With Christine Benz, Director of Personal Finance at Morningstar
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Steve speaks with Christine Benz about her article, 21 Days to Improve Your Financial Life. Christine is Morningstar’s Director of Personal Finance and the author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success.
Improve Your Financial Life In Three Weeks
In her three-week program, Christine utilizes each day of the week to coach participants on completing a single task. Jobs range from basic to-dos like right-sizing your emergency fund to more sophisticated investment activities such as figuring out the mix of stocks, bonds, and cash for your retirement portfolio. At every step, users have access to tests and worksheets they can print out and work on. Participants can also skip among the tasks as it suits their schedule and situation. This is because the jobs don’t build on one another, so the sequence in which you tackle them isn’t important. But at the end of 21 days, you’ll be in better financial shape than when you started out.
Steve notes that a lot of people are afraid to get this process started or are overwhelmed by it. Perhaps it’s because they think there’s a lot of math involved. The good news is there isn’t. It’s actually quite basic.
Week 1: Hit The Ground Running
Week 1 has baseline tasks that need to get done before you can get into the nitty-gritty of investing. On Day 1, participants calculate their net worth by adding up all assets. Assets include savings, investments, homes, vehicles, jewelry, art, etc. Then, subtract out all liabilities. Liabilities include credit card debt, mortgage, student or other loans, etc.
On Day 2, they make a record of their various major and minor sources and uses of cash (cash flow) and create a budget. Christine notes this isn’t hard anymore because there are a lot of easy-to-use budgeting and other financial apps to track household expenses.
For the rest of the week, participants quantify and set goals. Calibrating their target savings and spending rates, they assess their insurance needs to minimize financial risk or liability. They set up an emergency fund and develop a strategy to pay down debt.
Week 2: Optimize Your Investment Plan
The overarching goal of Week 2 is to ensure that your investments align with your goals. To that end, her program helps participants optimize investments for peak performance, risk, and tax efficiency. This second week’s tasks focus largely on your retirement portfolio. They also encompass investing for short and intermediate-term goals such as saving for college or buying a new home.
As Christine puts it, it’s important to take stock of your financial goals first. Then make sure that your investment allocations align with your financial goals so you’re not taking on too much risk. For instance, say you plan to buy a house in the next two years and are amassing a down payment. Or, say retirement is about 35 years away. In both of these cases, the bulk of your portfolio should be in stocks. Steve adds that even if you are retired and will likely live for another 20 to 25 years, you should include stocks in your portfolio so your assets grow and keep pace with inflation.
The Rule Of 100
Steve also refers to the rule of thumb where you take 100 and subtract your age. The difference would be the percent of your portfolio that you’d allocate to stocks. Both he and Christine agree that the thumb rule should probably be changed to 110 or 120 minus your age as science has increased longevity.
To improve their financial life, participants must create an investment policy statement that outlines key intermediate and long-term goals. There should also be an asset allocation schedule over time and triggers that would result in changes to investments. The latter is especially important because it keeps investors from fiddling around with their portfolios when markets go down. Equally important, it tends to enforce a bit of investing discipline. As she puts it, if you’ve written it down, you’re more likely to stick with the program than override it if you’re spooked by market volatility.
Week 3: Plan For The Future
Week 3 is about looking ahead at your own retirement. Day 1 of Week 3 starts with simplifying your investment plan. Other tasks include crafting a strategy for cash flows in retirement. For instance, looking at your portfolio and non-portfolio sources like Social Security. Begin evaluating your strategy for when to start withdrawing money from Social Security, tackling estate-planning basics, and getting organized. Then end the week and the program with knowing what to look for when hiring a financial advisor.
In addition to the outline above, Steve and Christine discuss many of the details for every day of the program to “Improve Your Financial Life in Three Weeks,” making it well worth a listen.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: You’ve all heard of Morning Star, I’m sure. And you may have heard of my next guest. Her name is Christine Benz. Christine is Morning Star’s Director of Personal Finance and author of 30 Minute Money Solution: A Step-by-Step Guide to Managing Your Finances and The Morning Star Guide To Mutual Funds: 5-Star Strategies for Success
Welcome back to the show, Christine.
Christine Benz: Hi, Steve, always great to be here.
Steve Pomeranz: You wrote an article, “21 Days to Improve Your Financial Life”. I just have one question, can I lose weight at the same time?
Christine Benz: You can try. Did you have a salad for lunch?
Steve Pomeranz: Maybe. Maybe that’s a good idea. So if this is each day for the next three weeks, weekends included, and I want to go through some of the daily activities that you should concentrate on in order to get your financial affairs in order. So let’s start with week number one, you write, “hit the ground running”.
Take us through that.
Christine Benz: Yeah, we were trying to put forth a lot of baseline type of tasks. The stuff that you need to get done before you can get into the nitty-gritty of investing. So we covered topics like, assessing your insurance needs, creating a budget, checking your cash flow.
So even before you create a budget, it’s valuable to take a look at where your money is going on an ongoing basis. We talked readers through calculating net worth, and we have, along with a lot of tests and worksheets that people can use. So they can print them out and work on them and document their own information.
Steve Pomeranz: I think a lot of people are afraid to get this process started. Or they’re overwhelmed by…maybe they think there is a lot of math involved, but this stuff is actually pretty easy, right?
Christine Benz: It really is, it’s quite basic. The idea is to find your baseline before you can move forward with more sophisticated financial planning tasks.
So see how you’re doing and covering some of the basic goals and also making sure that you are addressing potential risk factors for your household. So I do think insurance, for example, is a biggie. People need to make sure that they are insuring against the big risks before they can even get into investing.
Steve Pomeranz: Yeah, good point. So day one, you calculate your net worth, you add up all of your savings, all of your investments. You put an estimate on your house if you own a home, and then you subtract any debt that you may have. Maybe you have a mortgage, maybe you have some credit card debt.
If you own your cars, you can put them in there. If you have some jewelry or whatever it is put it in there. Subtract out any debt, and you come up with your net worth. It’s really a nice number to know because you can kind of follow that year after year and to see if you’re staying on track to increase your net worth.
So yeah, so I think day one, net worth, day two, assess your cash flows and create a budget. We’re not straining anybody here, I noticed.
Christine Benz: [LAUGH]
Steve Pomeranz: You’re not asking them to do two things in one day.
Christine Benz: No, and the good news is too regarding budgeting and tracking cash list.
There are a lot of great apps to help you do that right now. So whether people are using mit.com or some other budgeting software, maybe using Quick to track their household expenses. There’s technology that can make this job easier for you. Or you can do it the pen and paper way, or just keep some running notes on your cell phone.
Steve Pomeranz: Yeah, my mantra is, know what you own, and that’s where you’ve got to start. You’ve got to know what you’re doing. Okay, week number two, where we’re graduating from salads, maybe we’re adding a little more protein. I’m not exactly sure. So, you write, ensure that your investments align with your goals.
What does that mean?
Christine Benz: Well, to take stock of your goals first, for one thing. Take stock of your financial goals. And then make sure that, to the extent that you have investments, that you have allocated them properly, so that you’re not taking too much risk, say, if you plan to buy a house in the next two years and you’re amassing a down payment.
Well, that’s money that you really don’t want to have invested in stock even though stocks have certainly beat the safer stuff recently. So taking a look at your goals and making sure that your investments are appropriately allocated, that you’re not taking too much risk given the proximity of a given goal.
For retirement, if you’re not planning to retire for another 35 years, well, there you certainly would want to have the bulk of your portfolio and stocks.
Steve Pomeranz: Exactly. Or even if you are retired and, you know, you’re probably going to live another 20, 25 years if all goes well, maybe 30, maybe more. You’ve got to remember that these assets have to grow, have to keep pace with inflation. And you can’t just go completely under the covers and hide from risk. You’ve got to take some kind of calculated risk and think long term. I mean some clients say to me, “I don’t even buy green bananas”-
Christine Benz: [LAUGH] Right.
Steve Pomeranz: … “because I’m not really thinking about the future here.” But, also another idea—there used to be this rule of thumb where you would take 100 and subtract your age and the difference would be how much you’d have in stocks. Now I really do not believe in that whatsoever, but someone mentioned something that actually kind of changed my thinking the other day, and that was, these days maybe your age shouldn’t be 100, maybe it should be 120 minus your age.
And then, okay, so maybe we just are underestimating modern science and our ability to live longer. We’ll see about that, okay.
Christine Benz: Yeah, I think those rules of thumb can be a decent starting point. But I’m with you. More like 110, 120 minus your age is a reasonable equity allocation.
Steve Pomeranz: Yeah, okay. So we were talking about day eight, create an investment policy statement. Boy, that sounds like something an advisor would put together. How does a small investor create an investment policy statement?
Christine Benz: Right, and advisers certainly do. But as an investor, you’re putting together an investment policy statement to just say, here’s what I’m doing, here’s the key goals of my plan, here is the asset allocation that I plan to stick to, and here’s how it might change over time. Closer to my goal investments that I’m going to use to populate my plan.
And importantly, I think one of the key reasons to create one of these investment policy statements is to say how often you’re going to check up on the plan and what will be triggers for any changes. Especially when the market starts going down, many investors are inclined to get in there and fiddle around, and oftentimes, they regret those changes they’ve made at those market inflection points. Taking the time to document your investment policy in one of these statements I think tends to enforce a little bit of discipline.
And if you’ve written it down, you’re more likely to stick with the program than override it if you’re feeling spooked by what’s going on in the market.
Steve Pomeranz: I think a powerful thing to write down would be the timing of your goals. What goals are short term? Let’s say you mention buying a house, let’s say within a year.
Christine Benz: Yes.
Steve Pomeranz: Or something like that. The intermediate term goals— maybe you’ve got kids that are 13 or 14 years old and you’re thinking five years for them—that’s an intermediate-term goal, to start college. And then you have your long-term goals.
And then you can pick the appropriate investments for those different time goals. You know, that is incredibly powerful. So let’s say you’ve got a long-term goal, market goes down, you hate the idea, it makes you ill, but you go…you know what I mean…this is 20, 30 years from now I’m talking about.
Let it ride and you can kind of leave it alone, and you know that your money for the short-term that you may need is sitting somewhere else and somewhere safe. That’s very powerful.
Christine Benz: I think so too. In fact, I remember during the financial crisis in 2008 everything was going down, as everyone remembers. And I had a family member who was very spooked by what was going on with her account balance. She had seen it nicely plump up and then she was watching it fall to the ground. The one thing that seemed to get through to her was me saying, “Are you retiring anytime soon?”
And at the time, I think she was in her 40s, so the answer was no. So she was able to kind of see, “well, I don’t need this money right now. I can let this ride with the knowledge that stocks over time do tend to outperform other asset classes.”
Steve Pomeranz: That’s right. It takes a little bit of belief. Let’s go to week three, we’ve added some bread into our [LAUGH] diet a little bit. Not too much though. Take a look forward up to and into your own retirement, let’s see, craft a strategy for generating cash flows in retirement.
So day 15, simplify your investment plan. Day 16 formulate a strategy for retirement portfolio withdrawals. Take us through some of that.
Christine Benz: Well, I focus a lot on this topic of retirement portfolio withdrawals. I work a lot on what’s called the bucket approach to retirement portfolio planning.
And the fact is yields are so low right now that retirees don’t know where to go to generate cash flow from their portfolios. So I think this bucket strategy can be a way to visualize on an on-going basis how you can generate cash from your portfolio. And that does mean periodically selling things or selling pieces of things that have gone up a lot.
So my advice to retirees is be flexible about where you go for on an ongoing basis. Income might get you part of the way there. But be willing to rebalance your portfolio. Scale back on the risky stuff. And use the proceeds from those sales to help meet your living expenses.
Steve Pomeranz: Very good. My guest, Christine Benz, from Morningstar.com. Don’t forget to go to Morningstar.com and put in Christine Benz’s name. And she will appear in all her articles will be there. To hear this interview again and to sign up for our weekly update of what’s going on our site and the new topics that we’re introducing every single week, don’t forget to go to stevepomeranz.com.
Thanks, Christine.
Christine Benz: Thank you Steve.
