Lessons I Learned as a Financial Planner

During college I worked for several years in the financial planning industry. I really enjoyed the work, especially building proposals for people that showed where they could get to if they would implement the strategies we were recommending.

I didn't stick with it, though, because the only people a college student knows are other people who don't have any money either, and the industry just isn't built around serving those people.

I did learn some important principles, though, and have tried to remember them as I've moved through life. Some day maybe I'll write a book. For now I thought I would share a few of them here. I call them: Lessons I Learned As A Financial Planner

Lessons I Learned As A Financial Planner #1: Never go into debt for a depreciating asset.

Any of you who have read Rich Dad Poor Dad will remember the simplified definition: Liabilities are things that cost you. Assets are things that pay you.

Buying an asset that is losing value, therefore, isn't really an asset at all, but a liability, and you shouldn't leverage your future buying liabilities.

My mentors liked to drive this principal home on cars in particular (see principal #2, pun intended), but it applies to lots of other things. Some furniture places are famous for making it difficult to buy without applying for store credit. Retailers and airlines are pushing their cards, as well.

Bottom line, the list of things you should go into debt for is pretty short. Leverage can be good. It can get you places you wouldn't otherwise be able to go. As J. Reuben Clark, Jr. once said, though:

"Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you."

Much better to have interest working for you than against you.

Lessons I Learned As A Financial Planner #2: Don't buy a car worth more than you make in one month (but if you want to, here's how to do it)

This was an internal rule for our sales team, but a valid principle that I've tried to remember, as well.

The reason for the rule was that as soon as someone on the team started making money, the first thing they wanted to do was go out and buy a fancy car that would show people how successful they were. To temper that we created this rule:

You could only spend as much on the car as you were making per month, and you had to pay cash.

We then came up with a trade up plan that would allow you to get a new(er) car every year if you wanted to. Here's how it works:

Plan to drive either your current car or the one you bought above for another year. Figure out what the payments would be on the car you wanted to buy, then start saving that amount every month. After one year, take your car, plus the savings, and trade them in for as nice a car as you can. Then continue to save for the next year and do it again. After a certain number of years you should be able to buy the new car you want every year, without ever having to take out a loan for it.

The other benefit of this plan is that if at some point in the year your car breaks down, you have a fund you can access to pay for repairs. Then just reset your clock to one year out from that point.

Bonus thought: Check with your accountant or tax advisor, but if you're using that vehicle for your business, you may also be able to write off depreciation value, up to 100% of the cost, depending on what you drive. That's how and why your rancher buddy is driving a new truck every year.

Lessons I Learned As A Financial Planner #3: Don't get a mortgage worth more than 2 ? times your annual income.

Another variation on this is Dave Ramsey's rule that your housing costs not be more than 25% of your monthly income.

Like rules #1 and 2, these are guidelines or guardrails to help us not get locked into situations where we are in danger of going backwards. Yes, you can qualify for a loan that represents up to 49% or whatever of your current gross income. But should you? Probably not.

Life changes when you own a home. You are treated differently by banks and other lenders for everything you do after that. That's why home ownership is the largest differentiator between the poor and middle class, and a key to long term financial stability. You should work towards home ownership.

At the same time, losing a home is also one of the biggest black eyes you can get on your credit. I've been through that, and it's not fun. The next time we bought (after years of putting our credit back together) we elected to stick to the bottom end of our price range instead of the top, and it saved us when I lost my job two years later.

Avoid the stress. Work your way up. Be patient. Buy a condo or town home. Build some equity. Sell it or rent it to get into a small home. Repeat.

Side benefit: Maybe this keeps you a little longer in neighborhoods, communities, and schools that could use your stability and influence.

Side benefit #2: Maybe you decide you don't actually need the big house in the gated community on the hill and can buy a second home instead in your favorite vacation spot. That works, too.

Side note: It's trendy these days to pull money out of your house to finance additional real estate and other investments. I was taught that it's actually illegal and unethical to recommend that as a financial advisor. Instead we'd suggest you pay off your primary residence and use a second home or other property as your point of leverage. You'll sleep easier at night and retire better if and when you know that can't be taken away from you.

Lessons I Learned As A Financial Planner #4: Use Nobel Prize winning strategies to your benefit.

There are two concepts that everyone should be incorporating into their long-term financial plan:

1. Dollar-cost averaging. Invest on a schedule, such as with every paycheck. Timing the market is impossible, even for money managers who do it as their full time job. That's not you or I. The problem is, most of the growth each year comes from being invested during just a handful of the biggest days. Miss those and you can kiss your annual return goodbye. The idea of dollar cost averaging, therefore, is that you're always buying, low or high, and over time this will put you further ahead.
2. Asset allocation. This has two parts: determining a mix of investments that matches your risk profile, and rebalancing your portfolio periodically to keep that mix. Doing this helps you stay in balance over time and limit losses during downturns.

Most retirement plans, such as your company 401(k) can do both of these things automatically if you select the right options. Just keep in mind if you have other investments outside the plan to factor those into your allocation strategy.

For example, if you're an angel investor in several startups, which would be higher risk, then maybe go a little more conservative with your retirement plan. If, on the other hand, your other investments are very stable, like say you own a couple of apartment buildings, you can probably afford to risk a little more in the rest of your portfolio.

And a final note: don't put it off. Certainly pay off your credit cards and any other high interest debt first - you're not likely to out-earn whatever interest rate they're charging you - but then start, in your twenties if possible. Outside of where you put your money, and ensuring it is outpacing inflation, time is the biggest factor in where you'll end up. $100 a month in your twenties can mean hundreds of thousands more in retirement.

Lessons I Learned As A Financial Planner #5: Make money on every dollar you spend every day.

This was a favorite seminar line from one of my financial mentors. The idea is elegant in its simplicity: If you must spend money, buy from companies you're invested in. This can be done by directly buying stocks, or just paying more attention to what your mutual funds and 401(k) plan is invested in. When those companies do better, so do you.

Ownership is an incredible feeling. I was reminded of this concept a few months back when I had a chance to invest the new Cashmere venture capital fund at Sweater . It's been so fun to see the updates Jesse Randall and his team send on the different start ups they're putting our dollars into. And guess where I looked first for Christmas gifts this year?

Give it a try. Practice thinking like an owner. It will change your life.

Lessons I Learned As A Financial Planner Bonus Rule: It's cheaper to pay full price when you have the money than to pay half price when you don't.

This is one my wife and I developed that became a check in saying for us. It really helps to curb impulse buying while you're working towards other goals. And more often than not we discovered we didn't need that thing as badly as we thought we did, anyway. It certainly wasn't worth going into debt for.

If you're patient, work away at it, and avoid spending on things you can't afford or don't need, you will get to where your finances are secure. Pay off your debts, establish an emergency fund, and as the fund grows, it will become an emergency opportunities fund. This is where things get fun. That's a good feeling.

My goal, when I set out to study financial planning, was to help struggling families. As I mentioned in my first post, what I learned, however, is that the industry isn't really set up to help those who need it most, only those who have wealth already. I ended up leaving the field but have always tried to share these principals when I can.

Recently I became acquainted with a young couple who have been on a similar journey to mine, Dan Ockey and Kay Ockey . If you're struggling to develop and stick to a plan, their coaching and Centsie educational products may be able to help.

Thanks for reading to the end. I've enjoyed writing and sharing these principles.

May they serve you well.