Are You Too Old School With Your Money?

Last week my Mom and I were Facetiming during dinner. If you're an Apple geek like me, you'll know what that is. She asked how she could set up automatic payments so that she didn't have to commit hours each month to tracking down all the household bills and manually paying each one.

I was surprised she wanted to adopt this approach since she'd rebuffed my efforts over the years to convince her it was not only safe, but a huge time saver. I suppose everyone has their breaking point.

We're in the process of automating all my parent's monthly bill payments, and it got me thinking about all the other old school ways we think about and manage our money.

For the record, sometimes it's ok to be a little old school.

Other times, not so much.

Old School Thinking # 1

You're Still Manually Paying Bills

Every single bill I receive is set up to be automatically paid. By default, it's always my credit card so I can earn the rewards points. For a few bills, I'm forced into paying from our checking account, but 90% of our expenses are automatically paid with our credit card.

Whenever a bill is scheduled to be paid, I get an email saying how much it's for and when the auto draft is scheduled to take place. If it all seems normal, I don't spend more than 5 seconds on it.

At the end of end month, my credit card balance is automatically paid off in full from my checking account. When the notification from the credit card company arrives in my email, I eyeball the balance. Knowing what our regular monthly expenses are as well as if there there were any recent large discretionary expenses, I know right away whether I need to go through the statement's individual charges or if I can simply accept it and move on.

The whole thing takes me about 1 or 2 minutes per month. No, I don't "balance" a checkbook like they tried to teach me in 7th grade home economics. Yes, this is coming from a financial planner.

Old School Thinking # 2

You Pay Extra On Your Mortgage

I get it. You want to be debt free. Dave Ramsey is your biggest hero. Well congratulations, you're squandering away your money.

Without even considering the effect of deducting your mortgage interest, your mortgage interest cost is lower than the expected return on your investments. It's not efficient to pay down a debt costing you 4% while you're giving up a 7% return on that same money.

If you're one of the few who will still itemize their tax returns (versus taking the big new standard deduction, more on this later in the year), it's likely you can still deduct the interest you pay on your mortgage unless you live in a McMansion. Once you factor in the after-tax interest rate on your mortgage (assume you deduct), the case for investing instead of paying extra on the mortgage becomes even greater.

Get it out of your head that you need to pay down your house as fast as possible. Each dollar you choose to invest has almost a 100% advantage in terms of building your net worth versus that same dollar spent accelerating your mortgage. I promise you that you'll feel much better with a big fat investment balance versus paying off your house sooner.

Remember, your investments help fund your retirement. You live in a house that does not pay your bills in retirement (well, mostly, more on this next). In addition, your house does not pay a dividend nor does it appreciate, on average, as fast as your investments.

Old School Thinking # 3

You Fail To Consider A Reverse Mortgage In Retirement

A reverse mortgage (RM) allows a homeowner over age 62 to tap into their equity to manage retirement expenses. In many cases, a RM line of credit accessed when the stock market experiences declines can actually improve the overall sustainability of a financial plan.

Up until the Reverse Mortgage Stabilization Act of 2013, you probably should have ignored RMs. They were costly and restrictive. Ignoring this source of income now could be a big mistake.

Although misunderstandings still persist, these are the facts:

• You don't give up the deed to your house when you take out a RM.

• You kids can still inherit your house after you move or pass away.

• A non-borrowing spouse can stay in the home after the borrower passes away.

• If the house is worth less than the amount you've borrowed at the time of your passing, government insurance makes up the difference so your kids aren't on the hook.

The biggest issue people have with RMs is getting over the psychological constraint of taking loans against the house they spent so long paying for. However, if you think about your home as an equity asset on your personal balance sheet just like your investment portfolio, then using home equity to meet expenditures becomes the same thing as whittling down your investment portfolio for the same purpose.

The benefit is just like the efficiency identified in #2. If the cost of a RM is lower than the expected return on your investments, then using a RM leaves more dollars invested over time. This leads to passing on MORE overall wealth to your kids, not less. And, if your kids really want your house, they can just use all those extra investment dollars to pay off the RM balance and move back in once you kick the bucket.

Old School Thinking # 4

You Won't Need Long Term Care

It's quite conceivable that at some point in your life, you're going to need help with things like cooking & cleaning, driving, paying bills (see #1 above), and even getting up and around. Who's going to help with that? Your kids? Mhhhmmm...

I wouldn't rely on my kids for this unless a plan is explicitly mapped out well in advance. Taking care of elderly parents is a massive burden. Plus, it's awkward. I don't want to imagine helping my Mom in the bathtub when she's 90.

And who's going to pay for the care that you'll probably need? Most long term care (LTC) isn't actually covered by Medicare. Should your health situation be dire, your Medicare Part A will cover "skilled" nursing care in long term care hospital. But, that benefit period is limited to 60 days before a new benefit period begins and you're on the hook for another deductible and more coinsurance.

In most of the financial plans where I've analyzed whether its better to use LTC or pay out of pocket, it's usually better to pay a couple thousand dollars in LTC premiums each year versus watching your savings and investments quickly evaporate should you need just the average amount of care over the average amount of time.

Old School Thinking #5

You Can Beat The Market

Maybe you can get lucky once or twice in your lifetime, but you can't predict which stocks are going to outperform with consistency and you certainly can't do it over the long term. No one can. Let me put it bluntly. Here's how many people are in the stock picking hall of fame, zero.

If you don't believe that the stock market is an insanely efficient exchange and all current prices reflect both current and future expectations of value, you're a sucker.

Accept the reality that the best thing is to avoid market timing nonsense and stick to your plan of buying low cost, tax efficient index funds while you periodically rebalance. If you can't commit to that, all kinds of hair brained investment schemes will start sounding good.

The only investment philosophy you should believe in is a passive strategy that employs globally diversified funds. Remember, if you don't believe in something, you'll fall for anything.

Old School Thinking #6

Your Financial Advisor Has Your Best Interest In Mind

Ahh, my favorite.

Financial advisors are just sophisticated sounding salespeople. For the most part, they peddle expensive and chronically underperforming crap their employing brokerage firm incents, or worse, forces them to sell.

The only difference between a financial advisor and a part time RadioShack employee is the financial advisor makes a helluvae lot more money preying on the knowledge gap between you and them. It just so happens that mutual funds, insurance, and annuities pay a lot better than electronic gizmos. Interacting with both financial advisors and the average RadioShack employee, I can tell you the RadioShack employee has fathoms more integrity and character.

Don't believe that financial advisors will always act in your best interest, read THIS, and THIS, THIS, and THIS.

Old School Thinking #7

You Deserve That Fancy Vacation, New Car, Kitchen Remodel, MISC Stupid Thing

What you deserve is exactly correlated to how well you've prepared. Inheritances excluded, obviously. I know you feel you work hard. You probably do. I know you feel you put up with a lot of crap. Definitely. I know you think buying that new thing will enhance your life. It usually won't after a short period of time.

You have a choice, you can have all your wants right now and have only a little in retirement. Or, you can balance having some things now and some things in retirement. What's it going to be?

Since most of my adult life I haven't had much money, it would be very easy for me to think that I somehow deserve more now that my business is relatively successful. The reality is I want nice things, but I also want nice things in retirement and I certainly don't want to work until I'm 70. For this reason, I drive a 2001 vehicle. My wife and I took a camping trip for our 10th anniversary versus splurging on Hawaii. I bought my house 7 years and 1 month ago and only just now and I'm finishing our kitchen remodel.

Point here is that I could blow all my extra cash on fancy stuff, but I don't. I save almost half of my income and find creative and impactful ways for myself and my family to enjoy life.

I always tell all my clients they can spend their money on whatever they want as long as it doesn't sabotage their other financial goals. Follow my example.

Take Away

Change is hard. According to Science, it takes more than just a few days to develop a new habit. In order for a new behavior to become automatic, be prepared to dive in for an average of 66 days. It could even be more in some cases. The study concluded that it may take up to 8 months to realize full adoption of a new habit. The harder the habit to master, the longer it'll take.

This means you've got some work to do if you actually want to change your thinking based on anything I've written in this blog post. If that sounds too suffocating, what's worse, continuing your current thinking and getting the same results or committing to change and doing better?

You decide. And no half assing.

And if you need a little help staying focused, give us a holler. We will help you map out a plan to begin implementing right away. We'll even stay on you so you're not only accountable to your goals, but to us as well. We care about you achieving your goals, being efficient, and having a good life.

#financialplanning