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A Blueprint for Building Your Financial Plan

Karen Wallace, CFP®

Karen Wallace: Hi, I'm Karen Wallace from Morningstar. I'm here with Peter Lazaroff. He's chief investment officer of Plancorp, and he's just written a book called Making Money Simple that'll help you lay out your financial plan.

Peter, thanks so much for being here.

Peter Lazaroff: Karen, thanks for having me.

Wallace: So let's talk about what inspired you to write this plan, because it really does give some commonsense advice for somebody who wants to--just from soup to nuts--make their own plan.

Lazaroff: Sure. Well, financial success isn’t magic--it's engineering--and all you really need are good systems in place to help make good money decisions. And I really wanted to lay out the blueprint that I'd personally used as well as that that I help coach clients use to help build wealth, and I feel like if you read Making Money Simple the hope is that you can turn your career success into financial success.

Wallace: You start out with an discussion that I think is so interesting, and it basically is telling you that one of the major tools that successful investors have is just time. And people maybe don’t even understand the power of that compounded interest over time. I feel like that’s kind of one of the best lessons that you give is just: Find your investments and let a lot of heavy lifting just happen.

Lazaroff: Right. Because I think most of investment success is minimizing mistakes and just getting the heck out of the way of compound interest. And a lot of what I address in the book is that you try to find these little areas of improvement that when compounded over time have enormous results, and I think our brains are really not wired to appreciate exponentials. We tend to think more linearly where it's easy to imagine 1+1+1. So going from 1, 2, 3, 4 is easier for our brains to connect the dots then going 1, 2, 4, 8, 16, 32. And so certainly I tried to present some examples, some of which are more of those classic nature where "start today makes a big impact," but also some different examples that people maybe haven’t heard of before, both historical and theoretical, to try to just get a better visualization for what time can do mixed with compounding.

Wallace: One of them that was interesting was just imagine a paper folded, and the most you can fold a paper is eight times, but if you could fold it, it would be to the moon in something like 30 folds.

Lazaroff: Yes, and I honestly don’t remember off the top of my head--I do remember when I first learned of this, I tried to fold a paper and I couldn’t get past seven, but I guess the world record was eight folds. And the thickness doubles every time, and when you keep doubling something... I think if you double a penny everyday for a month you end up with $10 million, and so it's that same concept.

Wallace: I've heard of that one.

Lazaroff: Yeah. With paper, there is a graphic of how many folds until it's the size of the Empire State building, to the sun, to the moon, the height of a house, and so just trying to take a different way to think about it other than just traditional charts and graphs. The other thing I think that’s a story that I'd heard throughout my career was that of Ben Franklin's will where he had left money to Philadelphia and Boston and said you had to wait 100 years before you could tap it. And ultimately turning a relatively small gift that compounded into millions of dollars for these cities and then they could make a withdrawal and then 100 years later they got to make another withdrawal. So I'm trying paint out--everybody doesn’t have 100 years, but I bet you have a lot of doubling periods in your life. How many times can you fold that piece of paper that’s really your portfolio? And when you accept that you are looking for little changes to compound over time, it really changes the nature in which you are thinking of building a financial plan.

Wallace: Right. The book was sort of clearly laid out into sections, which I liked, and you can kind of assess where you are right now and assess where you want to be, which sounds more obvious than maybe it is. You really think about your goals, and you think about what are the things I need to do right now to get there.

Lazaroff: So if you want to build a system, that’s great, but you definitely have to know what the end goal is. And so just like if you take a flight you know where you want your end destination to be. If we fly from your office here in Chicago and want to be in San Francisco, we then create a plan to make sure we don’t end up in Toronto. And ultimately I think if you figure out where you are trying to go and then you understand where you are then you can start building steps, and it doesn’t have to be complicated. I think that a lot of the information that goes out to investors--there's two camps, one of which says its super-complicated and you need our help. The other is it's really easy as long as you listen to our advice and you use our products.

I think what I am trying to explain to people is this system of saving is almost as important if not more important than anything else and then trying to automate that over time and prioritizing those goals. So I definitely go through some exercises in the book of how to set goals and then, once you set those, how do you prioritize different financial goals such as saving for retirement versus emergency fund versus paying down debt versus saving for your children, and try to lay out sort of the mathematically optimal way. But then also acknowledging we don’t live in a spreadsheet. So what are the things that you might tweak for your own plan based on what makes you comfortable with debt or with cash or with investments.

Wallace: And you touched on other areas that are so important to a financial plan like insurance. You need some sort of risk management in place, and I thought it was really helpful you had experience working with insurance, so you have all these sort of tips to kind of get yourself out of situations where somebody is trying to sell you a product you don’t need.

Lazaroff: Yes, I did an internship at insurance company where I got my license and they told us how to go sell certain types of policies. And I think, as I said earlier, a lot of financial success can be just minimizing mistakes, and one of the things that was important to me is to spell out some of those mistakes in the investment landscape as well as some of those mistakes that will come at you from all corners. And I think insurance sales tends to be something ... everybody needs insurance at a certain point. But oftentimes you end up with a policy that’s expensive and doesn’t necessarily make sense for your needs. And what I did was lay out a lot of the sales one-liners and said, "Hey, here's what you are going to be told. Here is sort of the other side of that argument." Because anytime you are sitting down with a financial professional from any realm, you don’t always know the other side of the argument. You hear a really succinct, well-laid-out argument for why you need to do x, y or z. And so trying to equip people with enough information that they are not overwhelmed but also to say "Hey, this is probably all you need unless these very specific instances apply to you. And if you hear these really good arguments, I want to make sure that you understand I know those arguments too. Here is the other side of them."

Wallace: So the book itself is laid out into three sections. We start with, like we were saying, the goal setting and just explaining the concepts. The middle section is a real deep-dive on investments and minimizing mistakes there, appropriate allocation, and things like that. And then we sort of end up where you are talking more about the insurance and estate planning. Just what's important to cover with estate planning.

Lazaroff: Right. I think a lot of personal finance books focus on how, often, and not why, and then they skip over some of these big one-time or less-frequent decisions you have to make, and we've spoken about insurance a little bit. But starting a family, saving for college, buying a home, estate planning--I think that’s a really big one, because a lot of people think estate planning is just for the ultrawealthy. But basically if you want any say over your assets or your well-being or your children when you are unable to make that decision due to death or incapacitation, it’s a really important set of documents to have, and understanding which documents you need and why and what to look for costwise is really important. And I think a big mistake people make is trying to go online and do them themselves and then the documents don’t meet their state laws or perhaps they will go ahead and pay money to have someone do the documents. But not necessarily fund those vehicles correctly and so certainly laying out estate planning in a way that I felt like was easy to understand. It's one piece of the book that you can't do on your own but at least you can go out to an experienced attorney and know what it is that you need and be a more active engaged participant in those conversations.

Wallace: And there is also a section on choosing an advisor for somebody who understands all this but maybe wants to outsource some of it.

Lazaroff: Right. I think it's not rocket science. I think a lot of people sometimes incorrectly assume that it's a lot like performing brain surgery or doing things where you need a lot of training, and yes that helps, but I'd like to equate it in the book to mowing my lawn. I mowed my lawn for several years, and then I hired a professional to do it, and they did a lot of things that either I knew I should be doing but was too lazy to do or didn’t have time or things I didn’t know about in the first place, and so ultimately I had a healthier lawn, better-looking lawn. Then I had more time to spend on other things, and so I think one piece of the book, jumping around, that talks about best uses of money--some as experiential purchases, and some are those that create more time. And I think hiring an advisor, and then the process of how to hire an advisor because there are so many different titles out there and designations, it was really important piece to me. And certainly you can go through the book and find questions that you can ask each of your advisors as well as a process for asking those questions that tries to help remove bias. You can also go to peterlazaroff.com/worksheets and you can find all of those as well. Generally speaking, the goal is if you've read the whole book, you say, "Great I can do it on my own." That’s wonderful. You may get overwhelmed at some point, or you just may realize there are so many moving parts in our lives between our careers and our families and our hobbies that this is just one more thing that you want to offload to somebody else. And I will say I personally have an advisor. So here I am as a CFP and CFA, and I certainly can do this myself, but I certainly at one point in time decided, "Look, it'd be great to have an unbiased third party give me feedback." And then just take something off my plate. I mean, that’s a win in and of itself.

Wallace: So this book provides a really helpful blueprint, whether you want to do it yourself, whether you are looking for advisor. It just helps you understand the whole process and what you need to know. It's sort of slim read, too. It's not going to take ...

Lazaroff: I wanted to be approachable, and my hope is that everyone can pickup something new regardless of their skill or past experience.

Wallace: Great. Well, I really enjoyed reading the book.

Lazaroff: Thanks so much, Karen.

Wallace: From Morningstar, I'm Karen Wallace. Thanks for watching.