CNBC On? Change the Channel.

If you are not a viewer of CNBC or any other market "news" source, bravo! If not, I implore you to stop watching and to break the habit as quickly as possible.  If you are a believer in actively buying and selling stocks and bonds and taking a lot of action in the market, the near real-time raw data may be of value to you. However, in my opinion, the talking heads and interviews on these channels provide absolutely no value for making personal financial decision and, in fact, perpetuate the "more is better" and "keep up with the Jones's" way of thinking. This cannot lead you to making appropriate and financially aware decisions. Watching these channels will not help you maintain your values and reach your goals. Instead you may be brainwashed to continue chasing the next big thing, hoping to strike it rich overnight. This form of investing is virtually no different than purchasing lottery tickets and does not set you on a path to increase the likelihood that you reach your goals.

These channels are entertainment outlets, not financial advice delivery mechanisms. They have no incentive nor obligation to help you, only to maintain and increase viewership. This seems often achieved by playing to the human emotions of fear and greed, either by sensationalizing stories of investments with wild returns or drawing viewers with doom and gloom news. Being financial aware includes not allowing negative influences of this type to subconsciously impact your decision-making.

There may be value to the financial professional in watching these channels, but I am certain there is no positive impact to the average American trying to make well-considered financial decision. If you must watch, at least turn the volume off so you don't have to hear the useless flow of information. Keep your brain clear to focus on how financial decisions will impact you.

The $20 Bill or How I Learned To Be Generous

I have spent a good deal of my life lacking in generosity. When I went to dinner with friends, I rarely offered to pay for dinner even when my financial situation was far better than my company's situation. Providing money to charities never ranked high on my list. Gift-giving was not a strength for me. This all changed with one exercise that greatly increased my financial awareness around my cash flow. I believe this story can provide a clear example of the power of financial awareness.

The concept of creating a budget or spending plan has long been professed as a cornerstone to gaining good financial habits and to constrain needless spending. In my opinion, presenting budgeting as a constraint-mechanism leads to difficulty putting together a budget and following a budget, analogous to trying to maintain a strict diet. In fact, I have found that the process of creating a budget and understanding my spending has actually created more freedom around my use of money.

Just about a year ago, my wife and I spent a good deal of time learning about our cash flow. We divided our expenses into fixed expenses (mortgage, utilities, taxes...) over which we had little control but needed to be paid regularly, and variable expenses (groceries, phone service, entertainment...) over which we could exert a great deal of control from day to day and month to month. We then set up a system similar to the envelope budget system but used separate bank accounts as each envelope. Each paycheck would be automatically directed to the various accounts to fund our expenses. This allowed us to keep cash for specific purposes clearly defined. While this may feel like a constraining device, it turned out to be the opposite.

As an example I introduce the $20 bill. I found myself at lunch with a friend on a Friday with a $20 bill in my wallet. This bill was left over from our grocery shopping account for the week. We had spent less on groceries than we set aside weekly, and my wife and I had split the left over cash. When it was time to pay for lunch, without much thought I pulled the $20 bill out of my wallet and told my friend I would take care of the lunch. This was something I had never done before, but was able to easily do because I was aware of several things about this particular $20 bill. First, I knew the bill was left over from a different expense and was no longer needed for that expense. Second, I recognized I could do whatever I wanted with that money. It was not needed to cover any expenses, including saving for future goals as these had been included as expenses in our budget. Third, I realized I wanted to treat my friend to lunch and had the ability to do so without impacting any of my family's plans. Knowing all this, I felt very comfortable making the decision to use the $20 bill to pay for lunch. This $20 bill had been freed and provided me the freedom to use it however I chose.

By having established a well-considered and thorough budget, my wife and I have been able to increase our financial freedom. No longer do we wonder whether we have the ability to purchase something or if doing so will hurt our long-term plans and ability to pay our bills. We know exactly what each dollar is assigned to; whether that be for retirement savings, to maintain an emergency fund or to pay a certain bill. We are fully aware of the impact each financial decision may have. Even now, while I look for new employment and am only sporadically bringing income to the family, we are able to feel reasonably comfortable we can meet our financial obligations and continue our path to reach future goals. I am certain budget is a freedom-creating device, not a constraining device.

Financial Planners Know You Before You Are Even A Client

A financial planner's work life is filled with days making assumptions; assumption about investment returns, future tax and inflation rates, life expectancy, and so on. The process of financial planning does not exist without accepting that many assumptions must be made and that these assumptions will prove to be close in the long term even if very wrong in the short term. However, many financial planners make a series of assumptions about you before they ever meet you... entirely unnecessary assumptions.

If you have hired a financial planner, recall the data collection form you likely filled out or a discussions you held at the beginning of the relationship. Questions revolved around your current assets and liabilities, cash flow, current insurance products, any wills or trusts current in place and your short- and long-term goals. The goals asked about would have dealt with when you hope to retire and with how much income, what your investment return expectations are, what you would like to happen when you pass away and possibly what material possessions you hope to gain. The goals questions may have given you the opportunity to indicate "Not Applicable" if you felt a certain goal was not relevant to you.

However, the planner has already assumed this list includes the goals you should and will have. They have assumed retirement as a goal, that minimizing taxes both during life and at death are important to you, that you want to be able to maintain a similar lifestyle if you became disabled and so forth. These decisions have been made before you entered the door. Each planner has his own list, but very few enter a relationship with no list.

These lists do include items which generally are planned for, but why the rigidity? It can make a planner's job easier and, frankly, more accurate. Having to start planning analyses from scratch for each client requires far more time, thought and attention to detail. I suspect, however, that you want to plan for your future, not your planner's ideal future.

So, what list did your planner provide? Or if you are planning on hiring an advisor or planner, what list are they giving you? Be aware of their assumptions and how they may impact the financial advice you receive.

Controlled Effort and a Short Word on Wealth

One of the recurring themes you will find in my writing is the issue of control. I wanted to take a moment to discuss my beliefs around control as a way to put a few of my own biases and preconceptions out in the open. This post is almost entirely based on my personal opinion and observations built over years of study and experience, and much less on researched knowledge.

From my experience working with clients, people have a tendency to focus a great deal of their attention on items out of their control. Three such topics are discussing the stock market, investment performance and expectations about governmental actions (often tax policy) which could impact finances. My belief is all three of these items are virtually entirely out of your control. Short-term stock and bond market movements are based as much on emotions and guesses as on rational analyses, leaving these movements out of control of individuals. Investment performance is largely a product of  these market movements rendering them largely out of your control. We have the opportunity to impact governmental action by voting every couple years and by openly expressing our opinions, but do not have direct control of this either. Yet, in my experience, more time is spent discussing and considering these three topics than all other financial topics combined. Similar to the Pareto principle (80% of effort is put into items producing only 20% percent of results), a wildly disproportionate amount of people's financial effort and concerns are spent on items which produce only a very small amount of total result.

My strong belief is that you should try as much as possible to refocus on items within your control. Your financial situation can be impacted far greater by focusing on earning potential (e.g. career development, continuing education) than on stock market performance. Greater wealth can be made by putting effort into really understanding your cash flow (a comparison of income and expenses) and how that cash flow supports your values and goals than by understanding how your investment performance occurs. Spending time really understanding your goals and how to achieve those goals will have far more impact on use of financial assets the way you hope to than spending time concerned with governmental action and how much of your money is lost to taxation.

It is not my goal to convince you not to think about the uncontrollable items at all, but let us mix the 80/20 rule up. Spend a greater deal of time focusing on items that you can control and that will have significant impact on your wealth, and far less time and effort on the uncontrollable. The long term impact on your wealth and financial health will be dramatic.

A short word on wealth. 

In this post, I have used the word "wealth" several times. It is important that I define how I use the word wealth as it is likely different than many people will assume. I do not assume wealth to be measured by your bank accounts, net worth or money stuffed in the mattress. I define wealth in terms of happiness and being able to achieve those goals that you most hope to and that best support your values. It has been shown that, after reaching a certain level of basic comfort, more money does not result in greater happiness. In fact, in my observation, often people with more money display a greater deal of fear and concern about their finances than individuals with far more tenuous financial situations. Therefore, pursuing greater happiness wealth seems are far worthier goal than financial wealth.

The Rectangle and the Square

This morning I thought I would post something I wrote a couple years ago. It is a short piece describing what I believe to be a true financial planner. It was written to help individuals understand what a financial planner should actually be doing for them.

The main premise of the piece is that a financial planner does something different than many individuals realize and that it is important to seek out a professional actually providing the service you would like to receive. My thinking has expanded a bit since having originally authored this. I do think it is still valuable to post this piece. I will post about my current expanded thinking in the near future.

The Rectangle and the Square

One of the frequently asked questions of a financial planner is, “What does a financial planner do?”  Some believe a financial planner is someone who provides investment advice.  Others believe a financial planner helps prepare for retirement.  Many believe that anyone providing financial planning advice must be a financial planner.  While all of these things are part of what a financial planner is, none of them fully capture a planner's scope of service.  My goal with this column is to lay aside some of the misconceptions about financial planners and provide a clearer understanding of a financial planner's duties. 

Recalling the lessons of grade school, many of us can remember the similarities of the rectangle and the square.  One of the most intriguing days in school is when the teacher explains that “all squares are rectangles, but not all rectangles are squares.”  Rectangles can have many different footprints, with sides of varying lengths.  The definition of a square, however, is far more restrictive.  In fact, the definition of a square begins with a rectangle.  The definition of a square is a rectangle with four equal sides.


In the financial advisory world a similar scenario exists.  There are many professionals who belong to the financial advisory industry - the rectangles -, but very few of these are financial planners - the squares.  All financial planners are rectangles as well as squares, but all individuals providing financial advice are not financial planners.  The rectangles generally include anybody providing advice regarding an individual's finances.  The financial advisory industry includes professionals such as insurance salesmen, investments advisors, tax preparers and financial planners.  They may hold licenses or designations such as the Certified Financial Planner™ (CFP®) designation or the Chartered Financial Consultant (ChFC) designations.  However, none of these titles or designations makes an individual a financial planner.  This is because in order to truly be a financial planner an individual must adhere to a stricter definition than simply providing financial advice.


There are two items which are added to the financial advisory definition – rectangles - to create the financial planner definition - squares.  An individual who does not meet both requirements is not a financial planner even though they may provide a form of financial advice incidental to their true business.

The first addition to the rectangle's definition is that a financial planner must provide broad service reviewing a client's total financial picture.  Seven vital areas must be included in a planner's service.  These include:

  1. Helping define financial goals and objectives
  2. Reviewing cash flow
  3. Tax planning
  4. Investments
  5. Retirement planning
  6. Risk mitigation
  7. Estate planning

If an individual in the financial advisory industry provides service in all these areas, they may be a financial planner.  However, they must go a step beyond simply reviewing each area by being committed to all service areas equally.  If the individual has a significantly greater focus on one or two areas, they are likely not financial planners.  This is not to say that individuals who focus on one area are not excellent at their chosen specialty; however, this specialization does not allow them to truly act as a financial planner.  It should also be added that a financial planner can, under certain circumstances and in agreement with a client, determine that some of the areas may warrant less focus.

The second addition to the definition of a rectangle is of equal importance.  In order to be a financial planner, an individual must act as a fiduciary.  To be a fiduciary in the financial planning sense is to act in the client's best interest ahead of all other interests, including the planner's, at all times while helping the clients achieve their goals.  This also means helping clients understand the implications of various options in financial matters, so the client can make informed decisions.  This may require the financial planner take the difficult position of telling a client they are mistaken in their thinking, even though this could potentially harm the relationship. 

What is a financial planner?

Returning to the original question, “What does a financial planner do,” it is now simple to put together a meaningful answer.  A financial planner provides financial advice to individuals in respect to their entire financial picture with the purpose of helping clients reach their short and long-term financial goals.  In doing so, a financial planner always places the client's interest first and helps the client understand the implications of the decision being made.  A financial planner is not an investment advisor, insurance salesman, tax preparer or estate planner.  What sets a financial planner apart from the vast majority of the financial advisory industry is that a planner views each of these areas equally and affords the same amount of care to each area, providing clients with truly integrated financial advice and planning.  

Financial Awareness Defined

For my initial post, I thought I would share a short vignette describing a situation in which financial awareness was lacking. I believe this will help clarify my definition of financial awareness and what I hope to accomplish with this blog.

This story occurred a couple years ago as the firm where I first began my career and thought I would end my career was rapidly approaching its demise. I had returned from a conference of young financial planners a couple months earlier where I had learned so much about the meaning of money and what financial planners could do for people if they would move beyond the basic investment advice/product sales paradigm. I was full of excitement about this new way of looking at financial advice and very excited to enter the conversation I am about to describe.

At a gathering around Thanksgiving time, I was asked by a close acquaintance about purchasing a home. The questions posed to me were those generally asked of a financial planner; questions such as how much home could be afforded, what types of mortgage would make sense, etc... During this discussion, however, I never got a feel for why this individual desired to purchase a home. The questions were all very mechanical, focused on how one logistically goes about purchasing a home and keeping a home. These are certainly relevant and important questions to be asked, but with my newfound perspective on financial advice I wanted an idea about what value this individual hoped to receive in a home. Therefore, I began asking a series of questions which were met with surprise, but not nearly as much surprise as the answers that followed.

My first question to this acquaintance was why he wanted to own a home. (I later learned that the wording of my question could come off as challenging...luckily this did not happen.) At first I received no answer, then a vague "Well, I guess it's what we are supposed to do next." I asked what "supposed to do next" meant. This individual responded that he felt it was time for he and his family to own and live in a house. After further discussion and questioning, it became clear that what was meant was that he felt there was an expectation to purchase a home. He had found good employment, been married, began raising a child and purchasing a home was simply the next check mark on his list of progress through life. He had not consciously considered whether he wanted to own and maintain a home and to accept the financial burden and responsibility which accompany homeownership. This step was seen more as an obligation to this individual than a choice.

As we discussed this discovery, I tried to help make it clear that there was an active decision to be made. We discussed that he and his wife had the freedom to choose to purchase a home, rent an apartment, or even live in a tent if they so chose. I wanted him to understand that there was no obligation to commit himself financial to this based on expectations he believed others had of him. My goal was to present him with questions which would allow him to reassert his financial freedom and make a financial decision living fully aware of why he decided the way he did.

Living financially aware is exactly this process. It is defined by having an understanding of what one values and making financial decisions based on well-reasoned logic and a fully aware thought-process. Living financially aware means using your money in ways which support your values, beliefs and desires.

My goal is to bring you more short stories such as this to help understand financial awareness as well as tools to increase your own awareness. I also plan to share articles I find from other sources as shining examples of financial awareness or lack thereof, and plan to share some of my own personal struggles and successes at reaching financial awareness. Please let me know what helps you reach a more financially aware place.

Why This Blog and Why Me

"Living Financially Aware" is about better understanding the role of money in your life.

I have spent the past five years working in the financial planning industry and have encountered many difficulties during this time in this industry. I have seen a well-respected financial planning firm implode, watched as many people desperately needing financial advice go un(der)served by the industry and watched individuals unaware of the impact money has on their lives give up freedom of choices because of this lack of awareness. I also was fortunate to have many powerful and positive experiences. Most important among these was my introduction to a community of individuals truly committed to helping people financially on a deeper level than most of the industry is willing to address.

Personally, I have undertaken a great deal of learning to help people financially. I have had to use this learning for myself as I have been without employ since September 2009. My family and I have been able to weather this period due to strong financial habits and a great awareness of the force of money in our lives.

The purpose of "Living Financially Aware" is to share much of my learning with the hope to help others. I hope to reach a group of people not well-served by financial planners, people who desperately need financial assistance but are unable to receive it in an unbiased manner. My goal is to have a profound, positive impact in people's lives.

I plan to discuss and clarify these themes more deeply in the near future and appreciate your feedback. I welcome you to my blog and hope you enjoy and find value in my writing.
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