Compounding vs total return, envelopes vs simplifying your finances, and the potential value you could get from working with a “assets under management” financial advisor.
Also, Tori Dunlap reached her goal to save her first $100k by age 25 on the day her interview aired!
In the show today, Tori's goal of saving $100,000 by 25 years old was celebrated. She has been able to set up a wealth snowball that will propel her towards her FI goals. Assuming an 8% return, the money will double every nine years based on the rule of 72.
The rule of 72 is 72/interest rate = number of years to double your money. It speaks to the power of compounding.
However, many in our community have pointed out that instead of the term ‘compounding' we are referring to ‘total return.' Although the principle and the way these concepts will work for you is the same, we generally mean ‘total return' even if we say ‘compounding.'
Simple compounding can be found in savings accounts and CDs. The total return is found in other investment vehicles when the actual stock is appreciating and also creating a dividend that is reinvested. The math works out to be the same. We appreciate people pointing this distinction out.
Reach People Where They Are
We want to reach people where they are. In a recent episode, we discussed the envelope system taught by Dave Ramsey. The system did not work for Brad and Jonathan, but that doesn't mean it won't work for other people. Listen to that full episode here.
Bob sent in an email about the episode. He taught the Financial Peace University five times and personally saw it transform families towards FI. Although Bob appreciates the simplicity of finances that Brad talked about, many people in FPU classes are not that sophisticated.
The heart of the envelope system is reaching people where they are because it is simple. It simplifies the bigger concept of personal finance into something you can hold, do, and execute on. The method is helping people get out of debt and setting them up for other success.
Brad and Jonathan want to reach people where they are. Although Jonathan had a bad experience with the envelope system, that doesn't mean everyone will. However, he hopes that everyone graduates from the envelope system at some point.
The envelope system is a defensive mechanism to bring control back into your life.
Hopefully, you can move forward after you get your budget down. Simplifying your finances in the future can be the next step.
Do whatever you have to do. If that means having fifty-seven different envelopes with a couple of dollars in each one. And that makes you feel better, that gives you some control, then do it.
Getting on the path to FI or financial solvency is locking this down. Once you get it locked down, then you can move on to more advanced ideas.
Financial Services Industry
Recently, we've discussed high fees and incentive misalignment of financial advisors. However, we recognize that there are good financial advisors out there. Even if it is difficult to find a good one.
We received an email from Cheryl, a fee-only financial advisor with 20 years of experience, who provided a different perspective. She mentioned an article on our site that breaks down the total cost of the assets under management model based on a 2% assets under management fee. Check that article out here.
She mentioned that a 2% assets under management fee is very rare. Typically, the fee is closer to 1%. Also, it generally decreases in size as the size of the portfolio grows. According to Cheryl, it would be nearly impossible to find someone paying $40,000/year for $2 million in assets under management.
Even if the assets under management fee is lower, it is important to look at the cost of the funds they are putting you in. Those fees can add up as well.
It’s true that not everyone needs a personal financial advisor but its equally true that some people get value equal to several times any fee they may pay.
How To Find A Good Financial Advisor
Some of the value that Cheryl pointed out includes:
- Reminds you to save 10-15% even in rough times.
- Reminds you to carry disability insurance.
- Talks you out of a bigger house than you can afford.
- Lets you know how much to save for a future house purchase.
- Reminds not to rely on exclusively life insurance through their employer but to also buy their own policy.
- Reminds them to update beneficiary designations.
- Reminds them to get wills, health care proxy, power of attorney documents, and to update those documents when their life circumstances change.
- Reviews tax documents.
- Advises prenups.
- Advises on how marriage can affect income-driven student loan repayment plans.
- Councils against cryptocurrency.
- Talks you out a timeshare.
- Reminds them to increase their umbrella coverage when their teenager starts driving.
- Reminds them to open a Roth IRA when their teenager starts working.
- Advises them to open a SEP IRA for their side hustle.
- Councils them not to take a loan from their 401K.
- Talks you out an annuity.
- Advises you to delay taking Social Security.
- and more…
These are just a few of the many things that a financial advisor can help you with. For some, a financial advisor is critically important. For others, they can work through this on their own.
A good way to vet a financial advisor is to see if they try to sell you whole life insurance on the first visit. If they do, then they are likely not a good fit.
Tori has officially saved her first $100k by 25! In addition to this, she has helped many navigate salary negotiations. She spoke of learning to be grateful but backing up your ask with hard data.
As you negotiate raises, it is important to realize that you are negotiating for everyone that comes after you. Once you start to understand your worth, then you will continue to grow in other areas of your life.
If you are stuck in a bad company culture, then it is likely you will not be there long. People on the path to FI just don't stick around for too long. With FU money in hand, they can wield that to change company culture or leave. One great example is Joel from FI 180 who quit his job in a toxic culture.
ChooseFI: Your Blueprint to Financial Independence is officially released. Thank you so much for all of your preorders! You can now buy the book anywhere books are sold.
If you would like to join our book club, you can find that cohort group here.
Feel free to check out these book reviews:
- The Fioneers
- Accidental FIRE
- Stealth Wealth Family
- Stop Ironing Shirts
- Budgets Are Sexy
- Coach Carson
- Millennial Revolution
- Bigger Pockets
- Retirement Manifesto
- Route To Retire
- What's Up Next Podcast
Thanks for checking it out!
Let's see what the community has to say!
She booked her first trip with travel rewards. Congrats!
You can learn more about travel rewards through our free course. Sign up here.
Jose announced that he and his wife are debt-free and on a path to be FI in 12 years. Congrats!
They took everything about FI to heart.
Jose and his wife doubled their household income, live in a small space, meal prep every week, sold one car, track their expenses, moved from California to Texas, and started using travel rewards.
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!