The Practice Doctor is IN

Al Depman, CLU, ChFC, CMFC, BH

Money Lessons for Life

Our son, Joe, is graduating from high school in June and will be going off to college at the end of the summer. He’s our first (of three) to take this journey. Eighteen years ago, the ball was squarely in my court. As a financial services advisor, it was time to follow my own advice and invest our money where I was suggesting clients invest theirs. It was a reality check, to be sure. This was 1991 and I dutifully contributed regularly to three vehicles:  

• An aggressive growth mutual fund,
• A variable life policy on my newborn (which I overfunded) with a balanced portfolio, and
• EE Savings bonds, which were aided and abetted by Depression-era-scarred relatives.

As of six months ago, we were looking forward to being able to contribute $20,000 a year to his higher education from these various sources. As of this writing, it’s looking more like $10,000 a year––with the bonds accounting for 20% of that figure. My son has taken an interest in how much we can contribute since he’d like to attend a private college. As we discussed these topics, I began to realize how little he knows when it comes to financial literacy. This is a bit embarrassing for me to admit; it’s like the shoemaker’s children going barefoot. Through his high school curriculum, I’m sure he learned more about art history than money.

Is this true of your clients’ teenagers as well? Wouldn’t it be a great value to help educate your top-tier clients’ children on the basics of money management? This would not only strengthen your client relationships, but build legacy relationships with the very ones who may inherit the wealth.

In preparation for this piece, I came across the Twelve Financial Principles that Every Young Person Should Know, developed by the Virginia Council on Economic Education.  These points are on target and I plan on reviewing them with Joe, as well as my second son, and daughter.                                                                               

• Map your financial future: take time to list your financial goals, along with a realistic plan for achieving them. Having a plan in place is better than winging it. There inevitably will be course changes, detours, and roadwork. As it is written by a far wiser person than me: “It’s the journey that counts, not the destination.” But in order for the journey to be meaningful, you have to have a destination to provide context.

• Don't expect something for nothing: be leery of advertisements, sales people, or other sources of financial offers promising anything free. If it sounds too good to be true, it probably is. Be a diligent reader of the fine print. We tested this out when Joe went to replace his ailing cell phone. He was ready to jump to another carrier for a “cool touch phone.” We stepped back and reviewed the contract and renegotiated terms with our current carrier and still managed to get a “sweet” phone. I’ll take “sweet” over “cool” if it’s cost efficient.

• High return equals high risk: diversification of assets is the best protection against risk. It will be interesting to see how this generation of college students views the past six months and what lessons they’ll learn. Will they turn risk-adverse or will they believe in the strength of the stock market? These investment decisions won’t come into play until the first real job out of college, and so there will be time to see how the current mess evolves. But certainly the risk/reward continuum will remain.

• Know your take-home pay. This has been a recently learned lesson. Joe’s first part-time job for an hourly wage produced a pay statement with deductions. “You’ll get it back when you file your tax return,” his friends told him. He thought he’d be getting a large check from the IRS, but once we got the 1040EZ completed, it was a disappointing $72. There hadn’t been any federal withholding at all––just state. He’s now having federal taxes withheld so he can get a refund check next year. 

• Compare interest rates. How long will your money be tied up in order to get the advertised credit rate?  We’ll be examining this as the subject of student loans becomes more of an option.

• Pay yourself first. Skim your pay to set aside money for emergencies and longer-range goals. There is a saying: ‘Save first, spend the rest, don’t spend first, save the rest.” There usually is little left. In a way, having his federal taxes withheld is a form of forced savings.

• Know the "Rule of 72." This is the formula for determining how long it will take your money to double. Divide the interest rate into 72. For example, an account earning 4% interest will double in eighteen years (72 divided by 4 equals 18). This has proven handy in estimating the risk/reward issues of points 3 and 5.

• Your credit past is your credit future. Many years ago, two years out of college, I got into a problem with my American Express card. After a lot of humble borrowing, I eventually paid off the balance, but there was a black mark on my credit for many years, making life difficult. It’s an easy trap for college kids to fall into. So far, Joe only has a debit card and he manages that responsibly. Hopefully, this bodes well when he does enter the world of credit cards.

• Start saving young. Employ the “Rule of 72” and recognize that inflation will take its toll on the value of a future dollar. The race to outpace inflation will only be won with time on your side. Here again, a tough life lesson learned from my own experience. A divorce 13 years after graduating from college reduced my net worth to near zero. The time lost on the compounding of those vanished funds will never be recouped.

• Stay insured. Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. I’ll be giving Joe a life insurance policy that he can take over to ensure his insurability. He’ll need to find the right property and casualty company for himself after college. How the health insurance market will look in five years when he’s out on his own is anyone’s guess. But hopefully I’ll be able to coach him on purchasing these coverages when the time comes.

• Budget your money: Create a monthly budget to identify expected income and expenses, including savings. This will serve to curb the impulse to overspend and slip into debt. A balanced budget is an excellent preventative medication for fiscal flu.

• Don't borrow what you can't repay. Be a responsible borrower who repays as promised, showing you are worthy of getting credit in the future. As I mentioned before, I was humbled by my American Express default and had to borrow from family to make it right. I did repay the debt relatively (pun intended) quickly. If Joe were to ever be in a similar situation, he has my empathetic ear and my willingness to do a reasonable bailout. Once. I will expect this twelfth lesson to be learned and not repeated.

Share these tenets with your top clients and their children. Bing them a value above and beyond the norm of simple handholding during times of crisis. Educate the next generation: it’s a critical difference you can make today for a better tomorrow.

The Doctor is OUT.

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. “The Practice Doctor”, is MitchAnthony.com’s Business Practice Consultant. He is the creator of “The Practice Management Assessment” tool and materials and has authored numerous articles in professional publications on practice management, and author of the forthcoming book, How to Build Your Financial Advisory Business, to be published by McGraw Hill in 2009. Al combined his Liberal Arts studies with 10 years of management experience with McDonald’s Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at al@mitchanthony.com.

© 2009 Al Depman