Deciding on which debts to pay off ASAP and which to wait on until other essentials are taken care of
making the most of your opportunities
You can watch the whole interview below or read an edited version of the highlights here.
Where Should Our Money Go?
Elle: Thank you so much, Doug, for joining me. I’m thrilled that you could chat with me this afternoon.
Doug: Happy to be here. Thanks for having me on.
Elle: I’m really excited about your book Family Inc. I am always fascinated to see how people approach money obsession with marriage the different perspectives and circumstances.
And you have a unique perspective because of your background. Do you mind introducing a little bit of how you got into finances?
Doug McCormick: Sure. So I’m a little bit of a journeyman meaning that I got into investing as a hobby that my dad promoted as a very young man.
And then I went to the United States Military Academy and actually served in active duty for a number of years and then I made a career transition where I went back to business school and then spent some combination of time on Wall Street and investment bank working for an investment firm.
And now I’m an owner of an investment firm so I feel like I’m not here today and I think that broad perspectives you know kind of allows me to come at some of these topics from a slightly different vantage point than that much of the advice will get out there today.
Elle: Yeah and that’s what I appreciate about your book. It is very detailed oriented. You have the numbers you have the stats for them and at the same time, a perspective of the family that wants to succeed and how to approach it like a business.
I wanted to talk about a topic that a lot of people have been e-mailing me about especially now open enrollment.
They’re thinking ‘OK let me set us up for a great year in 2018 with finances. They’re planning insurance and reevaluating retirement contributions.
A lot of couples honestly are trying to do it all. They know they need special emergency fund. They’re supposed to have pay down their debt. They’re supposed to invest in an IRA and they feel like they’re being pulled in so many directions.
But your book goes into having a specific plan to help couples to help families figure out OK this is where our priorities are.
Can give us like a high-level view? What are the layers of the steps that families need to take in terms of investments and priorities?
Doug McCormick: Absolutely. And first of all let me say your question hits on the exact reason why I wrote the book and why I came up with the philosophy because in isolation there’s lots of good advice out there.
You know invest this way get this kind of insurance you know is school a good investment or not. And what I personally struggled with was trying to make sense of all that good advice for my own personal circumstances when I had competing demands.
Do I invest my money to pay down debt or do I invest in equities et cetera?
And so the whole premise of the book Family Inc is that we’re all in some ways we could manage our finances like a business.
What if we manage finances and if we borrow some of the principles from you know corporate America we would actually make better decisions?
And so with that, it is kind of the overarching framework where you’re looking at yourself and your family as a business owner and you own two assets really – your labor assets how you make money at your day job plus your financial assets you can really kind of help prioritize those choices you make.
So I would say the very first thing a family must do is ensure you don’t go out of business.
And by that I mean is take care of the critical insurances. The biggest need that families often have that is neglected is disability insurance.
I would also argue that life insurance is a real critical need as well. And then also umbrella insurance for liability. And those are not insurances that you’re paying for to give your family a windfall if something bad happens.
Doug McCormick: It’s really to replace the loss that you experience when someone passes away or someone is disabled.
So first and foremost in kind of the pyramid of things that you’ve got make sure you’re properly covered with insurance.
The second is an emergency fund. And I recommend generally three to six months of available liquid cash to support yourselves and that’s really based on the belief that life is uncertain and you’ve got to be able to protect yourself against financial distress and you do that with an emergency fund.
After that to your question about 401K enrollment that’s clearly the next priority for me. And it’s the next priority because it’s so attractive.
The reason the 401k is so attractive is it’s got big tax benefits in terms of deductibility and deferment of taxes. And you also often have company matching programs.
From there I go down to pay down debts. And there are different kinds of debt some I choose to pay down some I don’t yeah.
If you’re paying down a debt I look at it as pain myself. And how is that money going to perform in the stock markets versus just pay that down myself.
Obviously, if you’re paying down that that’s a certain return to yourself if you have it in the stock market there’s a little bit of risk it may go up or down.
Elle: Makes sense makes sense. So I know everyone has and like you said like good advice in isolation.
You recommend like having that emergency fund pretty fully funded before you even start with the other steps. That might delay a family saving for retiring or paying down debt for a year or more until they get that funded.
Do you see that as a concern or why you feel very strongly about having a full emergency fund?
Doug McCormick: Yeah I would say in some cases I’ve seen families create their emergency fund buy a home equity loan or availability on a loan or some kind of borrowings.
And I think that is acceptable but usually, folks that hold those kinds of resources also have an emergency fund.
So my view is that the number one thing that families struggle with is the cost of financial distress.
If you experience bad credit if you experience a bankruptcy it’s really tough to overcome that.
I contrast that too if you approach retirement and you have not saved as much as you’d like. You can always work longer. You can spend less you can invest more.
And so I think there are ways to solve the savings problem on the backend that are easier than dealing with financial distress.
Elle: I notice that you had mentioned some debts you’re saying hey pay those off now. Others you can kind of put off a little longer like the student loans and the mortgages and assuming car loans that are low interest.
But you know for a couple that’s listening and they’re trying to say like what’s our measurement like how did you come up with a cutoff point in which loans to pay down faster versus later.
Doug McCormick: Yeah it’s a little bit dependent on individual circumstances but in general my view is in today’s market investors can expect over the long term to achieve four to five percent after-tax real returns on their investments.
And so if you compare that to what your cost of interest is I think that’s a good kind of trade.
So very bottom line if you are paying interest it’s more than 5 percent pay it off and pay yourself that interest rate. And if it’s less than that I’d probably keep it invested in the markets.
Elle: Great. Great. Now I loved how you tackled not just what you should do in the numbers in the rationality but you also dress kind of the psychology you know we have That’s me every turn. And then we kind of have investor returns.
Doug McCormick: Yeah yeah. Unfortunately, investment returns are often better than investor returns.
And you know it’s I think it’s about being real with yourself and acknowledging that there are rational decisions and then there are emotional decisions and I think you can manage the emotional decisions by educating yourself well.
But I think understanding some of the biases that go into how we make decisions is a helpful way to you know ensure that you’re making good decisions upfront that you can live with when life and the markets do what they do.
Elle: That’s true. So in your experience has there been like one or two that you see these mistakes that couples make over and over again that sabotages their retirement plans what they intend to do. What’s actually happening. And so how could they counteract it.
Doug McCormick: Yes I. There are a couple of things and I would say in many cases are not necessarily mistakes but there are lost opportunities.
So these are along those lines of lost opportunity. I think that very successful managers of wealth think about things over a very long-term time horizon and it’s so easy to get caught up in the day to day news cycle of apples up a lot today and it’s down a lot tomorrow.
And making decisions that are short-term in nature. So I think the big number one piece of advice I have for folks is think long term and when I say long term I think decades.
You know if you’re in your 30s today and you’re thinking about retirement you’re really talking about a 30 or 40 year period that you have to manage. And when you think long term I think you can take a more aggressive investment posture in terms of your asset allocation. So in general I think people are under exposed to equities and I think if you have a long term focus the risk associated with the day to day ups and downs diminishes dramatically. And then the last thing I say that people often don’t do well is for most families you’re number one asset your labor and thinking about how to maximize the value of your labor through education and job choices is a real important success factor to financial security.
Elle: Yeah I saw that there was towards the beginning of the book with the first couple of chapters I think the second and the third and did a good job of breaking down not just the degrees and the differences with income over the lifetime but I found it fascinating you broke and also your majors and which you get a degree and how that can affect your.
Doug McCormick: You know I think it’s challenging because I think young people call it 18 to 20 often aren’t thinking about their lifetime earnings trajectory but they’re making decisions that are going to dramatically influence them. And so you know I think we we all owe it to you know our youth of today to really help them understand which degrees pay more and what kind of college education is a good investment versus not. And I’m not saying that one career is better than another. But I’m saying that people that are well-informed and understand the financial consequences of the career choice you know that’s ideal.
Elle: And I think you make a good point because they’re adults and that’s one of the first decisions as you know here here’s the income you could expect and therefore your other choices whether you know you get more aggressive about scholarships or doing work study because you know we don’t want to have a large long or it’s going to take longer to pay it back. Those are considerations haven’t those are good discussions to have as a family before you know the financial aid is right in front of you and you’re just going to say yes to whatever.
Doug McCormick: It’s arguably the single biggest financial decision that a young person makes. Both Where do I go to school what do I study on do I go to school. And so to have that important context I think supervised.
Elle: Yeah. Most definitely. Well thank you so much Doug. I appreciate your help with this. Again guys if you haven’t already please pick up Family Inc. It’s a great book full of information and I love how you break it down the numbers in the context of a family unit. So if they want to get more information from you ask your question pick up your book.
Doug McCormick: Where can they go. Sure a couple of easy ways. First of all there’s a Web site family incom that’s Af-Am. I L Y ink i n c period dot com and it’s on Amazon and Barnes and Nobles and appreciate the interest in the sport.
Elle: Thank you so much. I hope you have a wonderful afternoon. Great thank you.
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Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..