement. What about taxes? What are you doing today to minimize your taxes in the future? These are all very important factors we all need to consider when planning for retirement.

A good retirement plan provides a roadmap that ensures you know where you are going, and that you will arrive at your destination safely.

Did you know that there are over 45 million people in the United States that carry student loan debt? And….as of right now, you just watched me make my last payment, and I am no longer one of them. Here’s how I paid off $50k in student loan debt.

When I graduated from undergrad less than four years ago, I had 12 different loans with a principal balance of 42k. Upon entering the workforce, I wasn’t making much money, so I chose a graduated re-payment plan with low payments. I saw that I wasn’t making much progress, and I couldn’t stand the thought of making these payments for the next 10-30 years, so I decided to make a plan.

The Plan

The four key steps to this plan were:

1. Creating a Budget
2. Automating my Payments
3. Creating a Repayment Strategy
4. Monitoring my Progress and Staying Focused

The budget wasn’t too bad, I had just gotten out of college and was used to living on very little. But by actually putting my expenses on paper and tracking those opened my eyes to some areas where I could be doing better.

Automating Payments was important because it ensured that I never defaulted, and it forced me to contribute every month.

For my Repayment Strategy, I actually kept the low monthly required payments so that I could choose where to allocate my additional money. (Image of Repayment Plan) By attacking the smaller loans first, it helped me realize the progress I was making and build momentum towards my goal.

This is where monitoring my progress and staying focused came into play. After the first year, I had made solid progress paying off two of my highest interest loans, but I wasn’t moving quickly enough. I added a second job and took any additional side work that I could find.

Now here I am, having just made my last payment on $50k in student loan debt in less time than it took me to accumulate that debt. Ridding yourself of your student loans is attainable. It didn’t take an inheritance, a government bailout, and I certainly wasn’t making a 6 figure salary; just a plan and some hard work.