Financial Triage – Episode 083

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. We’re going to be talking today about financial triage, and of course we have our co-host, best-selling financial author, Kim Butler, with us. Welcome, Kim. Hello, Todd. Happy to be here today. Well, super. Well, when I think of triage, I guess the first thing I think of is car accident or something like that, but certainly if we look at the economy today, you might say

[00:47] that some triage is necessary at that level, but we don’t believe in talking about levels that are outside our control, so we’re going to pull that all the way down to our own personal economy. And what does financial triage mean in our personal economy, Kim? Well, I love the discussion, but will you first of all tell our listeners the three steps that you shared with me earlier about what occurs in a triage, just in case, like myself, they are trying to think back to that old medical document that they might have read about that would have helped them understand what exactly triage means, and in particular, the three steps that you quoted. Super. And this comes from, I was at a seminar and a paramedic was actually discussing

[01:40] the three steps that they go through, and it’s important that they go through them in this order whenever they come upon an accident or an illness or anything that requires their skills. And step number one is to stop the bleeding. Step number two is to assess the body. And then step number three is to address systemic failures. So if we back up to step number one, stop the bleeding, and we transfer that over to the financial world, what does that mean? Well, I love this concept because stopping or plugging the holes in the bottom of somebody’s financial bucket is an analogy that I’ve used for a long, long time. So whether you want to talk about plugging holes in a bucket or stopping the bleeding on a body, or as it relates with your finances, forcing the things

[02:38] that are costing you the most money to stop costing you so much money, that’s a very, very important step. And it really comes down to efficiency. So let’s take some examples. One of the biggest examples that we see when we look at people’s finances that is a hole in the bottom of the bucket or blood leaking out of the body, if you will, might be getting a little graphic here, but we’ll try to keep it clean. One of the biggest examples of this hole is the fees that are charged in mutual funds or any type of managed money. And so we all know that this exists. There’s a mutual fund. There’s often a front-end load or a sales load fee. But more importantly, believe it or not, is the annual ongoing fee.

[03:29] And they come with a lot of different names. You could just call them your annual management fee. It might be called a 12B1 fee, which is a particular line item on a mutual fund charge. But whatever it’s called, these annual fees are a big hole in the bottom of people’s financial buckets. And not only does the actual dollar that a fee is charged cause trouble, but the then-following lost opportunity cost, or you could just say opportunity cost that that dollar caused, does massive, massive damage to people’s assets. So let’s run this through an example. Let’s say you have X dollars in a mutual fund and you have a $1 fee every single year. Not only have you lost the dollar, but you’ve lost the opportunity

[04:22] for that dollar to earn money really for the rest of your life. And that’s what opportunity cost is. And the way that you measure opportunity cost is you apply an interest rate to it. So let’s say that you were confident that your particular mutual fund could average, say, 10%. And that might be a little high in today’s numbers, but just easy math. So you have $1 times 10% for the remainder of your life. That can really add up. And then it gets worse, of course, because that $1 is charged every single year. So if you’re measuring 30 years, you have $1 at 10% for 30 years. And then you have $1 plus, if it did grow, whatever other additional fees are for the next 29 years. And then you have an ongoing, ever-expanding fee

[05:14] and an ongoing, ever-expanding opportunity cost that withdraws money from the fund because those dollars are no longer there to be invested. And so this is a major hole that, if we’re back to our analogy here, we’re talking about financial triage, this is a major hole that must be stopped. And it’s true whether your mutual funds are just regular, like held in a cash account or an after-tax account. And it’s also true if your mutual funds or managed money is held in a 401k or a 403b or any type of IRA. And if you do have mutual funds in that environment, there’s probably some additional fees that are going on as well. So how’s that for stopping the bleeding? Absolutely. And just this week, I had an even simpler example.

[06:05] I had a client who opened up an account that, at the time they put in $25,000, and they were guaranteed a 1% interest rate for $25,000. And there was a $25 administration fee if at any time they went below that $25,000 minimum. So they were carrying about a $5,000 minimum. This account had been going on for a long period of time. And if you looked at it, they were technically receiving a negative interest rate. So again, this may not be a life-threatening bleed, but it’s literally sort of like walking around with a continuous bloody nose, because every month there’s money that goes in and money that goes out, which makes it confusing. But if you weren’t making deposits in that account, you could literally just track the decline of that account.

[07:00] That’s a bleeding that didn’t need to take place because they could have just changed the account, sacrificed the 1% interest that was not sufficient enough to make up for the $25. And literally that’s not a big amount of money, but it’s certainly blood that remains inside the body. Absolutely. And there’s a variety of other things around car insurance, around life insurance, around real estate and our home mortgages, et cetera, that are areas where people are causing loss in the way that they’re handling their personal finances. And most often it’s not the product itself that caused the problem. In other words, the mutual fund and the fees, yes, that’s part of it, but where the real problem is the opportunity cost.

[07:49] And though we could argue that mutual funds might not be the best investment, just setting that aside for a moment, it’s often the strategy that can make the change. In other words, all you have to do sometimes to stop the bleeding is check a different box. So if this is an area that is of concern for you, if you think that you might have some holes in the bottom of your bucket or that your personal economy is bleeding in some way, let’s get that stopped. And if you have questions, please don’t hesitate to email us, Kim at partnersforprosperity.com, Todd S. for Strobel at partnersforprosperity.com and we can help you get the blood stopped. So moving on to number two, I believe you said it was assess the body.

[08:36] And if we look at our body of finances, one of the areas of mistakes that people make is they often try to figure out first where they should be headed with finances. So if you liken it to this body that you have, rather than trying to figure out where you wanna be next or what trip you wanna go on or what might be wrong with your healthful term, you’re really just looking at the picture today and my interpretation of assess the body says, figure out what’s going on big picture. So now we’re done with stopping the bleeding, now we’re looking at the whole body, but not in the future, what’s going on right now? And in finances, that’s exactly what people need to do. They need to take a look at their finances right now

[09:25] and they need to stop trying to figure out something about their finances long-term or in the future. Again, one of the biggest mistakes people make is they try to figure out their finances in the future by estimating when are they gonna retire? How much money are they gonna need in retirement? What age might they educate children and at what amount and at what inflation rate and what tax rates are gonna be in the future, et cetera, et cetera, et cetera. The typical financial planner’s approach is always, and I know this because this is how I was taught as a certified financial planner when I had that designation, it’s always to try to figure out what you want those finances to look like in the future.

[10:06] And it’s a very limiting, very backwards approach to handling your finances. You’re so much better off, just like the paramedic that just assesses the body, to assess your body of finance as it is today and to try to make today’s finances the most efficient that you can by stopping the outgo, and I’m not talking about expenses, I’m just talking about fees, and then assessing where you are today and getting a real clear picture of that without trying to figure out anything in the future. I see the definite area of media manipulation in this particular area as well. If you have a broken leg or a deformed limb, the late night commercials on instant facelifts are so attractive that maybe you’re investing in a facelift.

[11:01] And if we take that over to financially, we could be saying, you know, we have kids that we need to send to college, perhaps our cash flow is tight, but yet there’s this big push by some financial guru to change my mortgage over to a 15-year mortgage and put myself in even more of a dire cash flow situation. Well, so often, and this is really what’s leading us to step number three, there are systemic failures that are occurring in our finances that once we get the bleeding stopped and once we assess the body, we can then address those systemic failures. And what I define that as on the financial side is really back to habits. And there are two specific habits that I see people having that I believe cause the biggest problem.

[11:55] The first is we’re not saving consistently. We’d rather try budgeting or we’d rather try some other kind of put money in every now and then and hope it goes up environment. And as a society, we need to get back to our good habit of saving every single month or for some people every quarter if that’s how they get paid. Basically, every time income comes in, the very first thing that you should do is pay yourself. I mean, we all learned that from our grandparents, but how many of us actually do it? And I’m gonna submit that the answer is a very, very small percent. But if you can get yourself on a habit of consistent savings, everything else works so much better. And I’ll just put a little plug in here

[12:39] for good old whole life insurance, which is the redheaded stepchild of the financial world, but it absolutely does cause us to save on a consistent basis because that premium bill shows up either once a month or once a year, and it forces that savings. But I want to immediately address the second area that I see people making mistakes in, and this is investing with too much risk. We all think that risk is the likelihood that we’re gonna hit one out of the park and do really great with an investment. But risk is actually better defined as the propensity for loss. And there are way too many times that I see people’s major accounts, we’re talking like their large 401k rollover or their IRA or maybe some after-tax account,

[13:28] but it’s a big part of their overall net worth, and it’s invested in such a way that it can get lost. In other words, the principal can go down, maybe not 100%, but certainly by a large factor. And that is a huge mistake. We work hard in this society to build up principle. We should work equally hard to make darn sure we don’t lose it. And so when you are looking at your overall finances and if you wanna address systemic failures, making sure that all of your dollars are stored in such a way that you cannot, will not lose principle, that is a very, very important thing to address and one that we wanna make sure that when we’re investing our dollars, that they are in a place where principle cannot be lost.

[14:18] I had an opportunity to go to lunch this weekend with a multi-millionaire. And one of the things he said was is that you can take away all of my money, you can pick me up from the city that I live in, you can put me anywhere else in the world. And the systems and the knowledge that I have give me three to five years and I will have it all back. That’s the power of the system. Interesting. Well, so let’s get clear on our financial systems. Save consistently and don’t invest with risk. And literally, if those two things are in place, then that solves the bulk of people’s financial issues. Now, yes, there are some ancillary things like somebody that has too much debt or somebody that’s not working or something like that.

[15:10] But if somebody is earning income, which as our listeners know, we think they should do for the rest of their lives, then if they are saving consistently, which we also think they should do for the rest of their lives, in other words, a 60 or 70 year old probably needs to keep right on saving because they’ve still got another 20, 30 years to go and they are investing for growth or income without risk, then that solves a lot of the challenges. So if people are interested in getting more information about this, we welcome them to go to the website and grab the free ebook that is also available as an audio book. It’s partners number four, prosperity.com slash ebook. And it’s called Financial Planning Has Failed.

[15:59] And though it may not use our triple analogy here of one, stop bleeding, two, assess the body and three, address the systemic failures, the financial planning ebook, again also available on audio, does address a lot of the failures that have occurred, the history of financial planning, and more importantly, what you can do about it. And I would like to add that savings does not necessarily mean sacrifice. There’s so many gurus out there that want you to feel the pain. There are areas that you can find money, particularly in the realm of the way you pay your taxes, that you can find money to save without eating soup beans every night, correct? Absolutely. Lifestyle should be maintained and enjoyed

[16:53] while at the same time savings is occurring. Super. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast. Special thanks to Kim Butler. Take care, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.