Thinking Differently About Financial Planning
When you’re committing financial suicide, the impact spreads further than just your finances. One man who knows this better than most is financial planner, personal finance blogger, and author Carl Richards. Known as the ‘napkin financial planner,’ Carl has made it his personal mission to help people clear up their financial mess or at least stop them from getting into one. Most importantly, many of his lessons come from personal experience. The following is his story and some of his lessons.
An Accidental Start in Finance
Between 1995 and 1999 Carl Richards’ life seemed unstoppable. After answering a job ad for what he thought was a security position, Richards found himself working in securities. The job involved answering the phone at a Fidelity Investments call centre, but within four years he was a certified financial planner and a Merrill Lynch financial adviser.
A Move to Vegas
Taking up the opportunity to partner with a successful Merrill Lynch colleague, Richards and family moved to Vegas in 2003. Although having budgeted USD 350,000 for a new home, he soon found himself looking for houses of USD 500,000. Going against his gut instinct, getting caught up in the herd mentality of the times, and falling prey to the promises of his rapidly rising income finally saw him purchase his dream home at the asking price of USD 575,000. He then borrowed 100% of the purchase price.
Living the Dream – For a While
Even though Richards was a financial planner, he simply didn’t want to believe that the dream wasn’t reality. This led him to leave the sums to the lender and bury his head firmly in the sand. Ego did the rest, with further borrowing being sort to ostensibly grow Richards’ financial planning business, but also to fund an increasingly extravagant lifestyle. However, dark edges were beginning to seep into conversations, at the same time they were appearing in the housing market.
The Collapse
When the stock market plummeted, Richards found himself mired in increasingly difficult conversations with clients. As these clients started seeking reassurance, the wheels started falling off Richards’ own life. His personal income dropped by 20%, health insurance and property taxes skyrocketed, the housing market plummeted, and his mortgage was reset at a higher rate.
Richards did what so many others did, cutting back on business and personal expenses only to find himself USD 200,000 in debt. Eventually, Richards was advised to choose between his moral obligations to his family and his contractual obligations to the bank. He chose the former, lost the house and headed back to Utah and back into renting a property.
A New Approach to Financial Planning
After losing everything, Richards’ attitude toward financial planning changed dramatically. Far from the cold dissection of figures, he now approaches his clients from a holistic level. This is largely due to suffering the psychological and physical health consequences of his financial life in a tailspin, which has resulted in his understanding that the needs of every person don’t fit neatly into a spreadsheet. Here are some of the lessons:
Lesson 1: Greed and Fear Will Send You Broke
Most people sell after bad news and buy after good. They also tend to put money in gold when markets collapse. Richards points out that this selling and buying strategy will inevitably need to loss and is driven by fear and greed. Most importantly, gold purchases should never be considered as anything more than speculative purchases.
Lesson 2: Beware of Overconfidence
The cost of your mistakes is directly proportional to your level of overconfidence. In a similar manner, buying something you can’t afford and figuring it will sort itself out can be one of the biggest mistakes you can make.
Lesson 3: False Savings Create Loss
If an item purchased on sale isn’t an item you would have purchased when not on sale, you’ve immediately lost money. By the same token, spending extra to drive to a cheaper supermarket may not be worth it. False savings are everywhere, and should be viewed sceptically.
Lesson 4: Plan Your Life Goals Before Planning Your Financial Ones
Your life goals are the ones that will make you happy and your financial goals should serve as the vehicle to get you there. Without a life plan, your financial plan will be rudderless or pointless. Be firm and honest about your goals and the rest will fall into place.
If you like to know more about how Carl Richards inspires how we approach financial and life planning, get in touch today. Call 01993 772 467 or contact us online.
