A friend texted me this morning.
“We should talk soon. Julie is coming around to the idea of us managing our own money.”
It seems easy, right? My initial reaction to my friend was, “That’s awesome!” because it is. There are few things more satisfying than achieving your financial dreams and knowing that you climbed the money management mountain yourself.
No “money-god” came down and did it for you.
You didn’t need the Powerball numbers.
You actually plotted a financial course and landed safely at your destination.
For my friend, and for you if you’re about to embark on this journey, there’s good news and bad news: the good news is that it isn’t difficult to manage your own money.
The bad news is that to effectively manage your own money you’ll need to be ready to face some fairly difficult tasks.
Two Types of People
When I was a professional advisor, I’d meet some smart people who wanted to jump into their own money management and wanted an expert with an opinion to look over their shoulder, hold them accountable, and make sure they didn’t miss any “I” dotting or “T” crossing.
…and then there were other, often equally-smart people who wanted to hand it over to me and have someone else take care of it for them.
Believe it or not, most advisors I knew preferred the latter type of client and loathed the first one. Someone questioning their motives? Someone asking “why are we doing it this way?” all the time? That’s preposterous!
But if you’re going to ever learn how to manage your own money, you’ll need to be the first type, not the latter.
The steps aren’t difficult:
The Steps to Managing Your Own Money
My kids are reading myths in school. In the story of Hercules, he faces a series of challenges to achieve is goal.
I look remarkably like the guy on top, but I’m a little paler and not quite as naked. And I have less hair.
You’ll have a series of gauntlets in your way too, if you want to manage your own money.
1) Write out your goals. I’m not talking about writing:
Retirement
College
New Boat
Fall Deeper in Love
Real goal writing has a specific time, dollar amount and vision attached.
I want to be able to live on $65,000 per year (in today’s dollars) by age 65 without having to work every day. With this money I’d like to: (here you write your bucket list, which should include visiting every NASCAR track in the country).
That’s a goal you can shoot for and be excited about (except for visiting the track at Pocono, which I thought was pretty overrated).
2) Next, you write out all the hurdles in your way.
– I have $25,000 in credit card debt (separate by interest rate, term, amount)
– I have to put two children through college
– I know nothing about money management
3) Then, you find one of the nearly bazillion financial calculators online (you can use our powerful little PlanWise calculator here on the site!) and figure out how much you need to save to reach your goal.
– I need to save $250 per month to reach my dream if I achieve an 8% return.
Armed with your money management return information, now you figure out how to come up with $250 per month.
– Tweak your budget
– Pay down debt
– Take on more work
4) Before investing, though, you have a big problem. You have to insure yourself against some of the huge “what if’s” out there for you and your family:
What if you die?
What if you are disabled?
What if you have a car accident?
You’ll need to create a will and evaluate insurances.
5) Finally, you begin the heavy task of research to find investments that have historically achieved 8%.
No Step is Difficult, You Just Shouldn’t Miss One
As you can see, when you take on the hard task and decide to manage your own money, getting it right will be difficult. Each area demands time and energy:
– Planning, milestones and tracking
– Budget, income advancement and debt reduction
– Insurance need projection and comparison analysis
– Estate planning
– Investment allocation, picking and monitoring
These are five basic money management steps, but each packs a punch!
I Don’t Mean To Imply You Can’t Do It
As soon as I finish this piece I’m calling my buddy and talking him through these points. Before he takes on the task, he should know how long the financial security road really is. Going in with your eyes wide open is half the battle if you plan to win the “manage your own money” game.
He can do it, and so can you!
I can’t really fathom being the second type of person. For me learning is fun and when you combine money in mix–fireworks!
Sadly, that was the majority of people who go looking for an advisor. I’m not sure they wanted an “advisor.” They wanted a “justgoanddoit-or.”
I really need to work on estate planning. I don’t have a will and probably should. Part of me wants to wait until I get married in the next couple years… but I know I shouldn’t.
At the very least, Lance, I’d get the medical power of attorney done. That’s a really important document. For single people, if they have beneficiaries on all of their things and have a medical power, it’s often enough.
I don’t think I could ever let someone manage our money. I think the whole trust issue would have me worrying all the time if I’m getting scammed or cheated out of money. Plus if I manage it myself I have noone to blame but myself if things go bad. I like being held accountable.
That’s funny. I had one client when I was an advisor who was a great guy….but said that he liked having me because there was “somebody to kick” when things went bad. I always knew he was joking, but he was definitely in the “have someone else do it” side. However, he was good about auditing his stuff and making sure he did his part. I’ll write in the future about how to make the most of your advisory relationship, if you choose that path.
I too need to do the estate planning. I’ve put it off way too long. Yes we have life insurance but that is only a small piece of the puzzle.
It is an important piece of the puzzle though, Sicorra! I bet you’re glad you have that done. Of all the insurances, I worry about disability the most and it’s the one most people don’t want to talk about. By the way, for retired people, disability insurance equals long term care. Horrible topic, but important.
I’m with debtsntaxes. I’m way too controlling to let someone else control my cash. That being said, I could work on some of the things on this list for sure!
Get busy, FF! 😉
In my opinion managing your own finances and investments is the only way to go. Nobody else is going to care about your financial future or goals nearly as much as you will and so I think people owe it to themselves to do the work necessary to control their financial path.
There’s no doubt it takes time and effort to learn about your various options and invest wisely but it certainly pays off in the end.
I’m with you, Garrett. However, I will say that I worked with some people who made more than $500k per year who seriously needed me in their corner. Those people (sadly) could do it all day long themselves but just didn’t have time and the issues were complex. However, they made the most of me because they knew EXACTLY what I was doing. They weren’t “trusting me.” I was just the guy who had the time they didn’t have to get all the pieces done.
What is happening tonight? Another check list and I score very high again.Oh, and yes; I am the first kind of person – after refusing any responsibility for money management for a long time I have embraced it with incredible passion :).
Of course you scored high, Maria! You’re brilliant!
I would guess that most bloggers are in the first camp…as well as most people who read blogs. Hopefully this article ranks high enough for people deciding to manage money for themselves that they’re able to read it and take the plunge.
I am with you on this. If you have time, you should learn and manage your own money. But, if you don’t have time then either have someone who you can trust, or put your money into several stocks and bonds index funds.
I agree with you 100% about writing things down with specific numbers. I got much more interested in personal finance once I started looking at exactly how much I was spending, what I owed in debt, and what my projected earnings and savings would be.
I think that the order you set this up is as important as all the steps. Most noobs like to start with the tackling the hurtles first without thought that they need to steer the ship in some direction. Start with what you want to get out of all this effort.
Great comment, JP. I hadn’t thought about just how important these steps are in the exact order…but they are. I think that I did that job for so long it’s just a series of dominos that should go in an order.
I always found that people wanted the hurdle or they wanted to just invest. Doesn’t it seem like paying down debt and investing are the “sexy” topics?
I am way too much of a control freak to let someone else step in and take over!
Favorite read of the week Joe. I like this exercise a lot; I’ll need to try it out when I get home. There are plenty of smart people out there who are great at what they do. But even they can miss the big picture when it comes to setting big goals and laying out a path to get there.
Can’t jump on the “good points” comments here as it completely denigrates the service provided by financial planners. It is analogous to saying nutritionists and personal trainers shouldn’t have a job simply because people can follow the rules – stop eating shit and get your ass on a treadmill. lol.
A lot of people don’t exercise and a lot don’t understand/handle money topics. It isn’t that people aren’t smart enough to understand either topic (health or money) but rather they just don’t act.
I always made savings a priority! It has been made all my dreams come true. I bought my first house because of saving a down payment. I saved and invested in income property which helped me achieve financial freedom.
There’s so much here. I agree that the former type of investor is generally the recommended. That type of involvement is very empowering and makes sure that the client’s interests (and sometimes changing philosophies) are well represented. To me, that’s what is most important. In that way, the advisor serves as an educator, a valued resource.
I agree that anyone can manage their own money if they take the time to research and make the right choices for themselves. So many people never start because they don’t take the time, are afraid of doing the wrong thing, or think they will get to it next month and then they are 40 with no savings or retirement. It would be better to have someone plan and help them than go down this road. I really had no idea when I started working how to invest at all or what my long term goals were. I’m so glad I did start putting some money in retirement. I only wish I had added more, but hindsight is always 20/20.
Joe, but what if he accidentally hits BUY instead of SELL? Uh oh!
You buy Dr. Dean a happy meal the next day?! Even though I won the SF Giants vs. Atlanta Braves bet from 2010, I still feel bad having him buy me dinner.
I’ll get him next time.
Dude! Thank goodness for errors and ommissions insurance, huh? Crazy.
I let Dr. Dean have anything he wanted on the menu, except dessert (I wasn’t springing for the $1 apple pie. I’m not MADE of money….). I feel worse that he bought me a meal and we didn’t even have a bet on the line. Fun night.