Afford Anything - Avoid These 13 Hidden Money Mistakes That Most People Make, with Jill Schlesinger

Episode Date: September 8, 2020

#275: Even the nerdiest of money nerds are susceptible to making a dumb financial mistake. “Nope, not me! There’s no way I make any financial mistakes. I live and breathe this stuff.” You’re not capable of making any financial mistakes? Even 'hidden' mistakes, like having the wrong life insurance policy, not having an estate plan, or listening to the wrong ‘experts'? Exactly. Jill Schlesinger, author of The Dumb Things Smart People Do With Their Money, sets the record straight on 13 things you shouldn't do with your hard-earned cash. For more information, visit the show notes at https://affordanything.com/episode275 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your energy, your focus, your attention, anything in your life that is a scarce or limited resource. Saying yes to one thing implicitly means saying no to other opportunities, and that opens up two questions. First, what do you want most? And second, how do you align your daily decisions to reflect that? Answering those two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. Today, Jill Schlesinger from CBS News,

joins us to talk about 13 money mistakes that very smart people, well-informed people, commonly make. Now, we're not talking about classic money mistakes, like taking out a bunch of loans or getting over your head in credit card debt. Those are the money mistakes that we hear about in headline after headline after headline, the cliche money mistakes that we're all aware of. But Jill Schlesinger and I, in this interview, discuss hidden mistakes like having the wrong life insurance policy or not having an estate plan, or taking advice from the wrong people listening to the wrong so-called experts. It could be that you're doing a bunch of things right on the outside. You're nailing your budget.

you've got a great savings rate, but you have no estate plan. And so in this episode, Jill Schlesinger, who is the author of a book called The Dumb Things Smart People Do With Their Money, clues us in on what not to do, what mistakes to avoid that we don't often hear about enough, such as failing to protect our identity, not planning for the care of aging parents or aging grandparents, and buying sophisticated financial products that you don't really understand. Now, Jill is an Emmy-nominated and Gracie award-winning business analyst for CBS News. She is the host of Jill On Money and the former chief investment officer and co-owner of a financial advisory firm. She makes weekly appearances on NPR's show Here and Now, and she's a certified financial planner and a graduate of Brown University. We are airing this episode as part of the September sabbatical. So in the month of September 2020, I'm taking my annual September sabbatical, where I'm not creating new episodes. Instead, we're airing some of our favorite interviews from the archives.

This interview with Jill is a classic. The first time that it aired, we heard from a lot of people who said that they learned specific actionable tips that helps them level up their game. So I hope you enjoy it. But more importantly, I hope you learn something and take action. With that said, here is Jill Schlesinger. Hi, Jill. Hello.

So you have written about 13 dumb things that really. smart people do with their money? What inspired to see that topic? You know, there were so many books that judge you for drinking a latte or talk down to you or maybe even promise how to get rich. But I have been in financial services for more than three decades. I can't even believe it. I started as a commodities options trader on the floor of the commodities exchange. I then became an investment advisor, a CFP, financial planning and planner and money manager, and now a business analyst for CBS News. And I kept thinking that there are all these books that were kind of obvious and silly, two ends of the extremes, but there really weren't any books for otherwise intelligent people who are really stymied by their emotions, specifically fear and greed. and I wanted to write a book that acknowledge that, you know, those emotions, plus a lot of our

cognitive biases can lead us astray. So essentially, I just wanted to write a book for the people in my life, my friends, my colleagues, my former clients, my radio and podcast listeners, TV viewers, all those people have been kind enough to share their dumb things with me and have sought advice. What's the dumbest thing or one of the dumb things that you've done with your money? Well, I highlight this as the last chapter. Chapter 13 is you try to time the market. And this is a very classic smart person mistake because if you're really smart, you believe that if you study hard, there's a certain amount of expertise that you

could bring to the market and to the idea of beating the index against whatever index you're trying to beat, like the S&P 500 index. And I think that it's kind of funny. It's like smart people really regard their successes as evidence of their great brilliance and their setbacks are bad luck. So when I was a money manager during the technology boom and bust, there was a moment where I just sort of thought, wow, these tech stocks were going bananas. I wasn't the only person who thought that.

There were tons of people who thought that. But I was publicly making a statement. I wrote a column about it and was on a radio show and television and I talked a lot about it. And I basically said, hey, warning, warning, you know, these are crazy levels. And I got out of the tech bubble, not 100%, but largely before it burst. And so all of a sudden I thought I was brilliant. Oh, so smart, right? And people really thought I was.

smart. I mean, it was great for my business. People thought, wow, she's the one who didn't get killed by the tech bust. But as time wore on, I didn't get back into the market because it's really hard to make two great decisions. One, when to actually get out, but also then when to get back in and I waited too long. And it was a really good lesson because, by the way, all those people who thought I was so smart, then subsequently wrote into the paper and called the radio show, and it's like, hey dummy you missed the whole rise of the stock market you know in the really the beginning of 2003 with the year 2003 was a terrible year for me personally because I was like wow I really blew this and I started doing some more research about market timing and I really came to understand that over the long term

it's really hard to do it so even though we all try to do it the idea that you can maybe just not worth all the effort because at the times where you might get it right on one leg or the other leg buying or selling, it's tough to get the second decision right. So that's chapter number 13 for me. And I really thought that it was important for me to highlight something that I had done because here I am this certified financial plan or this trader, this person who's been in the business a long time. And I just want to say to everybody, we make mistakes. We are human beings. And these are very emotional issues. So two things that I hear within that answer. One is you bring up the excellent point that if you do try to time the market, you have to be right twice. You have to be

right when you sell and when you buy. And the probability of being right twice is far lower than the probability of being right once. Yeah, absolutely. The other thing that I hear you say is that and correct me if I'm misinterpreting this, is it that if somebody is smart or successful, then that might be in this context a bit of a hindrance if that success leads to overconfidence. The expression in a bull market, everyone thinks they're a genius. Yeah, absolutely. And, you know, I learned this not just in my own experience, but I interviewed Annie Duke, who wrote a great book, Thinking in Betts, and she's a professional poker player.

And what she really helped me understand is that same thing, like, almost like the rules of poker. You might think it's crazy to use gambling, but real gamblers play the odds, right? And they try to make the smartest decisions given everything that's happening in the course of a hand. What she said is the gamblers who go astray are the ones who think that their decisions and their results are absolutely hand in hand going down the same path. And she made this analogy to me, you know, for someone to say, for example, if you got the timing of the market right, done on one leg, she said, look, if you run a light a hundred different times and you've never gotten into a car accident, is running the light an actual good decision or not?

And I was like, no, that's a terrible decision. She said, right, but you don't judge the quality of that decision based on the fact that you've never gotten to a car accident, right? I said, right. She goes, what, we do that all the time with investing and with decisions where you have emotion, that creep in. And I found that to be so fascinating. It really, like, hooked me in so enormously because I felt like that is so true. That oftentimes the way the human brain works is that we kind of fool ourselves and we conflate

the decision and the outcome. And that is not always the case. Absolutely. Resulting. It's a very terrible way to make decisions and yet a common way to make decisions. How do we catch ourselves when we're doing it? Is it purely self-awareness or are there techniques, tactics that we can use in order to provide a sanity check to ourselves?

I still think that the best defense against doing a lot of the things that I outline in the book starts with, number one, kind of knowing who you are emotionally. I'm not saying you have to go to therapy to manage your financial life, although it probably couldn't hurt. But I would say, if you're the kind of person who tends to really, you're a kind of person who tends to really, be lured by greed. If you're the type of person who's lured to do something based on fear, understanding that is incredibly important.

And then the next important step is to create a plan that will help you trump those emotions. So the thing that's so useful about a financial plan, an asset allocation plan, any, you know, sort of pen to paper or, you know, printed word to printed piece of paper, The real benefit of it is that when those emotions creep in, you can fall back on the plan. And you could say, oh, that's my emotions. Let me just look at that plan again. Oh, right. I don't need this money for 30 years.

And so I am not going to fall prey to this. Or, gee, in my game plan, I had this like fun money account that I could use maybe 5% of my total invested assets. And I could put it into crazy stuff. Well, I'm already at 5%. So the next crazy thing that happens, I have to say no to that so that the plan can really help you overcome the pull of your basic humanity, the thing that makes you human, your emotions and those cognitive biases. If you do create a plan, how do you hold yourself accountable for sticking to it?

I'm thinking about the number of people who create diet or exercise plans or eating, you know, lifestyle change plans that then fall by the wayside within a week. I know. it's so hard. I really do. And you know, it's so funny that you said the diet and exercise because I absolutely use that analogy in the book because I am a lifetime member of Weight Watchers. And to stay on plan and to be accountable is really hard. One of the things that's important is that you revisit that plan from time to time. And if you don't want to do it yourself, I'm fine if you want to do it with somebody else. That's, that's, that's,

absolutely positively important. However, if there is some life event, birth, death, marriage, divorce, new job. It's a great time to actually take a look at the plan and see where you are, see if you need to make any adjustments. And if not that, then every couple, three years, you need to look at that plan and make sure that you are still doing the things that you intended to do. Now, speaking of plans, that ties in really nicely with dumb thing number 12 on the list. Since we started with 13, I'm going to work backwards. I love you. It's fabulous. Most interesting way to approach it. I love it. It works really well with this conversation that we have about planning because dumb thing number 12 is that you don't have a will. I hate this one. I mean,

I hate this one, meaning I love this one. It is essentially an extended guilt trip that I put you on. See, I will not make you feel guilty for having a latte. I promise I won't. But not having your estate planning done, I will really harp on you. I think this is by far the worst of the 13 mistakes that I outline. I really do. Because it is hard to overcome that dumb mistake for your heirs, right? You don't do your estate planning.

And it's not as if there will be a process. it just makes it so much harder for the people you've left behind. And I tell stories that were just heart-wrenching to me, where I've gone into clients' homes, where the husband said, I have the will, and there was no will, and now we're digging through, and we're finding out that there has to be a huge long probate process, or that we just don't know where certain things are.

imagine that you've left your family with a pile of crap to settle at a time where they are just not at their emotional best. They're trying to grieve the loss of you. And you've added to that grief because you were just so freaked out by facing your own mortality. You just couldn't quite get it together to conduct this part of the process. I think that's terrible. And I don't think that that's what most people would really want their legacy to be. Like, oh, yeah, I really miss good old grandpop. Too bad he left a pile of crap for me to settle.

And it took 12 months. When you say will, I'm assuming that you're referring to any estate plan, like a will or a revocable living trust. Yes, I'm really talking about what I think are the most essential documents. I mean, you don't need to have a trust. But I think a will, a durable power of attorney, which assigns someone the right to make a financial decision on your behalf and a health care proxy, which is a health care decision on your behalf if you're not able to do so yourself. Why is this so important? Because at the time of your life, when you really need it, you probably are not in a position to execute these documents. I know it's hard.

I mean, no one wants to think, oh, what's it? You know, I love when the estate attorney is like, well, what would you want to happen while you are, you know, incapacitated? Do you want to be on a respirator or not? Do you want this? Do you want extraordinary measures, it's hard to even contemplate that. But if you do, again, you make it so much easier for your friends and your family. I tell the story of my own father because my father was very clear about his wishes. Years before he died, he was very much sort of top of mind, maybe because his own father had Alzheimer's and had a pretty rough end of life. He would say to me, I don't want to be like this, or I don't want this.

or I don't want this to happen to me. Or if I can't physically do the things I want to do, I really don't want to be kept alive by a machine or a breathing tube. And when he said that, I think that my sister and I would always sort of roll our eyes like, oh, brother, here's daddy going kind of off the wall again. But when it came time to make really hard decisions, those decisions were so much easier because he had articulated his wishes.

And if he hadn't, maybe it would have been terrible and difficult and gut-wrenching. And maybe we would have gotten to the same conclusion. But because he had spoken to us in that way, it was like a gift because then we could make a decision, move on, we could mourn his death, we could help out my mom, all these things that I think would have been a lot harder had he not been clear about his intentions. Right. And you don't have to then spend the rest of your life wondering and guessing and second-guessing yourself. Indeed. Indeed. And it's a very difficult position to put people in

if you haven't done that work. So why do people not do it? I think that it's for the obvious reason. I mean, really, that it's very difficult to contemplate your own death. The big reason that many young couples run into is that if they have kids, they fight about guardianship. And, I mean, one of the most horrendous knockdown dragout fights that I ever saw in my office when I was a CFP and a money manager was a fight between a couple that just really melted down into, you know, your brother's an idiot, your sister's this and fight, fight, slam door, slam door, move out of the, and leave and leave the office. And I know that these are very touchy issues.

Again, you're hearing emotions are infused in so many of the. these problems. However, if you die without instructing who the guardian should be, then your state will make that decision for you. And you know what? I come from a small family. That may not be so bad for me, but I have a spouse who comes from a big, huge family. And there are certainly some people in that family who you'd want taking care of your kids more than others. And especially if you don't want to name a family member, you want to name maybe your best friend, your college roommate, you know, if that's the case, if you don't put that down on paper, you're going to run into a big problem, or you won't, but certainly your kids will and the friends who you want to

be the guardian will. Let's talk about another form of taking care of yourself as well as other people having support in the event that something happens to you, and that's insurance. This leads us to dumb thing number 11 on the list. You buy the wrong kinds of insurance or you don't buy any at all. I think that insurance is probably the most misunderstood financial decision to make. It shouldn't be because I would blame the insurance industry for making it so complicated. But the thing that's kind of cool about just the general concept of insurance is you can pay somebody to assume some of the biggest risks that exist in your life.

That's amazing, right? There aren't that many risks where you can just pay somebody to say, hey, you worry about it, not me. That's a good way to look at it. I like that. Absolutely, absolutely. And the problems that people run into with insurance is, it's sort of an extension of the estate issue,

is that we don't like contemplating the worst thing. Let me think about what would happen if I drop dead tomorrow while I still have young kids. That is not a fun thing to think about. It's not fun to think about, gosh, what happens if my aging parents need care and they can't afford it? Who's going to take care of them? What's going to happen? Is there insurance that can help me through this?

I call it a boring, complicated, and thankless part of your financial life. But it is critical that you address some of these risks and take them, and, really address them head on, right? So run insurance numbers. Be sure not to be sold something that's more complicated than what you need. Reassess your needs when you can, you know, every few years. Take advantage of those employee benefits that are out there. Some people have unbelievable benefits, and these are some of those benefits are benefits that you can take with you, even if you don't stay at that job. So insurance is really a cornerstone of protecting your family, you and your family. What type of insurance should, say, the average 35-year-old, maybe married with one or two kids?

What type of insurance should they have? I think that nine times out of 10, maybe nine and a half times out of 10, that kind of couple is going to buy term life insurance because they will need coverage for a certain period of time, term during which they're accumulating money that could protect them later in life, but they haven't done it yet. So term life is really cheap. If you're healthy, that's kind of what you should stick to. Of course, if you buy a home, you have to have homeowners insurance.

Your mortgage company kind of forces you to do that. If you're a young couple and you're renting, renter's insurance, this is your cheap policies that give you great coverage. You should have disability insurance, which is usually through your employer. if you're self-employed, you should look into it. Because what's your big risk when you're self-employed? Something happens to you and you can't support yourself. So this is a huge issue that people don't like to deal with.

You know why? Because disability insurance, it's really expensive. It is. And it's expensive because you have a much higher probability from an actuarial standpoint of becoming disabled before the age of 65 than dropping dead before the age of 65. And so the reason it costs so much money, is that you're protecting that earning income. That is something that's incredibly important.

So, again, most people have it through work. But if you don't, maybe you can get it through an association. Maybe you're going to have to buy it privately. But you've got to protect your income because if something bad happens to you and you're Paula who's kicking butt and making tons of money and supporting your family and you're self-employed, you run risk all the time that something bad could actually prevent you from reaching financial goals. With regard to disability insurance, there are a lot of people who are listening to this podcast who are part of the fire movement, financial independence, retire early. Yeah, love it.

Excellent. Excellent. I'm so into it. I'm so into it. One of the major questions within that community is, is it prudent to have disability insurance, long-term disability insurance, until the point at which your investments could cover your at least basic cost of living, at which point you can drop that disability insurance because you've reached that moment of financial independence. Listen, once you become financially

independent, you're financially independent, right? So the numbers are very clear. If all of a sudden you say, I need $2 million by the time I'm 45, and with $2 million, you're, you're, and with $2 million, I can live the life for the rest of my life. You've crunched your numbers. It works. There's no reason to carry disability insurance. Oh, and by the way, disability insurance is covering your earnings. So if you've already made the money, you don't have to worry about it.

The only downside of dropping a disability insurance policy is that if for some reason you kind of want it back, you can't get it because you will have no history of earnings after a certain point, right? So be careful. I mean, there are people I know who hang on to disability policies for a few years after they think they don't need it anymore just in case. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware.

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and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune Magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big bank muscle, fintech hustle. That's your commercial payments a fifth-third better. Let's talk about long-term care insurance. So for example, let's say that you build a portfolio of $1 million and your debt-free. And so at a 4% withdrawal rate, that's $40,000 a year. You're debt-free. You live in a low cost of living area. Your home is paid

off. So that's enough for you to live on. But if you were to become disabled and you needed assistance with activities of daily living, you would need to pay for that. And that 40 grand a year is not going to cover that. How do you manage that in an early retirement context? The upside of long-term care insurance is that it will do exactly what you're saying, meaning that it will provide money to give you care, whatever kind of care that means. That could mean, like you said, sort of like, hey, I need someone to help me with my meals. Or it also could mean that I go into a facility and I need some money that's available to pay for that. And it's more than that 40 grand a year. or I'm married, and by the way, the 40 grand a year needs to go to my spouse and then I need care.

You could buy long-term care insurance. It's just really tough to make that early on in your life because you kind of don't know what else is going to happen. So, I mean, I guess you could buy it. It's incredibly expensive coverage. You have to be careful with it. And it would be cheap to buy it in your 40s. but I would definitely talk to, I would work with an unbiased fee-only planner to run some scenarios to see under what circumstances that makes sense for people. Let's talk about dumb move number 10 on the list, which is that you don't plan for the care of your aging parents. So this is another tough one because it's like now that the roles are reversed because, you know, on one hand, your parents had to talk to you about uncomfortable things.

Now you've got to talk to them about uncomfortable things. The problems that arise for a lot of people later in life come about often because they are not asking for help when they need it. And one way to kind of nip that in the bud is to have conversations with your parents where you can understand what's going on in their financial life. and what their intention is about how they want to experience the later decades. So here's why it's really hard, because not only do you have to bring it up, but then they have to be receptive to you bringing it up.

So that can be tough. And I have been brought into situations where there's a lot of emotions, where you become your worst 18-year-old self in the moment, and your parent becomes his or her worst, you know, 38-year-old parent in that moment. So I walk people through the kinds of questions to ask, but what's more important, the most important thing to take from this chapter is just because this is a difficult topic does not mean you can ignore it. You want to take baby steps and you don't want to dictate solutions to your parents.

This is a great opportunity to bring in a third party who can navigate this with you and your parents. so that everyone is on the same page. The reason why it becomes really important for you as the child is that chances are, if something's going wrong in your parents' life, you're going to be taking care of them. So you want to know that and you want to have an idea what would the game plan be if? What do you do if your parents are not receptive to these conversations? You know, what you really have to do is chip away. Again, a baby step.

You bring it up and if they shut you down immediately, you don't do a thing. you try to bring it up again. I have a friend who loves to bring it up every time someone else's parent dies. So she'll say, you know, Jill's father died. And it was so great that, you know, he really communicated with her a lot, not just about his end of life needs, but he talked a lot about their money and, you know, how Jill's mother would need some support, but she had enough money. But to bring in a friend's example is really good.

And sometimes using a terrible example is also good, telling a story that's kind of scary, like, oh, my God, it's so sad. John's mother died and his father, like, he didn't have enough money to support himself. We just figured this whole thing out and it's not good. And that can be a trigger to help your parents start to share with you. What do you do if you have several siblings and all of you disagree about the plan for caring for your age? parents. Yeah, that's a tough one. I mean, not every family gets along perfectly. I think that you do want to all get on the same page. You know, and I have some examples in the book about ways to talk to your siblings about how to manage this process. I guess that really the most important thing in this

process, in really the whole book, it is about having conversations. And if you don't have these conversations, it will not actually improve the outcome. So you really need to be honest with your siblings. I actually interviewed a wealth psychologist for this book, and he was very helpful in trying to help me understand about what's blocking you from doing this, but also how you have to get everybody involved. What were some of the big takeaways from that psychologist? The biggest takeaway is not to go too far, you know, without everyone being on board. He's the one who said to me, the baby steps. He was told a great story about a woman who had, you know, millions and millions of dollars

and the kids were just could not believe she was not giving anything away, that she was not really talking about it, that she was very withholding. And he started by saying to her, okay, you have millions of dollars. how would you feel if we allocated $10,000 this year to making some gifts to your grandkids? And for like at $10,000, she could say, oh, okay, yeah, that would be great. That's fine. And it got to be much bigger numbers, but it was really the incremental part. It was getting her over the hurdle and also was getting a professional involved to help her see

that by not dealing with any of her money and actually not addressing this, there would be a humongous estate tax that would eventually be due, and she could basically be doing two things at once, making sure that she better used her estate and reduced taxes and also give some flexibility to her kids, some of whom were doing okay, but others who weren't doing is okay. So that baby step notion, you don't have to create a hundred page plan and hire the $200 zillion financial planner and estate plan. to do everything at once. Sometimes it's the smallest step that gets you on the path. Now, conversely, if you have parents who are approaching retirement, but they don't have enough retirement savings, you know, maybe they're 65, 66, 67 years old and their portfolio is looking pretty empty, what do you do? Well, I mean, there are a number of things to do. I think that first you have to think about, like, what is it that they can do themselves and what is it

that you and your siblings are willing to do for them. In some cases, that could mean that the parents are going to have to downsize and move closer to one of you. Some cases, that's going to be they're going to move in with you. And in some cases, it's going to be that you, you know, one of your parents, maybe they've gone a little bit, this is one chapter, you know, in the book that I know you want to get to, but that, you know, maybe they've gone a little crazy. They've spent too much money and early in their retirement. And it may mean that someone has to go back to work. At the end of the day, unless you have the information, you can't actually create a plan. So you better figure out what's going on and then come up with the best solution for the family.

Speaking of families, let's talk about dumb thing number nine. You saddle your kids with your own money issues. I started this interview and I started laughing by saying that, you know, I'm not going to tell you to go to therapy, but maybe I should say you need to go to therapy. I mean, look, there are some pieces of our parents that we carry through into our adult lives. And what you may not realize is how you actually behave around money with your kids really does matter. Some of the stories that I tell in this chapter have to do with people who are emphasizing that money matters too much. And so that really does come down to their kids. And it makes their kids feel like I can only go into certain professions.

Or, gee, maybe if I choose to be a teacher instead of an investment banker that my mother or father is going to be judgmental about this. I mean, look, money is a loaded topic. And frankly, when it's not handled in a more balanced way, it can really infuse your kids with unhealthy habits of their own and also make them really resentful of you. So you've got to be careful here. You know, it's important to say that money is a means to an end. It's not okay for you to tell your kids that you're going through horrible money problems when they can't handle that fact. I think that maybe what I've seen a lot in some of my clients in the past is that their money

issues get expressed in forms of jealousy and resentment and some anger. And that's not good to pass along to your kids. And it's going to, it will actually stick with them. So if you have certain attitudes of money negativity, how do you stop yourself from passing that along to your kids? Well, I think the best way to do it is to, I mean, once you actually acknowledge it, that's when you start to see that you can balance yourself. I mean, look, the hardest part is if you have a partner and you're both crazy about money in the same way. But look, you want to communicate in a transparent way. You want to keep your own money problems to yourself. You want to be very careful about enabling your kids with money help. And, you know, you really want to cultivate education and

financial literacy. You want to educate, not preach. That's what I would say. say. Let's talk about number eight. You indulge yourself too much during your early retirement years. Yeah, this is a classic, right? You get to be 66 years old. You've got the couple. And, you know, you've got Jenny and Joanne who've saved their lives and they're so excited. And they're like, we are going to live large while we're healthy. We've got a couple million bucks in the bank. and they spend too much money in those early years and are unable to spend that money going forward. You know, you mentioned the fire movement. And I think that something that's really interesting to me is that when I interview people about it,

they seem very clear like, this is how much money I need to live on. That may change as they get older, but they seem like, I don't know, it just seems like there's great clarity in that. It's tough to say, I'm going to live on 120. grand for my first five years of retirement, then I'm going down to 80. I just don't feel like a ton of people make that transition very seamlessly. So be clear about what you need. Don't go crazy and spend way more money in the beginning because you're saying, oh, I'm healthy. I want to spend it now. If that's the case, you're healthy, you want to spend it, you want to travel. Great. Factor that in.

But remember, once you dip into that nest egg, it's gone. And unless you want to be going back to work, that may be a real problem for your later decades. How does this apply in an early retirement context if a person or a couple retires at the age of 45? Well, look, I think the big risk in that is that maybe if you said, for example, you said, I can live on 40 grand a year. And even if you worked all the inflation numbers out, and even if you decided you wanted a lower withdrawal rate, right, I think the danger is that you figure out that later you

actually need more. Like 40 seemed like a great number when I was 30. But then when I got to be 38, the number is not 40 anymore. It's 60. Or maybe I have kids. Or maybe my life circumstances change. Or maybe I met somebody who's got a different approach. The one thing that you just have to be careful about is whatever your assumption is that you're revisiting that assumption every couple of years. 40 may have been the right number when you were thinking about saving and you were 30-something years old. 40 might not be the number when you get to be 50 years old. How do you plan in a way that builds in flexibility without planning for so many contingencies that you just never retire? Okay. So the way I do it is I actually try to look at the worst case scenario in terms of

of the accumulation of wealth. So I am the kind of person who would really be looking at, I don't like to say a 4% withdrawal rate. I would much prefer to say, let me do my planning based on a 3% withdrawal rate. And that's how I always think of building a cushion in that's a little bit better. And also, look, if you're not an investor who's comfortable with big ups and big downs, you may need to be saving a lot more money.

So you can't build in every contingency, but you also have to be true to yourself. That's the other piece. If you are the kind of person who says, oh, I know I would never end up with somebody who would spend so much money. And then you meet that person and you might want to change your game plan. Then you change your game plan. And listen, you assume certain risk by adopting a philosophy that's, you know, it's kind of radical, right? And I still believe that most of the people that I meet who are really excited about the fire movement are not so excited by the extreme frugality, but they are excited about safety. a lot of money. And I think that's part of the process is really fantastic. And most, I don't know,

you're probably more of an expert about this than I am, but that I'm not meeting the people who say I want to actually do nothing from age 40 on. I want to do something different. I want to have the opportunity to live a life where I can choose to do this much or little work at that time. Or I would like to be able to do something where I don't have to work quite as hard and I want to have a great lifestyle. I'll be interested to see as the movement progresses, how many of these people are simply not working and how many people are actually still creating some sort of income stream.

Oh, yeah. Certainly as someone who's been in the movement for a long time, and I know hundreds of people, if not thousands, that I've met over the years in the movement, everybody still has an income after retirement. And I think that that's the misconception, frankly, right? That's so big, like when the old farts are like, oh, what are you talking about? What they're not realizing is this is opportunity. And that's the most beautiful thing in the world to

create for yourself, opportunity. Right. Thinking about it now, I can think of exactly one person whom I know who does not have a post-retirement income. Other than this one particular individual, every single person has, sometimes it's seasonal work or part-time work or entrepreneurship, you know, just entrepreneurship without the pressures of having to be profitable in year one. Yeah, exactly. And that's a beautiful thing. Buying opportunity is wonderful. We'll return to the show in just a moment. Well, let's talk about dumb thing number seven, which is failing to protect your identity. Yeah, I know. This is like the boring chapter. My editor's like, oh, I don't want to do that one. I said, okay, but there were just too many things that were going on. And it was so funny because when I was writing the book, and I'm like, no, I really think we should add this. I know it's sort of hard because it is like a boring topic, but look, being lackadaisical about this,

it leaves you open to a lot of inconvenience, some financial loss. It's just, I don't want to spend a ton of time saying that this is so obvious, but it is obvious that you need to be very clear. And one of the things that was interesting when my friend Dan Egan, who's a behavioral economist and I were talking about this and I interviewed him for the book, he said, you know, the problem here is that identity theft is, is one of these like weird, intangible threats. And so human beings will tend to ignore those kinds of threats. Like lion chasing me, I run. Very easy. Identity theft, murky, maybe sort of.

I'm not an idiot. I don't click on fishing links. Still, there are things we have to do. And we're still kind of lazy about this. So you're not going to eradicate identity theft from your life. you know, most people had their information exposed through the Equifax breach. But just keeping it in the book that maybe it made me feel a little bit like I'm being responsible. I have to at least just call it out there. Would you recommend one of those programs in which you lock down your credit

and then whenever you want to apply for credit, it's 10 or 15 dollars to unfreeze it momentarily? Well, here's a good news. There's no longer a charge to unfreeze credit. That was a little gift that Congress gave you while you weren't looking while your data was being exposed last year. Oh, wow. That must be new. Okay, in that case, I'm definitely doing it. Yeah, so I love a credit freeze. When I talk to identity theft experts, what I say to them is we should be born with our credit

frozen and you should have to open it proactively. But since that's not the case, once you've gotten the loans that you need, freeze your credit. You need to go apply for a mortgage. You can unfreeze it, but it is no longer a fee to unfreeze. Oh, that's fantastic. Okay, I'm declaring it now. Before this episode airs, I will freeze my credit. All right. All right. Number six, you take on too much risk. I mean, this is an easy one, right? This is the fear, greed chapter, because this is when you're, you really think that the market's going up.

You can take on all the risk in the world. The market's going down. You want to sell everything. What's important here is that I outline a little bit about, you know, it's not that hard to actually understand. this, how to create a plan, you really need to be very careful. And part of taking on too much risk is almost senseless. For example, I'm very worried that there are young people who are like, well, I'm young. I'll just be 100% in stocks. Okay, but you don't have to be. Like, you don't need to do that. So be smart about this. Don't necessarily take tons and tons of risk if you don't understand what the downside is. And you know, you can marshal through the chapter and get a little bit more information here. Of course, because everyone's going to buy the book. But you don't need to

do that. If you started investing later in life, let's say that you began investing for retirement at the age of 40. Should you consider taking on more risk in order to compensate for lost time? No, you should save more. Sorry. I mean, you always want to think you could just, you know, invest your way out of it. But really, most of the data shows it's not. not about getting a higher return. It is about saving more money. Let's talk about buying a house when you should rent. That's dumb thing number five. Yeah, I mean, the American dream is very big. It's an emotional pull. But look, there's tons of people who should be renting. They're not running their numbers. They're putting themselves in bad places. And especially now that the tax

laws change, I'm so over that idea, like when everybody was like, oh, but the tax benefit. Hey, tax benefits can come and go, and we've now learned that. So run your numbers. Don't just presume you should be buying when you can rent. Renting buys you opportunity. We're talking about opportunity, like in saving and having flexibility. Well, instead of saying I'm throwing my money out the window, just say to yourself, I am not throwing money out the window, mom or dad, who's yelling in the back of your head.

You say, I am buying opportunity. How do you know when you are at the right spot in your life to translate? transition from renting to buying? Well, I think that you've really got to run the numbers. I mean, one of the greatest calculators to do this is a New York Times calculator. It's the New York Times rent versus buy calculator. And it'll take you through a series of questions. But some of it is about who you are and where you are. Like, you might say, hey, I am, I'm still in job hopping stage. I want to have the opportunity to move to different states. I want to have, you know, sort of the wanderlust ability. Some of it is, hey, I am, I'm still.

I need to settle down in a community or I'd like to settle down in a community with a school system. I'm having kids. I want to just make a change of life. But there's a series of things that are different for people. I tell the story of my own mother who after my dad died ended up selling her house. And her first inclination was to use the proceeds and buy something. And my sister and I are like, hey, what about renting? And she's like, okay.

And she's like the happiest renter I've ever met. Man, it is nice to have that flexibility and to have a possibility. and to have a pile of money in the bank. Right. Are there any broad general rules, such as if you're going to live in a given location for X amount of time, or if the price to rent ratios are over such and such? I'm less interested in those ratios than I am

in you running the numbers for yourself, meaning what would I have to buy to be happy in this community and what would my rent be in that community? Because you can't compare apples to oranges, right? If I'm living in a two-bedroom apartment in New York City and then I say I'm going to move to an eight-bedroom house in the suburbs, that's not comparing the same thing. So what you really want to say is, what is the cost of me renting something in a community where I think there's a great school system? Maybe I'm going to make it up. Maybe it'll cost you 10 grand a month all in for half.

housing and this and that and your taxes and everything else. Okay. And maybe renting will cost you six grand a month. And maybe you say to yourself, hmm, what would I do with that extra four grand a month? Is it worth it? Do I have the money? Am I going to actually deplete all of the liquidity I have by putting it down payment on a house? All these things are huge issues. Right. So take a look at how it'll affect your personal budget. Absolutely. Absolutely. Let's talk about dumb thing number four. You take on too much college debt. Oh, you know that one too well, don't you? I'm sure you hear from people all the time. I have just been blown away sometimes on my radio show and podcast by the sheer scale of some debt that people are carrying. What is sad about that to me is a lot of these people are carrying those

kinds of debt loads. And I kind of say to myself for what, meaning, gosh, you assumed all this debt and you aren't in a fantastic, fantastically better place than you would have been had you gone to a state school and not had that much debt. So here's the thing. A college education is important. You make more money over your lifetime. What is not clear is that if you carry tons and tons of debt to get that college degree, whether it will still be worth it over your lifetime, because you're going to have to service that debt. So obviously, you need to be very clear as a family, what the family can afford. And why do I say that?

Because we know that the fastest growing segment of student loan borrowers are those over the age of 60. And if that does not blow your mind, I don't know what will. So that means our parents and grandparents are co-signing or taking loans out for their kids and their grandkids, and that could have a really significantly horrible impact on those people later in their life. Conversely, we know that there are kids who are drowning under debt. They are really at a place where they are not making good career decisions because of it. They are forced to live home. All of these things are important parts of the financial planning process.

And God knows this is really one of those times where you need to have those hard conversations. Because you as a family, freshman year in high school, need to sit down and talk about this. How much debt is too much? I've heard the general rule of take on no more than one year's starting salary worth of debt. So if you think that your starting salary out of college will be $50,000, then take on no more than $50,000. Would you advocate a rule like that or do you think it's more nuanced? I think it's generally more nuanced, but that is not a bad guidepost, you know, because I think what it's really saying is if you are going to be, say, a computer engineer. and you're going to make 90 grand your first year out of school.

Borrowing $75,000 doesn't seem so terrible. But if you are going to be a docent at a museum with a degree in art history and you're going to earn $29,000 a year, that same $75,000 could be a burden. And I also will just sort of a sidebar note, I would be very careful about these graduate degrees. There's just a ton of money being spent on graduate degrees that are not paying off for people and they can be crippling, crippling as you get older. All right.

Let's talk about dumb thing number three. You make money more important than it is. Yeah, this is the part about emotions and money. And not only do we know that the more money you make, there's not some direct correlation to happiness. We also know that the huge emphasis on money can sometimes make you stuck. It can make you maybe hide your head in the way. the sand about something. It can make you behave obsessively. In other words, you're not going to make your

best decisions when you are overly emphasizing money. And what you really need to know is, and I think, again, we talked about this earlier in the interview, one of the gifts that my parents gave us is that we respected money, but we never became so enthralled with it that it stopped us from making a decision that was in our best interest. What would be an example of that? You know, I could say that there are some people who will say, hey, I just, I can't do anything. So there's a story in the book where people come into my office with like these massive binders full of spreadsheets and trying to figure out, you know, when is the exact right time for me to move my money from my IRA rollover and what should I do and how should. And they are not and there's analysis, analysis, analysis.

They can't do anything. They literally cannot make a decision because they are so, wrapped up in like this money that they cannot make a decision. And I think that those are the kinds of subtle mistakes that people make that can really, really have an impact on your life. You know, it's funny. One of the problems about investing and a lot of the financial stuff that we do is that the core of that has an uncertain quality. I had interviewed a neurologist who said to me, you know, you'd be shocked to see what happens to the brain with uncertainty. It's almost as if I'm waiting for something to happen, my anxiety level goes up tremendously. If it's already happened, I know it's going to happen and it's already happened. I'm not as anxious. So that uncertainty can really

cause anxiety and we do not make good decisions when we have anxiety. Wow. We could spend another four hours unpacking that. But for now, we'll move to. dumb thing number two, which is that you take financial advice from the wrong people. Yeah. Well, I mean, I come from this industry. I always have said that the financial service industry to me is sort of like a drunk aunt or uncle, like somebody you really love so much, but who misbehaves sometimes. And the industry has not done itself any favors because when there was a chance to really adopt this standard called the fiduciary standard, which means your best interest of your client become come before you or your company. When there was an opportunity to do that after the

financial crisis, instead of embracing that and saying, of course, what other profession wouldn't put my patient or my client first, they fought it. And so no wonder people hate financial service professionals, because if you're not going to put me first, then how am I going to trust you? So I think that the most important thing is if you're dealing with a financial advisor or someone who purports to be an advisor, a planner, the first thing you want to make sure is you understand is this person actually putting my best interest first. You can ask them straight up. Are you held to the fiduciary standard at all times? If the answer is no, it doesn't mean the person's like some sheister. It just means that you may not get advice that is in your. best interest. So proceed with caution. And then that leads perfectly to dumb thing number one. You buy financial products that you don't understand. Yeah. And let me just be clear as somebody who has sold products before. These are boring and complex at the same time. So it's like really rife here for problems. Look, one of the things that happens when you are presented with an opportunity

for a financial product is that someone will sit down or will explain something to you. And if you don't understand it, don't do it, okay? And if somebody is touting gold on late night TV or a reverse mortgage or, you know, some friend of a friend has got the best hedge fund in the world, all you need to do is ask questions. There are questions that are as much as like, well, you know, how much does this cost? How easy is it to access my money if I invest in this? What are the tax consequences of this?

Are there cheaper options out there? You know, all of these things, you are entitled to ask these questions, but people don't because they don't want to seem dumb or they don't want to insult the person who's selling them. Ask questions. What type of questions should you ask? I mean, you've given several examples, but at the question, What are you trying to find out? Are you trying to understand how the product works?

Or are you trying to understand? Well, I think the first thing you're supposed to, you really are trying to find out is what will this cost me? That's easy. And that's not so clear all the time. Then you're trying to find out what alternatives are there to this. And then you want to know, are there other fees and penalties that I incur if I want to get my money out of this investment? What is the worst case scenario that I might face with this product? I mean, a lot of people will be happy to tell you all of the features and benefits of a financial product.

Will they tell you about the worst possible case scenario associated with them? And if they say, oh, there's no downside, then walk out of the office because there's a downside to everything. Absolutely. Well, thank you so much for coming on this show, spending this hour with us and talking about the 13 dumb things that smart people do with their money. Thank you so much for having me. It's been so great, and I really appreciate it. Thank you, Jill, for spending this time with us. What are some of the key takeaways that we got from this conversation?

Here are four. Key takeaway number one. Now, this is an actionable takeaway. If you've been listening to me for a while, you know that most of these key takeaways that we review at the end of each episode are ideas, concepts, frameworks for thinking. This key takeaway that I'm about to describe is an actionable one, and the takeaway is to create an estate plan. imagine that you've left your family with a pile of crap to settle at a time where they are just not at their emotional best.

They're trying to grieve the loss of you. And you've added to that grief because you were just so freaked out by facing your own mortality. You just couldn't quite get it together to conduct this part of the process. I think that's terrible. To put it bluntly, death is the ultimate uncertainty. We do not know when it will happen. And being young, being in your 20s or 30s, is not a guarantee of anything. So in order to not leave a mess behind, in order to leave a favorable last impression, if you will, or leave a legacy that does not result in a lot of stress and headache and worry and anxiety for, for the people who are left behind, create an estate plan. We touch on this in one tweak a week, which is a 26 week challenge. It's 26 tiny tweaks that can be accomplished in less than an hour and have a big impact

on your finances. Of course, it's going to take more than an hour to make an estate plan. But within the one tweak a week challenge, which is free and a whole bunch of people from this community are doing it together, we in one of the weeks, get you. you started on the path of developing an estate plan. So if you want to check that out, the one week a week is free. It's an ebook and an email series and a Facebook community, totally free. Affordanything.com slash 2019 to get more information about that.

Again, that's afford anything.com slash 2019. That being said, key takeaway number one, develop an estate plan. And key takeaway number two, this is also an actionable takeaway. create a plan not just for your estate, but really create a plan for the four D's, death, disability, divorce, drugs. Create a plan for what you will do if either you yourself or somebody close to you is affected by this. For example, what would you do if you have a parent or a sibling or a business partner or an important client who becomes so addicted to drugs that they can no longer function and they can no longer make good decisions and all of a sudden you've lost your business partner or it's your responsibility to now take care of your sibling.

What would you do in an event like that? And I know that that sounds far-fetched. I know it sounds like a total Black Swan event. And I know that it's not only improbable but also highly unpleasant to. think about, which is why most of us live in the fifth D, which is denial. We don't want to contemplate the possibility that a spouse might leave us or that we might get into an accident or contract an illness that leaves us disabled. These are unfun topics, but they are risks. The 4D's death, disability, divorce, drugs, these are risks. And a lack of planning, denial only

makes it worse. We don't like contemplating the worst thing. Let me think about what would happen if I drop dead tomorrow while I still have young kids. That is not a fun thing to think about. It's not fun to think about, gosh, what happens if my aging parents need care and they can't afford it? Who's going to take care of them? What's going to happen? Is there insurance that can help me through this. I call it a boring, complicated, and thankless part of your financial life, but it is critical that you address some of these risks and take them and really address them head on. In our conversation, Jill and I spoke about insurance. That's the way that she writes about it in the book. But when you talk about insurance and you zoom out, the broader objective is how do we

protect ourselves from these risks? If you're a frequent listener to this podcast, you're You've probably heard several of the Ask Paula episodes in which Joe saw See High, a former financial planner, joins me to answer questions. And whenever we get a question about insurance, Joe always is quick to zoom out, take that 30,000 foot view and remind us, hey, wait a minute, this conversation is not about insurance. This conversation is about risk management, insurance being a component of that. And so in this interview that we had with Jill today, we talked about insurance. We focused on insurance. Insurance is important. But remember, insurance is a component of risk management.

And the most important risks to manage are the ones that you think, nah, that will never happen to me. Because hopefully it won't. And most likely it won't. But if it does, it's nice to know that you're prepared. Geez, this takeaway is the sixth D. This takeaway is a downer. So, let's move to key takeaway number three. Be careful about how you talk to your children about money.

The reason that this stood out to me is because I recently re-listened to an older episode. Episode 127, we'll link to it in the show notes, in which I interviewed a financial therapist named Dr. Brad Clantz. on that episode, Dr. Brad talked about the importance of neither hiding nor burdening your kids with your financial situation. If you've lost your job and your home is headed for foreclosure, your kids are perceptive. They're going to notice that something's up. So you want to be proactive and positive about talking to them about that. And you want to empower them to do what they can to pitch in and help.

Hey, we're going to have a lot of fun cooking dinner together as a family. But that's very different than complaining to them, unburdening on them, using them as your therapist. So that's some of the wisdom that Dr. Brad shared in episode 127. And Jill, in our interview today, echoes a lot of that same wisdom. Telling too much of the wrong financial information to your kids is a mistake. And also, not talking to your kids about money is also a mistake. productively teaching your kids about money is good, but unloading your financial problems on them or making money negative statements is not good.

You know, it's important to say that money is a means to an end. It's not okay for you to tell your kids that you're going through horrible money problems when they can't handle that fact. I think that maybe what I've seen a lot in some of my clients in the past is that Their money issues get expressed in forms of jealousy and resentment and some anger. And that's not good to pass along to your kids. As Jill says, educate, but do not preach and do not burden. Don't enable with excessive help.

And take that role of mentor or teacher in which you educate and empower them to become adults with the capacity for making wise decisions. So that's key takeaway number three. And finally, key takeaway number four, don't make money more important than it is. Now, I share this one because this is something that I sometimes observe in some members of the fire community, where it seems as though some people are optimizing for finances and not for life. The great thing about the fire community is the huge enthusiasm for living a life that is not. wasteful, a life that is efficient. But that can cross over into imbalance and unhealthy obsession when every decision starts with the question, how do I reduce the cost rather than how do I

amplify the benefit or how do I find the optimal value? There's a great quote from Oscar Wilde where he says that a cynic is a man who knows the price of everything, but the very value of nothing. And an unhealthy obsession with money can lead to exactly what Oscar Wilde described. We also know that the huge emphasis on money can sometimes make you stuck. It can make you maybe hide your head in the sand about something. It can make you behave obsessively. In other words, you're not going to make your best decisions when you are overly emphasizing money. And what you really need to know is, and I think, again, we talked about this earlier in the interview, one of the gifts that my parents gave us is that we respected money, but we never became so

enthralled with it that it stopped us from making a decision that was in our best interest. And so the paradox of wise money management is that at some point, you understand when it is appropriate to make decisions that are financially irrational but meaningful in other ways. You never lose sight of the fact that money is merely a tool and is not the focus itself. And your goal is to optimize for your life, not for your money. Those are four key takeaways from this conversation with CBS News financial analyst Jill Schlesinger. That is our show for today.

So what do you think? Are there tips that we discussed that strike you? What stood out the most? Is there a change that you're going to make in your own life? Discuss today's episode with the Afford Anything community. You can find them by heading to Afford Anything.com slash community, where you can hang out with other awesome people who are super into being money savvy. Basically, if you're looking for a crew of financial nerds to hang out with, this is where you'll find your people.

So afford anything.com slash community to chat about today's episode or to chat about anything you want to talk about, whether it's debt payoff, saving for retirement, buying a house, buying a rental property, coping with the realities of the pandemic, anything that you want to talk about. You can find your people at afford anything.com slash community. It is currently September 2020 and I am taking a recess, a break for the month of September. It's the September sabbatting. So coming up throughout the rest of this month, you are going to hear from Cal Newport, who talks about the importance of doing deep work and digital minimalism. You're going to hear from Michelle Singletary from The Washington Post who talks about timeless financial advice that she learned from her grandmother. And you're going to hear from New York Times bestselling author Gretchen Rubin on developing better habits and routines. All of those episodes are coming up during our September 2020, September sabbatical itinerary. So make sure that you hit subscribe or follow in whatever app you're using to listen to this show so that you don't miss any of those awesome interviews. And so that you don't miss what we have in store for October because,

all right, you heard it here first. In October, you're going to hear from Dr. Gleb Siperski, who has a specific expertise in behavior change, decision making and cognitive biases. You're going to be hearing an interview with him and you're also going to be hearing an interview with Alan Donegan, the founder of pop-up business. school. That is what's in store for October. So again, to make sure that you don't miss any of these awesome upcoming episodes, make sure that you hit subscribe or follow in whatever app you're using to listen to this show. Big thanks to the sponsors of today's show, who make it possible for our whole team to be able to put out this great content. For a total list of all of our sponsors, including coupon codes, promo codes, deals, discounts, you can find all of that at afford anything.com

slash sponsors. And if you want to check out the show notes for today's show, you can find that at Affordanything.com slash show notes, where you can subscribe for free to get all of the show notes delivered directly to you so that you have a searchable record of everything you've listened to. Thanks again for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I will catch you in the next episode.