MP spoke with Herman (Tommy) Thompson, Jr., CFP®, ChSNC®, ChFC®, a Financial Planner with Innovative Financial Group in Atlanta, GA. Thompson has been an investment professional since 2004, specializing in wealth management strategy, financial planning, insurance needs analysis, and special needs planning.
He is a proud graduate of the University of Georgia and has earned the CFP® (Certified Financial Planner™) certificate, the ChSNC® (Chartered Special Needs Consultant), and ChFC® (Chartered Financial Consultant) designation.
Personal Finance Generally
How can we manage our money more confidently, and what would this look like in practice?
Unconscious biases significantly impact your confidence and how you approach money management.
If you grow up in a house where mom and dad live paycheck to paycheck, you have 18 years of experience telling you that is just how it’s done. If mom opens savings account for you when you’re three and teaches you that money goes in the piggy bank, you are more likely to develop a savings habit when you start working.
We call this availability bias; our thinking is most strongly influenced by what is relevant, recent, and traumatic in our own experience.
How does our health affect our wealth, and what can we do to ensure we’re on track to a prosperous future?
Debt can mess with your head.
There are many reasons to “pay yourself first” (especially in an employer-sponsored plan), but large debts will cause you to ignore this.
If you are too focused on paying off the debt, you won’t have emergency savings and could miss out on employer matching in your 401(k). If the debt seems insurmountable, you might ignore it and your other financial responsibilities.
Retirement and financial freedom seem so far away that you don’t save for them, but $500 for that pair of sneakers will suddenly seem reasonable.
The $500 sneakers will buy you a short mental reprieve, but debt equals stress. Stress leads to all kinds of behaviors (smoking, consuming junk food, consuming junk TV, etc.) that age us and create more stress.
Conversely, setting a savings goal and achieving it can improve your physical and mental well-being.
I talk to my clients about the virtuous cycle of success.
Set a goal (even something that might seem small, like saving $200/month). When you achieve it, your brain loves the endorphin rush. One achievement leads to another, and before long, your brain rewards you just for the behavior.
More savings leads to more achievement.
More achievement leads to less stress.
Less stress leads to better health.
Here is also where a good financial planner or counselor could be beneficial. If you are having trouble with your financial goals, it can help to have an outside party to provide accountability and avoid emotional investing.
Whether you’re going at it alone or working with a professional, remember your goals and avoid chasing returns.
Chasing returns is an excellent example of the old saying, “If you want to have a small fortune, start with a large one.”
Budgeting and Saving
What three out-of-the-box strategies can you share to help us improve our personal budgeting, and why these three?
1. Not All Credit Cards Are Bad
If you pay off the balance each month, they can be convenient and offer cash back. The other thing they offer is easy accounting.
Most credit cards will do it if you have trouble tracking and organizing your spending.
Again, MAKE SURE YOU PAY IT OFF AT THE END OF THE MONTH.
Paying credit card interest robs you of capital to invest and adds pressure that drains your creativity and productivity.
Zero should be your goal.
2. Many Parents Use a Budgeting Strategy
Many parents use a budgeting strategy with their college-aged children to get a credit or debit card with a stated limit. The child attempts to spend more than allocated for the month, and the card denies the charge. You can do this to yourself and set a spending alert.
Put a limit on your spending card and be your parent.
3. No More Food Delivery!
The trend has surged, but it’s time to pay attention to those delivery charges. It’s very convenient to use these services. but it multiplies the cost of eating. Food is typically a large (and underestimated) portion of consumer spending. Trade food delivery for a warehouse retailer and prepare your meals at home. This is an easy way to cut expenses, control costs, and improve your health.
What strategies should we use to save more, and why might these be the most effective?
Contributing to a company retirement plan is the easiest way to save for the long term.
Payroll deduction is usually accompanied by a tax benefit making the “sacrifice” of saving much lighter. Some retirement plans even offer a way to set up an automatic increase.
You can determine your end goal and set up your contributions to step up gradually until you achieve your contribution goal.
Another option is to set up an automatic transfer from your checking account to either a savings or mutual fund account.
If it’s automatic, it’s like a bill and will be funded monthly.
From a psychological standpoint, spending your savings is much harder if it never makes it to your checking account.
What should we look for in a bank account, how might this change based on our financial situation, and why?
The average American doesn’t need a lot of frills for their banking.
No fees, online access, and overdraft protection are the standard options that a consumer should expect. As your family expands, you may want the ability to integrate family accounts and transfer money freely within the family.
Small business owners may find that they need additional financing options and other bank products.
Whether you have a growing family or a growing business, the key is to establish a relationship with your local banker.
As more and more people change to an online-only bank, they are missing out on the personal connection that a good banker brings.
A local banker knows the available products and can ensure you get what you need. And when you have a large check to deposit, the online-only bank will force you to mail it in if it exceeds your app contribution limit.
What steps should we take to reduce our current debts, and why?
This will sound simple, but you’ll never reduce your debt until you start living within your means.
There are two ways to be wealthy: make lots of money or spend less than you make.
What are three commonly made debt reduction mistakes, and how can these mistakes be avoided?
1. I Believe Using Your 401(k) To Pay Off Debt Is a Mistake
Unless you’re over 59.5 years old, your early distribution will likely incur federal and state income taxes and a 10% penalty.
It could even disqualify you from being able to take certain deductions on your tax return.
In many cases, you can only pay off 60 cents of debt for each dollar you withdraw.
There has also been an increase in mortgage advisers recommending cashing in retirement accounts to make a housing offer more attractive with a larger down payment.
From what I’ve seen, the one making that recommendation cares little about the tax implications or penalties you will face.
2. It Is Essential To Reduce Debt, but the Debts You Pay First Matter
Don’t pay off the wrong debt first.
Homes and cars tend to have much more favorable financing rates than credit cards. Unfortunately, many people will pay the minimum on credit cards and try to make extra payments on their mortgages.
This is precisely backward.
Attack credit cards first and the mortgage last.
3. Going at It Alone Is Often a Mistake
Financial planners and bankers have experience working with budgeting and with credit.
You got into a mess independently, but you don’t have to work your way out by yourself.
You can do it alone, but it’s faster and easier with a guide.
This applies doubly if your debt has gotten to the point where you are considering negotiating a settlement.
Debt consolidators and creditors do this daily and know the state rules – the average consumer does not.
This knowledge gap can be a significant disadvantage.
A credit counselor will cost out-of-pocket funds, which can seem counterintuitive to those trying to decrease debt, but there are resources to help you navigate settlements.
What are smart places to park cash, and why?
Your time horizon and your investment objective dictate where to keep your cash.
We always recommend that clients keep 3-6 months of expenses in on-demand, FDIC-insured accounts that can be converted into greenbacks quickly. The same is true for anything you need to access next year.
Beyond a year, US Treasury iBonds are currently an unusually attractive option yielding over 9%.
Your financial advisor can also help you find a low volatility strategy to collect some yield while maintaining liquidity.
What types of insurance should we consider being covered by, and why?
Most people understand why they need life, health, home, and car insurance.
Long-Term Disability (LTD) Insurance
Long-term disability (LTD) insurance can be one of the most essential yet neglected coverage.
The Social Security Administration says that 1 in 4 20-year-olds will miss work for at least a year due to a disability.
Your family’s bills don’t stop just because you get hurt, so a 25% chance of missing work is scary.
Some people don’t have LTD insurance because it doesn’t have an active salesforce.
Most people who have the coverage obtain it as part of their group benefits at work. It is generally not sought out independently if it isn’t offered at work.
Long-Term Care (LTC) Insurance
Long-term care (LTC) insurance is the natural extension of LTD insurance and can also be overlooked.
The coverage typically comes with underwriting requirements and large premium payments. Often these premium payments can be “use it or lose it” so that if you do not end up requiring long-term care, the unused premiums will not be refunded.
However, your out-of-pocket expenses will be significant if you need a home health aide or assisted living facility and do not have the LTC coverage.
There have been some advancements in hybrid products (such as life insurance with a long-term care rider) vs. your typical long-term care insurance.
A financial planner can help you navigate these coverage options.
Is there anything else you would like to share?
Money advice has significantly evolved over the past decades and will undoubtedly continue to do so. A financial planner can help you confidently navigate the investment world.
If you look back 50 years, savings was the main focus of most financial advisors. Interest paid much more than we currently see, so traditional savings accounts were more attractive. The Federal Funds rate topped 9.5% in 1969. For the average American, this meant that low interest-bearing investments like passbook savings accounts and whole life insurance offered enough interest to be their primary source of “investment.”
The Federal Funds rate (despite quadrupling in the last year) is only at 1.0%. Savings accounts no longer provide passbooks to get stamped and don’t offer much interest. Whole life insurance has become the expensive little sister of the life insurance industry, accounting for only 33% of premiums.
If you look back 30 years, the advice was to save 10% for retirement, and you’ll be able to retire early. Social Security was well funded. The SP 500 returned over 17% (1982-1991). Higher returns and lower inflation were here to stay.
Today, we recommend that new college graduates save 12% of their income and work toward 15%. Social Security is facing a funding crisis. Interest rates are near all-time lows, which could impair both fixed income and equity investment returns. Stagflation and high inflation are on everyone’s minds.
In just a decade, gold was over $1,700/oz in 2012. Retail stores were popping up in strip malls to offer cash for gold. Commercials on television and radio offered to protect investors by buying gold. Financial advisors recommended diversification, but many investors flocked to the hot topic of gold. By the end of 2014, it was under $1,200/oz.
Digital assets were all the rage in 2021 and still dominate many investors’ minds today. In January of 2021, CoinShares reported $1.31 billion of inflows in a week. Television ads and apps on cell phones make it easy for investors to dump their life savings into digital assets. New fad, same advice: remain diversified.
Responses provided by Herman (Tommy) Thompson, Jr., CFP®, ChSNC®, ChFC®.
Securities and Investment Advisory Services offered through Royal Alliance Associates, Inc. (RAA) member FINRA/SIPC. RAA is separately owned and other entities and/or marketing names, products or services referenced here are independent of RAA. RAA does not provide tax or legal advice. (678) 338-4400.
Questions based in part on topics and comments provided by:
- Jen Hemphill, Accredited Financial Counselor at Association for Financial Counseling and Planning Education (AFCPE®)
- Herman Thompson, Jr., CFP®, ChFC®, Certified Financial Planner® at Innovative Financial Group
- Leslie H. Tayne, Esq, Financial Attorney and Founder/Managing Director at Tayne Law Group
- Linda Hamilton, Executive Vice President and Chief Operating Officer at Iroquois Federal
- Ann-Marie Anderson, Financial Advisor at PHP Agency
- Paul Dilda, Head of Retail Strategy, Products and Segments at BMO Harris Bank at BMO Financial Group
- Matthew Benson, CFP® Owner and Certified Financial Planner™ at Sonmore Financial
- Josh Richner, Outreach and Marketing Coordinator at National Legal Center
- Ken Tumi, Founder at DepositAccounts.com and expert at LendingTree
- Martin A. Federici, Jr., Chief Executive Officer at MF Advisers, Inc.
- Ba Minuzzi, Founder and Chief Executive Officer at UMANA