Values-based planning is a philosophy that's spreading like wildfire in the financial sector. Is this a passing trend or did they finally crack the code to attaining true wealth?
We recently sat down with Cory Faucheux, senior financial advisor at TruWealth Advisors, to discuss the ideas and practices behind values-based financial planning. Cory also took questions from viewers and offered expert advice on mapping a personal path to wealth. Watch the full Q&A video below or continue scrolling for the written transcript.
Financial planning — as a whole — is learning how to get from point A to point B. Which is why so many people focus on the how. Values-based planning goes beyond that. It focuses on the why. It looks beyond the numbers, into your value system and your motivations.
At the most basic level, make sure you have an emergency fund or cash reserve. Bad things inevitably happen and it's important to be prepared for that. We all know someone who was furloughed or lost a job because of the pandemic. We saw a lot of households go from two incomes to one income. Having an emergency fund to fall back on is so important.
It mainly comes down to cashflow in your own personal situation. Start with a goal that's achievable. Save $1,000 by depositing $100 a month for 10 months, or $50 a month for 20 months, then keep growing that number until you have enough to cover at least three months of expenses. I'm talking about the mortgage, the light bill, the phone bill, the necessities.
If your employer offers payroll deduction, that's a great way to build your emergency fund. With a set portion of your paycheck automatically going into your savings account, you don't have to rely on discipline. Trust me, being disciplined on the front end saves you a lot of heartache on the back end.
It all boils down to your personal values — and the most basic thing I want everyone to understand is no one has a better set of values than others. It's mostly a matter of how you grew up and what's important to you.
The debt question is one we see on both sides of the aisle. Many of my clients have a total aversion to debt. They want the mortgage paid off, the car paid off, everything paid off. On a more reasonable and foundational level, my advice is to pay off your high-interest debt first. If you look at the minimum payments on high-interest debts, you'll realize how much of that is going toward interest, not principal. It could take you 20 years to pay off your credit card at that rate.
Credit cards are great tools if they're used as tools — not a crutch. If your card balances start looking like a mortgage, it may be time to consolidate those payments. Debt consolidation is the act of moving your high-interest debts into one low-interest loan. It’s a smart financial move that can help you pay off debt faster, simplify your finances and boost your credit score. Check out Louisiana FCU's Debt Consolidation Calculator to see if consolidating is the right move for you.
Now that interest rates are low, I wouldn't rush to pay off a mortgage. Often times, especially if you're younger, saving for retirement is a bigger long-term win than trying to expedite a mortgage payment.
The same goes for car payments. Your vehicle's value is guaranteed to go down. There aren't many things I want invest in that are guaranteed to lose money.
It depends. Older loans have rates between 2.5% to 4.5%, while newer loans are closer to 6.75% or higher! Is your student loans structured as a 10-year standard pay, or an income-based repayment that could take 30 years to pay off? The higher the interest rate is on your college debt, the quicker you should try to pay it off.
Understand all of your options. Option one is to do nothing with it: You can leave your money in your 401k. There's no requirement for you to take it out. Just make sure you understand your investment strategy, that is, your goal for the account. What am I trying to accomplish? Why is this my goal? Confirm that your goals are in line with your risk profile and that your beneficiaries are set up. That can happen in an IRA, which is in a individual retirement account. IRAs are like your own personal 401k that can be rolled over tax-free, as long as it's done as a direct rollover.
Option two is to take the money out. If you're over 59 and a half, you no longer pay penalties. But remember, you will still pay the likelihood of taxes on that amount if all your contributions are pre-tax. Before you cash out, it's important to understand how that's going to impact your tax situation as a whole.
Option three is to get an annuity, which is a form of insurance that pays out over a period of time. It sounds good on paper, but the returns can sometimes be weaker than a traditional investment. Before you make that decision, take a good look at the fees, risks, liquidity and different options available to you.
Again, it all comes down to the goal, the reason, the why. If you're saving for retirement, a 401k is the best place to start. Oftentimes your employer will provide a match. That's free money! There's nowhere else you're going to be able to invest and get free money.
If your goal is to have enough money to cover an emergency, go with cash. You don't want to tie that into something like a certificate of deposit (CD), because if you have an emergency you don't want to have to go break a CD.
If you're saving for education, there are things like Coverdell Education Savings Accounts or Louisiana START 529 plans that are made for that.
The question should always be "what is the purpose? What is driving the savings?" Knowing the answer can help guide you toward the best option for saving money.
In order to start a budget, there must be a why. To stay disciplined in anything in life you have to understand why you're doing it. What is your motivation for it? If you don't have a cash reserve or you don't have your debt paid off and that's your motivation, well, that's your why. Your goal should be in line with your budget. You can't be on a beer budget with champagne taste and expect that to really pan out. You have to set realistic goals based on your budget. My recommendation would be to start with a budget, understand what your resources are and then set reasonable goals. If you set goals that are way too high or way too big and you never get that first win, you can't build momentum.
I like the zero-based budgeting method. If you have this much income to work with and have $100 left after you pay all your bills, you'll need to figure out the best place to put $100 a month. If your goal is a $1,000 you know it's going to take you 12 months to hit your first goal. Then you can say, "I want an emergency fund in 12 months." A goal without a deadline is just a wish. You need to say, "when am I going to accomplish this?" Only by creating the budget and understanding your resources can you really set appropriate goals.
Your goal beyond that should be retirement, and that's a little bit more complicated than just pulling a number out of the air. That's when you should sit with a financial expert to work through the prioritization your goals, your timelines, your resources and how you're going to get there.
It is never too late. Granted, the younger you are the better off you are. But it's never too late. If you haven't started, start now. If you don't start now, tomorrow's going to come and you still won't have started. It's like anything that you look at and say, "It's going to take me five years or two years." Well guess what? Whether it's two years or five years, it's going to pass regardless and you're still going to be in the same position if you haven't done anything.
Many young people say to me, "I don't have a lot. And what I can put aside doesn't feel like enough." It's always enough. It's never too late and it's always enough. Get started and stay disciplined. Those are the two best pieces of advice I can give you.
I have dealt a lot in both. There's no right or wrong. Your goal for retirement should be to be able to wake up in one morning and have income without having to go to work. Some people achieve that through the stock market; Some people achieve that by starting a small business like a carwash or something that has passive income. Some people achieve that through rental properties.
The only caveat: I've seen people who have a lot of rental property but not a lot of liquidity. If the economy tanks, that is not a balanced portfolio. Just like you wouldn't have all large-cap growth stocks as a stock portfolio. Having all illiquid investments as your entire net worth is not ideal either.
Just use caution and make sure you have enough liquidity. With stocks, it's really easy to say, "What's my rate of return?" It's not that easy to calculate your true rate of return on a rental property. "I bought it for X, my mortgage is Y, my insurance is Z. I rent it out and there's the net difference." Not necessarily. Because once your tenant moves out in three years, will you have to replace carpet? Will you have to repaint? Will you have to replace the roof?
If you buy the property right, have good tenants and good upkeep — rental properties can be just as good as the stock market. But neither are inherently superior since they both accomplish the same goal. It's all just a matter of how you want to get there.
True wealth isn’t about how much money you make, but what you do with the money you have.
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