Click below to listen to Episode 47 – Financial Mistakes We All Make

Financial Mistakes We All Make

Living with and preventing financial regret.

How often have you looked back with regret on something that you did (or didn’t do)? We make countless decisions every single day, and there are bound to be some regrets. Regret can often be wasted energy. Unfortunately, you can’t change the past, but you can move forward with better clarity.

Often times, it is financial decisions that are filled with regret. Many times, it’s because we didn’t know any better. Unfortunately, most people don’t really understand their complete financial situation and if it is healthy. Bob and Mary Jo are here to help with that by presenting some of the most common financial mistakes that they see with clients.

HOSTED BY: Bob Barber, CWS®, CKA® and Mary Jo Lyons, CFP®, CKA®

Mentioned In This Episode

Christian Financial Advisors
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Bob Barber, CWS®, CKA®
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Mary Jo Lyons, CFP®, CKA®
Dare To Lead by Brene’ Brown
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EPISODE TRANSCRIPT

[INTRO]

BOB:
Welcome to Christian Financial Perspectives, a weekly program where we talk about ways to integrate your faith with your finances. This is Bob Barber.

MJ:
This is Mary Jo Lyons.

Bob:
Are you ready to learn the truth about money from a biblical perspective?

MJ:
Join us as we discuss what God’s Word says about money and integrating your faith with your finances… If it’s your first time listening, welcome to the program. If you’re a returning listener, welcome back.

[EPISODE]

Bob: Ephesians five 15 through 17 be very careful then how you live. Not as unwise but as wise making the most of every opportunity because the days are evil. Therefore do not be foolish, but understand what the Lord’s will is.

Mary Jo: James Chapter one verse five – but if any of you lacks wisdom, let him ask of God who gives to all generously and without reproach and it will be given to him. How often have you looked back and regret on something you did or didn’t do? Since we make 35,000 decisions each and every day, we will clearly have some regrets, but for some of us there are far too many regrets and in my opinion, regret. It’s just a wasted energy. You can’t change the past, but you can move forward with better clarity. Ralph Waldo Emerson once said, for everything you have missed, you have gained something else. So life is a lesson. The decisions we make are hopefully the best we can do at the time with the information we have available. Another quote that I read recently that I thought was pretty profound was from Brene Brown. She declared in her book “Dare to Lead”. When we have the courage to walk into our own story and own it, we get to write the ending. And when we don’t own our stories of failure, setbacks and hurt, they own us. So when it comes to your financial health, we encourage you to own it.

Bob: So Mary Jo, I got to ask you – 35,000 decisions every day?

Mary Jo: Well, you know, a decision to do nothing is still a decision.

Bob: We’re making a decision to talk. We’re making a decision to move. Yeah, you’re right. That’s a lot of decisions.

Mary Jo: Think about it – brushing your teeth. That’s a decision.

Bob: If the normal person has 35,000, does that put me at about 60?

Mary Jo: Yes, Bob. Yes. Yes it does. But that’s another podcast.

Bob: Most definitely. Today’s podcast is going to be really fun. When I say fun, we’re going to talk about common financial mistakes and most people have a general awareness of their current financial situation, but most people, they don’t really understand their complete financial situation and it is really healthy. Some people, they saved a lot, but they’ve spent it off. They may not really have enough. I think about this as an example. Someone that comes in and we see this a lot. Mary Jo, you know, they’ll come into our office with one and a half million dollars and they think they can pull off for retirement $150,000 a year from that one and a half million plus their social security and pensions and they don’t realize that withdrawing 10% a year over 20 year period or less with inflation in a moderately invested portfolio that’s built for a retiree that’s going to deplete that portfolio completely. I just don’t think they understand that, you know?

Mary Jo: No, I don’t either. And we see that a lot and we’re always having to reset expectations. But I think you said something really interesting right there was that a moderately invested portfolio is ideal for a retiree. And you know, we don’t do cookie cutter and we’ve made these grandiose generalities when we say that moderate is appropriate for a retiree, but reality is a moderate allocation has won the race over the long haul repeatedly. And when you become very aggressive, even though you have time on your side, when the market does have a decline, your lows are much lower and it takes longer to make those up. So having a moderate portfolio that doesn’t drop so severely in a down market will save you over the long haul. That’s why we say that the moderate portfolio is appropriate for retirees, but probably most people,

Bob: And I’m glad you brought some clarity to that cause that’s true. As we move through life, even if we’re trying to get our financial life on track, it is human nature to make those mistakes because when it comes to money, sometimes those mistakes can be emotional, and we have got to make sure that we take emotions out of those decisions. Sometimes they’re due to a lack of understanding, and sometimes they’re just due to a lack of foresight or whatever. The reason is it seems that mistakes happen to all of us as much as we don’t like them, but hopefully by walking through some of these common mistakes, we can help you avoid that same path.

Mary Jo: Bottom line is there are actually only four uses of money. Live – what we spend it on, give – what we give it to. Owe – that’s for taxes and debt and grow. So live, give, owe, and grow, and grow is for the future. It’s savings and investments. And we call these the four short term uses of money. Today we’re going to review some common mistakes people make that can have a negative impact on their financial fitness. So let’s get started.

Bob: All right, we’ve got a lot of these to go through. So the first one that we see is people just burying their head in the sand and saying, oh, it’s not going to happen to me now. Like not reviewing their investment accounts on a consistent basis, looking at what’s working and what’s not, and making those necessary changes as needed. And it seems most people just continue to invest in their company’s sponsor retirement accounts such as a 401k or 403b each pay period, but they never review where it’s going. There’s no idea and they’re not looking at that on a consistent basis.

Mary Jo: We’re busy and we forget about things and sometimes we just don’t want to get started on something that they feel like is going to be, I don’t know, drudgery, but just getting started is the hard part most of the time. When it comes to your investments, are you considering which fund your retirement plan offers that are best in class? So you want to take advantage of these funds whenever possible, and maybe your spouse’s plan has a different best in class fun. So you want to consider the overall allocation, looking at all the accounts together rather than investing each one in a vacuum. By doing this you avoid overlap. You avoid investing in core performers, which none of us want to do.

Bob: Also make sure you’re adjusting your risk tolerance as time goes on, and be sure you know how to access your retirement accounts and that this information is available to your spouse and your financial power of attorney as well. So that’s one of the first mistakes we see. What’s the number two mistake we see?

Mary Jo: I think it was a toss up. This could be the number one actually, but let’s just keep going in order and it’s trying to time the market we hear about this so often and you know Bob, if it were possible, everyone would be doing it and we’d all be making millions. You and I would be retired on an island in the Pacific. It’s possible to get lucky once in a blue moon, but no one in history has ever been able to consistently time the market. So we just want to encourage you to make a commitment and stick to it. If in doubt you want to consider dollar cost averaging. This is when you buy a fixed amount on a fixed, predetermined schedule. You set it up automatically.

Bob: You know there’s another part of trying to time in the market that most people don’t think about and this is those that are sitting in cash on the sidelines because they’re always too nervous to make that move and that’s a part of market timing as well. No one knows for sure when the market low or high is going to be, and if you’re waiting to get in and look for a drop, if you see this big drop come in, dollar cost average into the market, that means let’s say you want to put $50,000 in the market, well put $5,000 in the market in 10 different increments that gets up to that $50,000. We call that dollar cost averaging and do that on a consistent basis and don’t look back because if you do, there’s the old adage that’s out there. As soon as you get into the markets, they’re going to go down and as soon as you get out they’re going to go up. So trying to time it, it’s just going to drive you crazy.

Mary Jo: When we invest in our company 401k or 403B or whatever retirement plan they offer, we’re actually doing that dollar cost averaging because each week or each pay period, when they take the money out for our contribution, then that gets funneled into our account and invested. And it happens methodically over time. So same principle.

Bob: It’s kind of funny when people look at me with kind of a deer in the headlights look, I’ll say, now what you want to do if you’re putting money into the market monthly is you want the market to go way, way down and stay down for about 15 or 20 years and then go way up about a year or two before you retire. And they look at me and go, why is that? I said, because you’re buying cheap and then it’s gonna go up.

Mary Jo: That would be nice if that would only happen on our timeframe, but it may not be our neighbor’s timeframe.

Bob: That’s right.

Mary Jo: So another common mistake is reacting emotionally and sometimes acting like a day trader. So that’s where you’re buying or selling based on headlines versus following a longterm strategy. And basing your decisions on fundamental research. Day trading is a loser’s game day. Day traders are people that make a living on short term investment moves, buying and selling in the same day at times or just doing so very frequently.

Bob: You know, we all hear those stories or see the advertisements that claim you can learn to trade like the pros, right. You know, and they only tell you about the extremely few people that are successfully doing this on their own, but they never talk about the ones that are slowly dwindling away their savings that are trying to trade like those pros. And I’ll tell you, there’s far more losers than there are winners when it comes to trying to compete against the pros with their multiple staff members. They have master’s and doctorate degrees in finance and economics. They’re using sophisticated algorithms. You’re just not going to be able to compete. It’s like me, Mary Jo, I’m not blessed with that height. I don’t think I would compete very well getting on the floor with the San Antonio Spurs, my team since we’re so close to San Antonio. So trying to trade like the pros is very, very difficult. And if you’re buying and selling in a taxable account, you should also be aware of the tax consequences and fees that come with that.

Mary Jo: That kind of brings us to our next common mistake and not not paying attention to tax consequences and investment placement. What we mean by that is, you know, you gotta be thoughtful where you’re placing the kinds of investments. There are certain investments that are great for a tax deferred account, and there are other investments that are much more tax efficient for a taxable account. And if you have inefficient investments in a taxable account, these can spin off capital gains and dividends and other tax consequences that’ll create taxable income for the year. So you want to be thoughtful about this. Speaking of taxes, you’ve got traditional mutual funds. These are those examples I was talking about. These are best suited for tax deferred accounts because they do spin off capital gain payouts. And taxable income to you as the shareholder. So instead, we’d recommend that you use tax efficient exchange traded funds and/or dividend paying stocks that you plan to buy and hold. And if you have questions about that, Bob and I are here to explain it and help walk you through that and make sure you understand what the differences are.

Bob: So I want to get a little bit into this tax code and helping you understand just a little bit of this. We’re not going to get too detailed, but understand your holding period that any gains are taxable when you sell. So you got your term gains and that’s anything you’re holding less than a year and that’s taxed at ordinary income tax rates. So if you’re in a high tax bracket, be very careful of that. Then you have your longterm gains as greater than a year. And that’s tax to either a 0, 15, or 20% rate, depending on your income level. But dividends, they’re taxed at ordinary income and investment losses can be offset. So under the tax code, investors can write off any amount of losses against their gains. So as an example, if you lose $50,000 one stock and make $50,000 and another, these gains and losses are offset. Really, you’re at zero. If your losses exceed your gains, you can write off up to $3,000 of the excess losses each year against your income known as carry forward, and you can carry those losses forward until you’re able to offset them. Also, let me give you an example that, so let’s say you have a loss, a pure loss, $30,000 you can’t write that all off, but you can write off $3,000 of that for up to 10 years against your taxes.

Mary Jo: And our next common mistake, this one’s a big one, spending beyond your means and not saving enough. So, this is pretty much a no brainer. Spending beyond your means can create financial chaos in very short order. So, we always encourage to avoid the use of debt. That’s one of the major biblical financial principles that we talk about so often here on the podcast.

Bob: So, we’ve gone over five common financial mistakes so far, and the sixth one is getting sidetracked by the headlines and paying too much attention to all that noise out there in the media and Facebook and all the different internet sites and cable. I mean it can drive you crazy cause the media sensationalizes everything. So just you’ve got to tune it out and create that longterm investment strategy and stick to it. Don’t let those short term, emotional reactions derail your plan. Do you ever notice how the stock market plunges? The media always says that it plunges, it dives, it crashes, but then it surges, skyrockets and sores and they use these adjectives for a reason. They want to create fear and generate an audience that might otherwise tune them out.

Mary Jo: You know, I’m thinking they make me tune now just with all that noise. But I think that is so true.

Bob: Yeah, most definitely.

Mary Jo: The next common mistake, it’s investing with different firms. People think this gives you a better chance of covering different investment strategies. But you know, when we talk about diversification, that’s not really what we mean. It’s good to have your investment spread across multiple asset classes. That’s the best way to diversify. And when we talk about asset classes, we’re talking about large cap stocks, midsize companies, small companies, international companies and bonds. And when we talk about bonds, we’re talking about corporate bonds and treasury bonds and all kinds of different types of investments. So, that’s what we mean by asset classes. You should have one advisor that’s a trusted advocate. A fiduciary is always looking at everything you have in order to ensure it’s properly coordinated and correlated. That’s how we avoid overlap as excessive fees and ensures you’re tapping into the best in class investment options at each provider. So, you’re looking at your 401k and getting the best of what they have to offer, your spouse’s 401k, your brokerage account, and looking to make sure you’re putting the right investments at the right place. And then looking at how it all fits together, like the pieces of a puzzle.

Bob: And you know, Mary Jo, something that goes along with this, which I say is common financial mistake number eight, is not disclosing everything to your financial advisor. It Is kind of like the old saying, “garbage in is garbage out”. Really, to provide appropriate advice that’s in the best interest of you, your advisor has got to know the full, big picture. If you aren’t open to revealing this, you’re only shortchanging yourself. I mean, think about this. Would you do this with a doctor or your doctor who’s trying to help you and leave out important information when she or he is asking for your medical history in order to make a recommendation? I also think of it like a blueprint. If you have a builder and you’re building a new home, are you going to tear off some of the blueprint and not show them the whole thing in order to build the house properly?

Mary Jo: You know, Bob, we all have our images I think that paints these pictures in our mind’s eye, and I’ve always called this, you’ve got to open the Kimono and you gotta tell me everything. You know, you’re also being unfair to the advisor. So, how can they help you if they don’t know what the whole big picture really is? They may provide inappropriate advice because they don’t have all the facts, and that’s not fair to you as the investor and it’s not fair to the advisor.

Bob: So a ninth common financial mistake we see is making those major purchases like a car, a home, maybe a vacation home or even paying for college without really understanding all the cost involved. So, first I want to get into the car. I remember we had a whole podcast on this, Mary Jo. We talked about buying a car. An example is buying a new car and this is one of those gray areas. Everyone has an opinion and you know, should you buy a new or used, and buying new is not always a mistake. But when you’re not able to pay cash and or don’t plan to keep it long term, you know, buying used may make more sense. The main thing is when you drive off that lot, you need to understand you’re going to take an immediate hit on the value of any asset, like a car RV or especially a boat.

Mary Jo: Okay.

Bob: A new car is going to take a biggest depreciation first two or three years. According to edmunds.com 19% on average in the first year. So why not buy something that’s about three years old if you can find one that is in good shape.

Mary Jo: You talked about another asset – your home. Buying real estate too quickly can also be a common mistake. We would encourage you to rent first and also avoid those track homes. Get to know the neighborhood you’re interested in, the schools, the traffic patterns, the crime rates, the trends, and if there’s going to be future highways coming through or future construction. It gives you a chance to do all that research and get a feel for things. And when we say avoid buying builder track homes, these are usually pretty poor quality. They use poor quality materials, they tend to cut corners, and they don’t use the most experienced crews. They have a lot of turnover. So a custom built home tends to hold its value, and you’ll also have confidence that the materials and the craftsmanship are a cut above average. So, we really encourage you to think about that

Bob: Yeah, you know Mary Jo with my real estate background, I can sure chime in on this too, because I’ve seen over and over and even our own clients who have bought these track homes and they think they’re making an investment. Five years down the road, they’re having to repaint them and maybe they want to sell it and they’re having to do all kinds of new things to it and they’re selling that same home down the street for the same price that you bought five years ago. So, people go and buy the newer home.

Mary Jo: People buy those starter homes when they’re really strapped for cash and they typically don’t maintain them. We’re talking in generalities, but I’ve seen it happen so many times. That brings down the value of the entire neighborhood. So oftentimes if you decide to sell, you can’t get what you even paid for the home, cause the whole neighborhood has depreciated.

Bob: If you’re going to buy a home from a track builder, I would really encourage you to go look at a neighborhood that’s say five to eight years old that that same builder has built and go find that neighborhood and see how those homes are doing.

Mary Jo: Oh. That’s a great idea, Bob. Good advice.

Bob: Oh, thank you. You know, being in real estate for so many years, you know, that was my background and my dad was in real estate for over 50 years, so I really understand a lot about that. You know, another major purchase. Most people don’t think of it as a purchase, but it is as a college education and tell you what, it’s so expensive and so many of us can relate to. Let’s say you got a degree in one field and you’re not even using that degree still in that same field. So, when you think about a college education, consider a tech school or like a community college those first couple of years, taking on all that college debt without a strategy and how you’re going to pay it off is a financial crisis in the making. Is that four year degree at a top college really the best choice. Every child’s different, so a trade school, sometimes those salaries are very high for many of those trades. For example, plumbers, electricians, carpenters, mechanics that know those computer systems. Those are well paid jobs and are in high demand and are not near as expensive as a traditional college education.

Mary Jo: You’re so right, and I’m a big fan of the community college. You can get the basics for the first two years at a fraction of the cost at a community college. They’re typically closer to home. So many students, they’ll get depressed, they have emotional issues, they gained a lot of weight when they’re away at school because they’re home sick. If that’s your child, maybe consider that community college. You also want to consider the cost of transportation. Can they utilize public transportation and maybe avoid needing a car during college. Take a smaller course load so that the students can work part time and that way they’ll have skin in the game and when they have skin in the game they’re much more likely to take it serious, their grades are better, and they tend to stay out of trouble because they don’t have time. They’re busy working. And also you get a job with an employer if you could, that pays tuition reimbursement as an employee benefit after a short time. This is especially good if you’re looking for an advanced degree such as a master’s degree. Let the job pay for it.

Bob: So Mary Jo, I feel like that’s probably enough financial mistakes to go over for today’s podcast. What you think?

Mary Jo: Well, let’s hope we slow down and we give thought to all those financial decisions and we just try to do better.

Bob: God encourages us all to be good stewards with what he’s given us and you know, he’s given us our time, talent, treasure, truth in relationships for the accomplishment of those God-given goals and objectives, the process of goal setting, that’s a faith process because you’re asking God what he would have you to do and do that always first. God wants us setting goals because it’s part of his intentionality. A faith goal and objective toward which I believe God wants me to move in faith – that’s acting out on the basis that this is what God wants me to do.

Mary Jo: So understand that we all make mistakes, but when it comes to money decisions, we encourage you to seek wisdom first. Be Intentional and understand that every spending decision, it’s actually a spiritual decision.

Bob: We want to help you avoid as many of these mistakes as possible by walking beside you in your financial journey. So if you would like to talk about your financial situation and how we may be able to help you, give us a call at (830) 609-6986 or go online to our website at ciswealth.com and set a 15 to 20 minute phone appointment with either Mary Jo or I through the website’s online portal. At the top of the website it says “meet with an advisor”.

[CONCLUSION]

You’re listening to Christian Financial Perspectives. Join us next week as we explore what God’s word says about money. Don’t forget, you can sign up for our free newsletter on ciswealht.com or give us a call at 877-71-TRUTH. That’s 877-718-7884. To make sure that you don’t miss any of our podcasts regarding the truth about money, make sure to subscribe to Christian Financial Perspectives at christianfinancialpodcast.com for free. If there are any specific topics you would like to hear more about, we would love to hear from you.

That’s all for now, until next week!

[DISCLOSURES]

Dollar cost averaging will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor.