EP 4: Making Money Simple (Part I)

by Peter Lazaroff | Jul 14, 2021 | Podcast

One of the trickiest things about personal finance is the sheer number of choices. It doesn’t matter the details of your specific situation – we all face countless decisions and each option comes with a lot of underlying complexity.

So many people struggle to understand where to start and what to do with their money. That’s why Peter wrote Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever.

In the first episode of a three part series, Peter highlights his favorite passages and outlines the important concepts of Chapters 1-4.

In this episode, you’ll learn how to build a bulletproof savings system for growing your wealth.

Episode

Outline

Wading through choice after choice is not easy to do, especially on your own. Consistently making the best choices becomes exponentially more difficult. As a result, most people struggle to figure it out.

We face endless obstacles, too.

For starters, the human brain isn’t hardwired to think rationally about money decisions;
We also have to live with the fact that advertisers subtly follow us around the Internet (and even our homes) to strategically encourage us to consume;
Then there’s Wall Street, spending billions of dollars to convince you to take actions when you shouldn’t;
and nobody receives a formal personal finance education led by a knowledgeable (and unbiased) expert.

So many people struggle to understand where to start and what to do with their money. That’s why I wanted to write a book.

And in 2019, I published Making Money Simple: The Complete Guide to Getting Your Financial House in Order and Keeping It That Way Forever.

When I outlined Making Money Simple, I wanted to give readers a clear starting point, focus only on the most important decisions to make, and share my savings system that quietly nudges your finances in the right direction without regular effort on your part.

The book is broken into three parts:

The first section is all about goal setting and building a system for financial success,
The second section focuses on investing
And the third section is about big financial decisions that happen infrequently, but are important to get right

This episode is the first in a three part series in which I will outline the important messages from these three sections.

To be clear, I’m not going to read the book to you. I did record the audiobook, which I know is on Audible, so if you prefer books on tape to reading hard or electronic copies, go ahead and check that out.

But for now, I’m going to highlight some of my favorite passages and outline the important concepts of each section.

Today, we start with the first section (chapters 1-4) on goal setting and building a bulletproof savings system for growing your wealth, but first I want to make some quick comments on the Introduction.

Introduction

The funny thing about the Introduction is that it was supposed to be chapter 1. And chapter 1 was so supposed to be chapter 2, and chapter 2 was supposed to be chapter 3, and so on.

But there was a misunderstanding between my publisher and me. I had chapter titles for each chapter, and Chapter 1’s title was in fact “Introduction,” but the publisher thought I had meant it to truly be an Introduction and not part of the book.

It wasn’t until the typesetting was done and there we were past the point of no return that I saw them place the Introduction outside of the normal chapters and table of contents.

You’re probably thinking, “so what?” but this gave me so much heartburn.
The distinction might not even make sense, but if you flip through the book, you will see what I mean. I had a number of early readers skip the Introduction and go straight to Chapter 1 (I know I’d do the same), so the book seemed to start abruptly.

Anyways, the chapter sets the stage for why it’s important to learn about money. It also has one of my favorite quotes:

“In school, you are given a lesson, then a test. In life, you are given a test and then you learn a lesson – and money lessons can be expensive.”

If you’ve listened to earlier episode, you’ve already heard me use this line.

I was fortunate in that I took an interest in this topic at a young age. But I never took a course in high school or college that ever really educated me the way that was needed to make good choices. That education was left up to me.

Another line I really like in the introduction is:

“Financial success isn’t magic; it’s engineering.”

I remember writing down this phrase after spending a day with executives and senior members of an investment firm.

Nearly everyone that day said some form of it. I was (and still am) very familiar with the firm’s messaging; and yet it was a new phrase to me.
The first time I heard it, I liked it. The second time I heard it, I was like “oh, that’s what so and so said.” The third time I heard it, I thought “I better write this down.”

And it makes sense.

Financial success is more about putting systems in place that best leverage the power of compounding and encourage good financial behaviors.
Typically the most effective systems and processes are those that remove the opportunity for us to exert any ongoing influence over our finances. Make a whole bunch of really good decisions, then implement.
The human brain isn’t hardwired to make optimal money decisions. Our cognitive and emotional biases create tremendous barriers to financial success.
You are never going to take the human nature out of humans, so putting processes and systems in place that acknowledges the inherent human biases we deal with and builds around them is the engineering part that makes financial success sometimes seem a bit magical.
- The right thing to do is often so simple that it seems that it can’t be possibly right
- Finances are complex, but they don’t necessarily require a complex solution

Chapter 1 – The Power of Time and Compounding

Story about: I remember thinking this section would be in the middle of the book

The first sentence:

“The most powerful tool you have for reaching your goals is time.”

Time mixed with the power of compounding is the most potent combination for wealth creation. That’s why I dedicated Episode 1 to this topic.

“Whether you’re saving early and often, systematically adding to your investment portfolio, or staying the course in times of uncertainty, time has the power to turn small habits into incredible results.”

James Clear wrote a book called Atomic Habits that is basically this sentence on steroids.

To be clear, I’m not comparing my book to a worldwide best seller, but I’m saying that my research on habits greatly influenced the systems described in my book.
I mention Atomic Habits because I think it is the best, but it was actually a different book that was published several years prior, called The Power of Habit, that piqued my interest in habits (how they are formed, how they are triggered, how they are changed, etc)
Good habits require training, almost like a re-wiring of your brain. Good financial habits are extremely counterintuitive to human nature.
But unlike other habits like healthy eating, reading more, or meditating – good financial habits can be automated. Good habits and automation – now we’re engineering something for powerful results.

Chapter 2 – Where Do You Want to Go?

One of the longer chapters in the book, but there was only a single quote that I felt really stuck out

I really liked my first sentence, again, especially because it followed the conclusion of a chapter explaining that small habits turn into incredible results.

“Financial success doesn’t just happen; it’s incremental.”

This can be a challenge for many people because you don’t see immediate results. Similarly, it’s hard to make progress without knowing where you’re trying to go.

All too often, people make money decisions without considering the impact on their future. In fact, research shows that our brains think of saving as a choice between spending money on ourselves today versus giving it to a complete stranger.

So this chapter seeks to solve for that disconnect while also laying out a process for goal setting that makes progress more apparent.
Because financial choices aren’t recognized for a long time, it’s harder to get excited about progress
When you go to the gym for a week, you might notice some differences in your performance or appearance. With finances, that’s not so.
HOWEVER, you can’t get a 6-pack by going to the gym just once, but you can potentially see long-term benefits from just a 30 minute financial exercise.
- Again, you have to play the long game, even if the results seem small at first

“There’s no such thing as a final draft of your financial plan.”

So in laying out the process for deciding where you want to go, I also outline some ways to prioritize different goals.

Priority #1 and 2 are always retirement savings and an emergency fund
The chapter outlines where to save for retirement first (401k, Roth IRA, etc) and I have a blog post on this topic (https://peterlazaroff.com/where-to-save-for-retirement/), but here is the order.
I’ll also link to a blog post on How to Set Up Your Emergency Fund, which I cover in that chapter: https://peterlazaroff.com/how-to-set-up-your-emergency-fund/
Then I cover investing vs paying down debt, and other general rules for prioritizing financial goals, but then I also rank goals tied to consumption: experiences, purchases that create time
- When it comes to prioritizing your consumption-based goals, the aim should be to prioritize those that will make you the happiest by favoring experiences over material goods and prioritizing purchases that create time

Chapter 3 – Where Are You Today?

At this point, you know where you want to go, but before you can start heading there, you need to understand where you are today.

I go through the importance of completing a Net Worth Worksheet to represent where you are today.

Why does this matter? Before making any personal finance decisions from here on out, you can ask yourself two questions to help you choose your next course of action:

How does this affect my net worth?
How does this impact my ability to reach my goals?

The first question measures financial success in the traditional, mathematical sense. In most cases, making good financial decisions should lead to an increase in your net worth.

Using your Net Worth Worksheet can be a useful tool when evaluating a major purchase such as taking an unplanned trip with friends or buying a new car.
Spending money is not a bad thing.
The key is to make intentional choices with your saving and spending so that you get the most value out of your money.

For example, an unplanned trip with friends may not be in your budget and will certainly reduce your net worth. But if you place a high value on travel and spending time with friends, then the hit to your net worth is well worth it. Plus, we know that experiences tend to generate longer-lasting happiness.

Examining a car purchase, however, is a bit trickier. Buying a car will always ding your net worth, but it’s probably a necessary expense. It may even be a goal you meticulously plan and save for. But how might spending more on a nicer car affect your other goals?

Framing decisions in the context of your goals can help you make better decisions and minimize regret. To better answer that question, you must complete the Cash Flow Worksheet, since that drives how much you can contribute to your goals.

One problem that can happen once someone reaches the Cash Flow Worksheet is discovering there is less monthly cash flow available than what is required to reach your goals. Which brings me to one of my favorite quotes:

“The idea of cutting expenses is often talked about like a tragic event, but that isn’t a productive way to frame the act of saving money. Saving isn’t about making sacrifices; it’s about keeping your priorities and getting more of what you really want.”

If you think you’re spending too much, here’s what to do:

Rather than the typical “cut out your Starbucks” advice, the first step is to skip all impulse purchases.

When you go to any store, make a list of what you need to purchase. Don’t purchase anything else.
If you feel like there is something else you need once you’re at the store, ask if you need the item in the next week. If not, skip the purchase.

Another trick to get your lifestyle expenses more in line with the things you enjoy most is to look at a summary of your recent spending and sort each expenditure into one of three categories: best value, good value, or low value.

This assumes you track expenses, so if you don’t that would be the first step
If you share expenses with a significant other, do this exercise separately and then compare notes. There will undoubtedly be other items you each ranked differently, but that’s okay. Nobody is right or wrong here.

Are there any items you both place a high value on?

Those costs don’t necessarily need to be cut right now.
Instead, focus on the expenditures you both put in the low value category. These expenses should be eliminated immediately to free up a little cash each month to dedicate toward the things you really value in life.

Bigger Savings

Cutting expenses that offer little to no value is a painless way to boost savings with relative ease. Finding big savings, though, requires a little more work. Here are some areas that can make a big impact:

Buy term life insurance instead of permanent (whole life) insurance.

If other people depend on your income, then you likely need or already have life insurance.
Not only is term insurance significantly less expensive than permanent insurance, most people are better off with term insurance.
Insurance salespeople earn a bigger commission for selling permanent insurance since it’s more expensive, so you may face a sales pitch that makes a compelling case for a product you don’t need.
But at least 99% of the time term insurance is your best bet

Increase deductibles on your auto insurance.

One way to lower your auto insurance bill is raising the deductible, which is the amount you pay out of pocket before the insurance benefits kick in.
The higher your deductible, the less the insurance charges you for coverage.
If you have an emergency fund that can cover the higher out of pocket expenses in the event of an accident, then this form of self-insuring is a no-brainer.
Of course, if you don’t have an emergency fund yet, then this strategy doesn’t make sense.

Increase deductibles on your home insurance.

Your home is likely one of the biggest (if not the biggest) assets on your personal balance sheet.
No one purchases home insurance because it’s fun. You need it because if that asset burns down, the financial impact of not having insurance would be devasting.
Much like with auto insurance, you can save a significant amount of money by increasing your deductibles, but this only makes sense if you can afford to take on the additional liability in the case of an unforeseen event.

Trade in your travel rewards credit card for one that earns at least 2 percent cash back.

People love miles and points, including me, but a cash back credit card might be more useful if you are spending too much to meet your goals.
In my experience, most people aren’t savvy enough with their spending and redemption strategies to make points more valuable than a simple cash back reward.
If your primary goal is to boost savings, cash back credit cards offer an immediate return in value and flexibility that travel reward cards cannot match.

Refinance your loans.

Refinancing debt to a lower interest rate can save you thousands of dollars on a mortgage, student loan, or other large debts.
If you decide to refinance your loans, it is important to make sure the monthly cost savings will offset the loan origination cost and the additional interest expense that comes from resetting the term of your loan.

Buy cars less frequently.

The average length of car ownership is 6.6 years. That means the average person will buy nine or ten cars from the time they graduate college until the time they reach age 85.
Driving your car for eight years means buying two fewer cars between the ages of 22 and 85.
Compounding the cost savings from buying fewer cars over multiple decades would result in significant bump to your net worth.
The cost savings can be highly impactful even if you do this with only a couple of cars, particularly in the first half of your career as you gain more time for the savings to compound.

Chapter 4 – Creating a System for Financial Success

Chapter 4 takes everything from the first three chapters and puts it into action.

If you only read chapters 1-4 of my book, you will have gotten most of system I used and coach other to use to achieve financial success.

Did you ever have to read The Odyssey in high school?

Homer’s epic told the story of Odysseus’s journey home to Ithaca, which included a part in which Odysseus and his friends had to sail past the island of Sirens. The Sirens sang a song no sailor could resist, but if they steered their ship toward the island, they wrecked their vessels upon the rocks. Knowing this beforehand, Odysseus devised a plan to enjoy the Siren song while safely continuing toward his intended destination.

Odysseus instructed his crew to fill their ears with wax and sail past the Sirens no matter what. Odysseus then had the crew tie him to the ship’s mast so he could listen to the Siren song without being tempted to steer toward the island.

The plan worked beautifully. Odysseus was able to hear the Siren song without wrecking his ship.
Even though he begged to be freed the entire time, the process he committed to in advance safeguarded him from foolish decision making.

In the present day, you face countless temptations in everyday life that can distract you from your stated goals when making financial decisions.

Messages to consume never stop. Advertisers literally follow you around the Internet. Stores meticulously place and price merchandise to encourage impulse purchases.
Social media make you hyperaware of all the stuff your friends and family members are buying.
Meanwhile, it’s never been easier to spend money thanks to one-click ordering, mobile payments, in-app purchases, and the increasing use of credit cards over hard cash.

As an investor, you face an even more complicated set of temptations.

Wall Street spends billions of dollars convincing you to take action when you shouldn’t.
Financial media doesn’t help, either. They cover markets as if investing is a daily activity and create a sense of urgency that doesn’t exist if you develop and follow a thoughtful plan to stay on course.
Repeat after me: Wall Street and the financial media are not on your team. The deviations these parties encourage from our intended course can lead to a financial mess.

Resisting modern day Siren songs requires a system for saving that limits bad behaviors today and helps you make good financial choices for your future.

In economics, this is called precommitment. It establishes processes that encourage good behaviors and help fight the temptation to deviate from a plan.
On top of a good system, you may choose to leverage a human or digital advisor to play the role of Odysseus’s crew, which means they need to have their ears plugged with wax (figuratively, anyway).
They also need to remain objective, unbiased, and themselves undeterred by the noise of markets and media so they can succeed in their role.
They should help you stay tied to your financial plan to ensure you sail safely past temptations and onward to your goal.

Whether you use an advisor or not, the systems described in chapter 4 will help you stay on course during your financial journey and enjoy life the way that Odysseus enjoyed the siren song (without actually tying yourself to a pole).

It starts with a Reverse Budget, which I’ve discussed on the show before. Rather than worry about tracking expenses, a Reverse Budget focuses on how much you need to save and the prioritization of your goals. I have a blog post on how to set one up that I will link to in the show notes.

Once the reverse budget is set up, then it’s time to build the automated system that will power your long-term success.

Automation helps you achieve specific goals by systematically creating positive long-term habits. The benefits of automation align with the human tendency to embrace habits. In fact, more than 40 percent of the actions people perform each day are driven by habit rather than actual decisions. Habits are a consequence of our brain’s constant search for ways to conserve energy. Habits free up our mental capacity from thinking about basic behaviors such as walking or chewing our food so that we can devote mental energy to inventing spears, irrigation systems, and (eventually) the steam engine and computers.

Unfortunately, our brains don’t differentiate between good habits and bad habits. And habits never really disappear. This makes it harder for me to avoid the cookies in the office lunchroom or mindlessly eating in front of the TV. Not only are humans creatures of habit, we also don’t like change. Change requires more mental effort, which our brains are hardwired to avoid. Routines become automatic, but change jolts us into consciousness, sometimes in uncomfortable ways. Our preference to avoid change can be leveraged by automating good habits.

As Charles Duhigg wrote in The Power of Habit: “Willpower isn’t just a skill. It’s a muscle, like the muscles in your arms or legs, and it gets tired as it works harder, so there’s less power left over for other things.” It is important to visualize the future and keep our goals in mind when making financial decisions, but that requires a lot of willpower. However, the habit of contributing to a savings account every week requires very little mental energy, particularly given how easy it is to automate those good practices.

By putting your personal finances on autopilot, you take advantage of the human tendency to embrace habit. Plus, it’s easier to do today than ever before.

One final quote, well, it’s more of a passage that is at the very end of Chapter 4 to close us out..

“Creating a system for financial success is all about making intentional, systematic choices with your money. A good system will direct dollars to the things that matter most and keep you on track for reaching your end goals. A systematic process can also reduce or eliminate our human tendencies that lead to poor consumption choices as well as subpar saving and investment decisions. But the system should also make it all automatic.”

Resources

About the Podcast

Long term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

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