Financial Complexity Is Killing You

Yes, literally.

It's a well established principle in psychology that complexity contributes to mental illness. As we voluntarily pack more and more into our lives, our capacity to manage to our obligations suffers. Our day to day of pointless work meetings, millions of emails from stupid people, and endless kid's extracurricular activities causes little bits of cortisol (the stress hormone) to drip into our system throughout the day.

Cortisol, when appropriate, is good for us. It's what kept us alert and alive 10,000 years ago when a lion entered camp. Too much of it, too often, leads to dysfunction.

Our two most popular self prescribed remedies for dealing with it are alcohol and our phones. Every time you get a text "ding" or a Facebook "like" our brains release a hit of dopamine (the feel good hormone). This is of course unless your Facebook feed is like mine- here's a video of people shooting each other, wanna watch, oh crap it's already playing, damnit now I'm just upset...

Our devices and vices are ineffective band aids on a bigger problem, which brings us back to complexity. There's too much going on in our lives, and it's driving us batshit crazy. It's not that we're stupid or incapable. It's just difficult to recognize when too much becomes too much.

As a financial planner, I see the complexity phenomenon as it relates to money all the time. Here's my small contribution to solving this problem.

Portfolio Complexity

A more complicated portfolio does not equal a better portfolio. It doesn't take 30 mutual funds to achieve global diversity. Tactical rotation in and out of market sectors as the economy changes doesn't result in a better return. Convoluted withdrawal schemes from illiquid annuities don't guarantee more retirement income. If you believe these things, you have been sold.

The investment industry is filled with charlatans peddling garbage. Very few actually recommend a simple basket of boring index funds that's occasionally rebalanced as the most proven method of getting the best bang for your buck.

It is.

One of my early mentors had a great philosophy referred to as KISS- Keep It Simple, Stupid!

Cash Flow Complexity

Imagine 10 different accounts at 3 different banks. Each spouse owns a checking account. Then there's joint checking. Mix in several savings accounts, each designed for a different purpose; one for bills, another for next year's vacation, a 3rd for car payments, and a 4th for miscellaneous stuff you haven't thought of yet. Cap it all off with a few CDs and a dedicated emergency fund account, and you've built yourself a hot mess!

To make it worse, each month you have to log in so you can spend hours moving your freshly deposited paychecks to their desired destinations. Doesn't it drive you insane when you screw up a transfer amount up and you have to figure out where you went wrong and then recalculate the whole process?

Just stop.

I have one bank account. Ok, I lied. I have one personal account and one business account. My Personal Account earns acceptable interest and functions as a hub for all my needs. It auto pays off my credit card in full each month. It houses my stash for tax payments. It includes my emergency fund. It auto funnels contributions into my 401(k). I look at it a few times per month so I can yell at Melissa for buying too much crap at Target as well as spot check for fraudulent charges. Time spent per month: ~ 5 minutes.

Simple.

Insurance Complexity

Salespeople (read: most financial advisors) like to sell cash value life insurance. It pays them a lot, but that conflict is a Whole Different Story. The pitch is to tout the product as insurance plus savings. That savings can be used for emergencies, paying for college, retirement, etc. The problem is that funding and accessing that cash value comes with all kinds of conditions. Put too much in too quickly and the tax advantage disappears. Take too much out too quickly and the death benefit collapses. There are also several layers of expenses, some which change over time, some that remain static.

I could write an entire book on this subject alone, but that wouldn't make for very exciting blogging.

Cash value life insurance can serve as a useful tool in select scenarios. Chances are you don't fit into one of those scenarios. For the majority of Americans, life insurance is a temporary need. This means you should buy term insurance, which covers you through your working years. You don't need a fancy cash value policy. All you need is what your employer offers and a supplemental policy to fill in the gap.

Estate Planning Complexity

Like life insurance salespeople, estate planning attorneys love to push more complicated strategies. Instead of an impossible to understand cash value policy, you're going to get an impossible to understand trust recommendation. Here's an example of what I commonly hear when I sit in on estate planning meetings:

The probate court system in Colorado is relatively inexpensive and highly efficient. But instead of

filing a simple will through probate, I think you would be better off with a trust...

Trusts are private legal arrangements that protect your wishes from the public. They often have their own tax ID, which means you have to file a separate return. They are lengthy and costly. But they avoid probate; the selling point that's going to get rammed down your throat.

There are times when trusts ARE appropriate, such as when you have a special needs family member, significant property ownership, or when you have tons of dough and you're charitably inclined. Most of us don't fit into those categories, so the need to complicate our lives with trust planning isn't always better.

You need a will, a medical directive, and a power of attorney. Once you've created these legal documents, all you need to do is explain to the person(s) you've granted authority over your assets and health what they are responsible for and give them a copy of the governing document.

Done.

The Knowledge Gap

Most financial advisors have at least a small knowledge gap over folks working in other professions. However, that doesn't mean the financial advisory profession needs to continue hyping complex strategies just to come across as sophisticated, implying they should be hired because you'll be better off.

The best financial planners are those that can listen and understand what's truly important, then distill your mess of a financial situation down to simple recommendations you'll actually follow. Any idiot can complicate something. It takes skill to deliver straightforward and effective solutions that require the least amount of brain damage to implement.

Now go turn off push notifications off on your phone, go for a walk, and do some yoga.

#financialplanning #savings #insurance #estateplanning #simplify