MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision making and the cognitive and emotional biases that can cloud our judgment.
In this episode, we're going to be talking about some of the big decisions we all need to make in our financial lives. But this is such a broad topic, we decided to do something a little different this time. We're doing it as part of a two-part episode. And this is part one.
In this part, we're going to talk about the planning process for those big financial decisions. In part two, we'll cover how to implement your plan. So let's start by talking a little bit about plans in general. Everyone has a million things that we want to do. We all have ideas and ambitions, and that's all well and good. But until you get into the details, those are just vague dreams. But concrete plans can turn those dreams into reality.
Steph Shadel is my guest to help us figure out how to create a good plan. Steph has been on the show before. She's a senior wealth advisor at Schwab Wealth Advisory. She's been helping Schwab investors for more than 15 years. She's a Chartered Financial Analyst®, a CERTIFIED FINANCIAL PLANNER™, a Certified Private Wealth Advisor®, and a Certified Wealth Strategist®. Steph raised many good points in the interview. She talked about how we're all different. So there's no one right way to plan. The way you approach planning will depend on who you are.
Some of us are goal focused, and others are more process focused. And she explained why that matters and what it means for our financial planning. Another point she emphasizes is that no matter what kind of planner you are, one thing that's needed is that all plans need to be flexible. Stuff crops up, you change, your life changes, the markets change. Your plan needs to be able to adapt.
Finally, there's all the emotional hangups and biases that can get in the way of good planning. We all have them. The trick is to recognize them when they crop up. That's enough of an introduction. So let's get to the interview.
Steph Shadel, welcome back to the show.
STEPHANIE SHADEL: Thanks, Mark, always great to be here.
MARK: So this is actually the first of two episodes that we're going to be doing. And we're going to be starting out by talking about really some of the key decisions that pretty much all of us face at some point in our financial lives. And the focus of today's episode is just on making a financial plan and some of those initial choices we are making at the beginning of the process. So does that make sense?
STEPHANIE: Sounds good to me.
MARK: OK, so first question: Before one starts trying to put together a financial plan, what are some of the initial questions that they should be asking themselves up front before they get too far down the road on the planning process?
STEPHANIE: Well, it's important to identify and prioritize your goals, and it can be helpful to ask yourself what do you want to accomplish with creating a financial plan? What matters to you? So that, what matters to you, should go into the plan. What do you want your money to do for you? And not just now, but down the road. Let's keep it high level. We really want to understand why we're doing the plan before trying to get overly specific. That'll come.
MARK: It's sort of like at this point, just be directionally correct. That's sufficient. Is that right?
STEPHANIE: Yeah, exactly.
MARK: Got it. Certainly one of the biggest questions because we're big fans of goal-based financial planning: Do you ever find people struggling with kind of big vague questions like "What's your goal?" "What's the purpose of this?" Does that … is that a stumper for some people?
STEPHANIE: Oh yeah, all the time because it kind of feels abstract. So someone that's put everything into their career and just really haven't thought about what they want to do after their career, they'll be able to quantify and set values to kind of expenses and things they want to do now. But that future stage of life is just a little bit more abstract.
And that's OK. We want to figure out your goals at your pace. And so not running out of money can be a goal, but at some point we want to be able to quantify that concern and address it. But the plan is a reference point. It's a roadmap of your life. So it's not written in stone. We can change it.
MARK: Yeah, in fact, I would say, tell me if you disagree, it almost certainly will change because there's so many things are unpredictable in life, right?
STEPHANIE: Exactly, I mean life does change. So the plan is to kind of help you address those changes. It helps you determine what changes you can make to overcome any obstacles.
MARK: So we know that many people, maybe even most people, do not in fact have financial plans. They haven't gone through this process in any form. Why do you think that's the case? What are those barriers that are getting in the way of preventing people from doing this?
STEPHANIE: Well, a lot of times for those that aren't interested in financial planning, I kind of put them into one of a few main groups:
Those who assume they're fine. And they tend to be a bit overconfident. They trust their salary too much, and what that really means is they're ignoring lifestyle creep. And lifestyle creep meaning, you're starting to make more money. You've had a few promotions over your career, and you're upgrading everything. You're upgrading your flight. You're upgrading the hotel. You're going out to eat every night instead of eating at home. Or they might subscribe to every streaming service, but you know, they may not be saving more. So it's easy to end up spending a lot more as you make more money but not changing how much you're saving.
And then there are those who think … that kind of know they're not fine, and they just don't want to face it. They want to keep pushing it off. "I'll figure it out later. I'll figure it out later. Maybe next year." And then you kind of get to a point where you see the light at the end of the tunnel, and now you got to get all this figured out because you're hoping to retire soon.
But then there's also people that just don't want an end date. I mean, when we talk about longevity and health in the family and your own health, it kind of hits you that, at some point, I am going to die. There is an end date. And so it's a morbid conversation, but necessary.
And there are some folks that just don't want an advisor or planner second-guessing them, especially if they've already made a decision to spend at a certain level or go spend on a higher-priced car or what have you.
MARK: Yep, yep. Just as you were talking, I'm thinking through friends, family members, acquaintances. I think I can identify people who fit into all those buckets. So I think you're exactly right. And yet, though, in your experience, you've encountered all four types of people.
At some point, there was some kind of triggering event that caused them to want to start this process and seek some help. So tell me a little bit about what were those triggering events? What caused them to say, "Hey, you know, maybe I do need some help. Maybe I do need to be a little bit more structured in how I think about this?"
STEPHANIE: A lot of times we go through some kind of life change or a major financial change that tends to trigger the conversation that, I might need some help or, all right, I need to really dig into my finances. Maybe it means creating a spreadsheet and starting to track your expenses a bit more closely.
MARK: Earlier you mentioned a goal like not running out of money. That's a perfectly good goal, a perfectly valid goal. At some point though, it's going to help to quantify it. So tell me a little bit more about how you go about working with a client to start quantifying these goals so that we can get a little bit more precision and some more structure to the process.
STEPHANIE: Right, right. And that's why it's important to identify the goal but prioritize the goal because that may reflect how much we spend on a particular goal. So looking at kind of how much do we spend on your basic needs versus travel, really looking at how you want to travel, how often you want to travel. Are you upgrading your flight? Are you more interested in road trips?
Will you be traveling domestically, internationally? Are you more of a big ship cruise fan or riverboat cruise, a smaller setting and therefore a little bit more expensive? And so it might require some research to assign values to these goals. Look up some flights, look up the average cost of a trip through Europe, because that'll be important to have some real numbers because it'll really impact how relevant the plan is.
MARK: So you go through this process, identify a handful of goals, put them in priority order, try to quantify the expenses associated with them. At some point, presumably, when that future vision is in place, you've got to come back to where we are right now in reality and about how much money you have or expect to have to offset these expenses. Is that how the process more or less fits together?
STEPHANIE: Exactly right. So next is putting together a brutally honest list of your finances. We want the good, the bad, and the ugly. Your plan is only as good as the information provided. You need a plan that encompasses everything: your tax information, your marginal effective tax rate, your property taxes. You'll want to go through your credit card statements, your investment account balances and allocations, insurance, the contributions to your retirement plans, whether there's a match, looking at other saving vehicles you might have.
Don't forget about any side accounts where there might be smaller balances. That's still something we want to incorporate. And also think about gifting. Are you gifting to family, to charity, or both? And so we basically need your personal income statement, your personal balance sheet, and projections. And so it's important to be true to yourself and your data.
MARK: So this is probably, to some fraction of the audience, starting to sound and feel a little bit like homework and just the nature of it because it's intimate data here. I imagine that's bringing up all sorts of mental and emotional obstacles to actually getting this done in the way that it can really help support good decision-making. Do you experience that often?
STEPHANIE: Absolutely. So mental accounting is huge, and it's not necessarily a bad thing. Like when we look at mental accounting as, well, I'm investing this account for a specific purpose, that actually can help people stick to their goals and really focus on how to manage that account, so to speak.
At the same time, it's easy to forget about accounts. For instance, you might have a checking account where there's X amount that stays in there, and it's earmarked for your life insurance premium or your car insurance premium. So it's really easy to kind of miss that when we're looking at incorporating everything.
Also, there can be a bias towards keeping it vague and not really getting into the nitty gritty because it does feel like homework. But really folks should look at this exercise as we're kind of doing all the heavy lifting in the analysis and the data collection; and that's really necessary because it'll get easier over time. But we got to get all the data upfront, make sure it's accurate and create this kind of baseline because then we're going to add to it. We're going to adjust it. And it's … a lot of times, it feels a little daunting at the beginning, but then after future iterations of the plan, it's a lot easier because we've done all the early grunt work so to speak.
MARK: Yeah, and it's … and I don't think we want to scare people here. It doesn't need to be accurate down to the penny.
STEPHANIE: Exactly.
MARK: But you just can't be leaving out big accounts or just being orders of magnitude off on the amounts in some of these accounts. Otherwise, I think, garbage in, garbage out with some of this analysis, right?
STEPHANIE: Exactly.
MARK: I guess a crude way of thinking about this is you've … people have identified the goals, the priority of the goals, you've kind of quantified those goals. You've looked at their current resources, and a crude way of thinking about it is, well, OK, here's a successful plan because they've got the resources to offset their future aspirations. And then maybe the unsuccessful are the people where there's some kind of gap. There's a shortfall there. So what are kind of the hallmarks and some of the characteristics of those who have a successful plan, or it looks like they're in pretty good shape?
STEPHANIE: So for those that have a successful plan, there's initially celebration, we're in great shape, we're doing everything right. At the same time, I do have situations where they kind of feel like it's a green light to spend whatever they want. And at that point, you are no longer following your plan. You are no longer sticking to your budgeting or saving as much. And it can get a little scary where we end up having to really update it a lot more often to take into consideration of these increased expenses.
MARK: For those situations where there's a big shortfall, what are some of the kind of hallmarks of those situations, and what kind of conversations are you having with people?
STEPHANIE: Well, I kind of go back to when we were talking about kind of different personality types. And so the folks that were expecting a very successful plan felt like they were in great shape but kind of forgot about that lifestyle creep issue. And so at times when we kind of get a gut check or reality check that, all right, you're not in the best position. You are spending too much. You're saving too little.
And so they can feel a little embarrassed or be in denial. The numbers aren't right, and you kind of got to talk through those numbers and really understand where we can make adjustments because the whole point of the process is not to discourage anyone. It's we got to find those gaps. We have to isolate them and then come up with solutions to get you back on track.
MARK: Yeah, it's not about judging. It's about diagnosing.
STEPHANIE: Exactly.
MARK: And then creating a plan to fix it. We're about to wrap up here this first episode, and then the next episode is going to be about more the portfolio component of the financial plan. Before we wrap up though, Steph, one more question. What are the key takeaways that you really want people to remember and take home, if you will, about the decision to kind of get this planning process started?
STEPHANIE: Think of your plan as how we put everything into place, all the pieces of your financial life, and we're able to create an organized outline or projection. It reflects your emotions, your dreams, your obstacles, maybe even hardships. And it helps you determine what changes you can make to overcome these obstacles or hardships. Do you have to save more or spend less? How much more or less?
The plan also determines your investment strategy. We're able to run stress tests against the portfolio by factoring in good years, bad years, flat years. Throw some financial crisis scenarios at it and just try to come up with some of those worst-case scenarios and best-case scenarios. But it helps us determine the minimum rate of return we need for you to be successful.
And a big part of the whole planning process is to help you be less emotional when it comes to managing your assets in volatile markets. Because you can't ignore it, right? Money is emotional. And when we see big down days or a lot of negative news and the markets reacting, it's hard not to want to change the plan or change your approach. But at the end of the day, all we have to do, because we did all the analysis, we did all the stress testing, we just have to stick to the plan.
MARK: Looking forward to that episode, Steph. Steph Shadel is a senior wealth advisor for Schwab Wealth Advisory. Steph, thanks for coming back on the show.
STEPHANIE: Thanks for having me, Mark.
MARK: Steph had some great ideas about creating a solid plan for your future. Don't forget, she'll be back in two weeks for part two. We'll talk about putting your planning into action, how to avoid pitfalls and recognize biases that can cause problems. I've got one more nugget that relates to something I said at the beginning of the podcast.
I mentioned that a plan should be flexible, and I came across two quotes that crystallized that thought pretty well. One is from Prussian military commander Helmuth von Moltke, and the other is from world champion boxer Mike Tyson. Helmuth said, "No plan of operations reaches with any certainty beyond the first encounter with the enemy's main force." That original quote has morphed into "No plan survives first contact with the enemy." Iron Mike put it this way: "Everyone has a plan until they get punched in the mouth." Pick your favorite, but either way, don't forget to make sure that your plan is flexible and stop back in two weeks for more about planning.
Until then, if you'd like to dig into this some more, there's a great article on Schwab.com called "5 Ways Financial Planning Can Help." We'll link to it in the show notes. There's plenty more resources at schwab.com/FinancialPlanning. That link will also be in the show notes.
If you'd like to hear more from me, you can follow me on my LinkedIn page, or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. And if you liked the show, please consider leaving us a rating or review on Apple Podcasts or comment on the show if you listen to it on Spotify. We always like new listeners, so if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app. Thanks for listening.
For important disclosures, see the show notes and schwab.com/FinancialDecoder.