I don't always tell my clients what they want to hear.
Don't pay off your mortgage early. You probably don't need all this life insurance anymore. Why do you have all this extra cash sitting at the bank? Et cetera...
It's easy to tell someone what to do. It's much harder to accept and act on someone's else advice. I'm in the unique position of knowing exactly what to do, but share the same mental roadblocks I see from time to time with my clients.
At two separate points this summer, the logical side of my brain had to overcome my own "head trash".
This post is about my own finances and specifically, what I felt like doing versus what I would tell a client to do if they were in my shoes.
INVESTING IN A DOWN MARKET
Yes, please take safe, guaranteed bank cash and put it into the stock market which is down 21.4%, said NO ONE EVER!
That's where I was on July 13th, 2022.
My wife and I had accumulated excess cash at the bank (sound familiar?), and we knew 1. this wasn't efficient, and 2. we need to knock out all our investment contributions for 2022.
It's easy to acknowledge that investing in a down market means you're buying shares when they're on sale. However, it feels super icky to purposely let go of that safe, guaranteed interest rate at the bank in favor of something that has performed so poorly.
I didn't let my recency bias get the better of me, even though I dragged my feet a bit...
I knocked out the following back in July:
Max IRA contributions for both Melissa and myself.
Max HSA contributions to our family plan.
Two sets of 529 plan contributions (we have two littles) according to what our financial plan suggested we save.
Set up and scheduled recurring monthly contributions to Melissa's new 401(k) plan (I was already doing this personally in my plan).
Queued up the maximum employer "match" contributions to both mine and Melissa's 401(k) plans. Since I'm my own employer, this comes directly out of my business checking account, i.e., it's my money.
All said and done, I moved $58,198 from the perceived safety of our bank accounts to our investment accounts.
Gulp!
100% of the cash contributions were immediately invested and I immediately lost money.
Dang...
That's ok. It's only on paper. When I look back in a few years, it's likely I will have gains. Even further out as we approach retirement, I'm confident we will have achieved something close to the historical average return in our portfolio.
Thinking of related client conversations, no one has ever said "I wish I would've messed around trying to time the market bottom with my contributions".
It's more of "I should've just invested my cash as soon as I could've and spent my time and mental bandwidth on other more important things in life".
FINANCING VS. PAYING CASH
The most feedback I've ever received from a blog post was when I discussed the math behind not paying off a mortgage early. If you missed it, HERE it is.
Queue up incoming hate mail.....
This round, we're talking about buying a new car, which Melissa and I did the 1st week of August.
We knew that borrowing rates on loans had gone up (funny because my bank is still only paying me 0.1% on cash...), and our 800+ credit score netted us a 4.99% interest rate.
Based on a total financed price of $50,341.50 amortized over 5 years, according to the bank I'm financed with, I'll pay an additional $6,645 in interest costs all said and done.
Skeptic: but paying interest is bad!
Well, yes, on its own without context I would agree.
However, you also need to look at the opportunity cost of paying cash.
Instead of writing a check, Melissa and I have 1. already invested ~ $60,000 we could've used to pay cash, and 2. plan to further whittle down excess bank cash with a contribution to our taxable trust (think joint investment account) at the end of the month.
Comparing apples to apples, let's look at what investing $50,341 might do for us compared to paying cash.
If we earn an 8% return compounded monthly, my $50,341 investment grows to $75,000 after 5 years. That $24,659 in growth is much more attractive than saving $6,645 in financing costs. In this scenario, I come out $18,014 ahead.
This knowledge allows me to sleep at night even though I know I'm paying interest.
Skeptic: but the market is bad right now!
Well yes, at this particular moment in time I would agree. But do I believe the market is going to produce a negative return over the next 60 months? Possible, but not likely.
Skeptic: fine, but I can't earn 8% so what if my return isn't that good?
If I earn 5% on my $50,341, that works out to $64,606 after 60 months. Subtract the interest cost of $6,645 and I'm still $7,620 better off than paying cash.
Astute Skeptic: but shouldn't a 5% investment return and a 4.99% cost of borrowed money basically net out to a wash?
No, and it has to do with the way the math works.
The biggest reason is that car loan interest is calculated based on simple interest, which works in our favor (it's less bad). Compare this to the compound interest we earn on our investments, which is basically magic.
Don't believe me? Feel free to become an expert HERE.
WHY MY FINANCES MATTER TO YOU
I want you to know that what I do with my money is the exact same thing I tell my clients to do with theirs.
Imagine if your doctor told you to eat better and exercise more, but they were overweight and unhealthy themselves.
Wouldn't you take their advice differently? You might not want to admit it, but subconsciously, you would.
A long time ago when I was much younger the first supervisor I ever had told me to never take advice from someone worse off than myself. For whatever reason, that simple message has stuck with me all these years.
The same should apply to you!
If I was market timing/day trading (I own the exact same portfolio as my clients), didn't carry obnoxiously expensive disability insurance (yes I buy this stuff), and had never met with an estate planner (not actually true), what gives me the jurisdiction to tell you to do anything with your money?
It doesn't.
Hope this helps.