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Knowing how to manage your money and make it last is essential in any financial plan. And while putting cash aside might seem ‘pretty easy,’ there are necessary steps for managing your own (without sabotaging your retirement funds).

Whether your goal is to save for your next trip, buying a new home, or even “just to have cash on hand,” you can still live the life you want today while ensuring your income for tomorrow.  

In this episode, I discuss why financial planning doesn’t have to be ‘all or nothing’ in your budgeting – and how the right strategy protects your portfolio for decades to come. 

Show Highlights Include:

  • How the ‘Diderot Effect’ steals from your savings and what you can do to successfully manage cash flow in the future. (1:20)
  • How to accurately define your money goals and where the 70/30 rule plays a part in your cash-saving strategies today. (4:25)
  • How to avoid ‘tunnel vision’ while saving for the next big thing and still live the life you want (without ignoring any bills or lingering debt in the process). (9:50)
  • Why your financial plan is like designing a car and the investments you need for protecting your lifestyle and preserving your income (without facing engine failure down the road). (16:02)

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in, to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. To find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com, or you can give us a call at (805) 409-8150 and if you’re at our website PensionAttention.com, go to our media tab and hit subscribe. Let us know what you think. Love to hear from you. And you can also go to anywhere where you would download podcasts, whether it's Google or Apple podcast app, you can hit the subscribe button and again, give us a rating, leave a comment, let us know what you think, it's always good to get feedback. [01:21.1]

The famous French philosopher, Denis Diderot lived nearly his entire life in poverty, but that all changed in 1765. Diderot at the time was 52 years old and his daughter was about to be married, but because of his lack of wealth at the time, he couldn't provide a proper wedding. Diderot’s name, however was well-known because he was the co-founder of a we know today as the Encyclopedia. Now, when Catherine, the great, the Empress of Russia heard of Diderot’s financial troubles, she offered to buy his library from him for a thousand British pounds, which is approximately $50,000 in today's dollars. Suddenly Diderot had money to spare. So shortly after this lucky cell Diderot acquired a new Scarlet robe, that's when everything went wrong. Diderot’s scarlet robe, it wasn't just a scarlet robe, it was beautiful. So beautiful, in fact that he immediately noticed how out of place it seemed when surrounded by the rest of his common possessions. [02:19.5]

In other words, there was no more coordination, no more unity, no more beauty between his robe and the rest of his items. The philosopher soon felt the urge to buy some new things, to match the beauty of his robe. He replaced his old rug with a new one. This one is beautiful rug from Damascus. He decorated his home with beautiful sculptures and a better kitchen table. He bought a new mirror to place above the mantle and his straw chair was relegated to the anti-chamber by a leather chair. Now these reactive purchases have become known as the Diderot effect. The Diderot effect state that obtaining a new possession often creates a spiral of consumption which leads you to acquire more new things. As a result, we end up buying things that our previous selves never really needed to feel happy or fulfilled. Anyone been there before? I know I have. Like many others I've fallen victim to the Diderot effect. [03:15.0]

You know, I recently just bought a new car year ago and ended up purchasing all sorts of additional things to go inside of it. I bought, you know, things that go with different tire package. I bought some things to go inside the car, like a charger for cell phone packages and things like that. None of these things and at any point in my previous car that I feel the need that these items are worth purchasing. And yet, after getting my new shiny truck, I found myself falling into the same consumption spiral as Diderot. We've all been there. We've all remodeled well, the bathroom, and then realize we need a new curtains and mirrors and towels to go with it. It just comes with it, it's become normal. And again, I'm not trying to say it's a bad thing, it's just an interesting thing as we talk about today's episode. [03:57.4]

Today's episode around savings, specifically savings when it comes to what I call bucket planning, the three stages, the short term, the mid-term, the long-term, we're going to talk about all three and how a Diderot effect can sometimes spiral into affecting what we save specifically in short term, and even more importantly, long-term. So first I want to start out what short term mid-term and long-term really means. Short term, again, this is a little bit speculative, but in my world of advising and as a certified financial planner myself, I consider short term anything less than two years. This is your Vegas money folks. This is your on-hand cash to use daily as a savings for either a short-term trip or something short term, you're looking to buy maybe a smaller value, maybe it's a TV or a new phone or something like that. That's your short-term cash. So, we're going to get into your mid-range and your long range, but before we do, and right after I mentioned what short term is, I want to bring up a rule. [04:56.8]

A rule that we've may have heard before it's called the 80-20 rule and what that States is live on 80% of your income and save 20%. Now, I want to split that up a little bit because I've used this for 15 plus years now, and how I use it is the 70-30 approach live on 70%, save 10% for short term, 10% for midterm and 10% for long-term. So, we just described what short term means anything less than two years. And I'm going to go out on a limb here and call that mid-range environment. Something you're saving for that may be two years out, but not maybe as far out as let's say, 20 years. Now, by the way, this range of years can vary for different people. So, if you're listening right now and you've got a few years on the job, I mentioned this really great rule of thumb for anyone in their late twenties, early thirties, he's just getting into their career, understanding where their income, how much you'd be saving to deferred comp plan. Hey, I got on the job and my probie house told me to just put into for comp plan, but I only put in what I can afford. That's your long-term bucket by the way. [06:02.7]

And we want to make sure we put that in context with what you're putting in savings, and then what you're ultimately saving for that maybe that 10, 15 years, maybe that's a house. Maybe that's preparing for a family that you, hopefully God will bless you with. Okay? So, we've got to build those buckets up and it's a really great bucket planning strategy to go through. So short term is anything less than two years and your middle term, your midterm is anywhere between two years and let's say 20 years then basically 20 years and beyond will be considered long-term. Now I just mentioned one of the best tools for long-term is your deferred comp plan is also your pension. You're on the job right now, and you're already paying into your pension plan. That's also a long-term savings strategy. It's coming from your paycheck, so yes, you are saving towards it. You're also electively saving towards your deferred comp plan. If you're not, I hope you do. If you haven't discussed that with someone, give us a call (805) 409-8150. It's important deferred comp plan savings is the best bucket along with your pension and ultimately drop to save for your long-term savings. [07:04.7]

But what about this midterm? This is the bucket that most people get confused, right? Saving cash is pretty easy. Brad, I get that. You just tell me to put it in cash. I am, I basically saying, go from checking to savings, do within the credit union, you don't need to necessarily put much investments behind it. You can, if you'd like, all right, I got a lot of those questions sometimes. Hey Brad, I got 10, 20, $30,000 sitting in my checking and savings account. You know, what should we do with it? Well, you're going to hear from me, not necessarily an investment approach, but saying what's your goal with it? Well, I haven't really thought about it that way. Well, let's define a goal with it. What's what's it there for usually the answer is liquidity. I just want to have cash on hand, by the way, that's a healthy answer. And to be clearer on that, the certified financial planning board that we adhere to, and that is a fiduciary for me. I usually say you want somewhere in cash on hand, somewhere between three and six months of your overhead. So, if your overhead is $10,000 a month, you should have somewhere between 30,000 and $60,000 of cash. [08:02.7]

Now that again, that's a rule of thumb and I tend to believe my active-duty retirement and fire and police can be more on the three-to-four-month range because you're not necessarily an entrepreneur or a business associate person that I may advise on who has fluctuating incomes. That's more important to have a larger reserves because there could be a disruption in their business where they need some cash on hand to help them pay the bills. Your situation may be more inclined to making sure that we understand how active duty and overtime plays into your cash needs. Again, should still be looked at on a custom unique basis. Again, sitting with an advisor and going through that is really important. But having that cash on hand is really important. That three to six months is important. That's your cash piece. That's your short-term bucket. The long-term bucket as I mentioned, the deferred comp plan pension ultimately drops stuff that you can control. Really, you can control the deferred comp right now, finding that right advisor to help you build that portfolio for you to help steward those investments for the long haul, but this mid-range bucket. What is that? [09:04.2]

We talked about it originally and I mentioned a comment from a younger individuals. It tends to be a house savings. It could be again, preparing for some cash for other, you already have a house, maybe it's a rental, maybe it's other investments outside of the deferred comp plan, a little portfolio you want to put together. Usually, it has some investments around it because you don't want cash sitting on hand for too long. Typically you don't want that in low interest rate environments, because you're going to have some sort of inflation. Typically, we don't know when or how much, but presumably it will be there. So, you want to make sure that your money is keeping up with the times. [9:35.9]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the drop program? Go to www.pensionattention.com to find out how we can help. [9:51.9]

And again, once you get past that first two years, like I mentioned, now, you can do a timeframe where it makes some sense to put a portfolio around it, put a little of an investment around it. That's where a rental property comes into play, maybe a portfolio like I mentioned. So that mid-term buckets really unique. Now last week on pension tension, I also mentioned something of insurance. And as I mentioned before, we're not insurance producer necessarily. We provide insurance solutions for our clients relative to their risk management needs. But for my younger individuals, insurance is a great mid-range bucket, to be honest. It has some great components inside there that a younger individual might need for insurance anyways, because they have a young family. If something were to happen to them, God forbid insuring their income is really important. The other part of it too, is there is cash value buildup. It kind of works like a Roth on steroids. I've used that term before. It's something I kind of coined. I like it because sometimes you make too much money to contribute to a Roth. And that's, if you're outside of the job, obviously you can contribute to a Roth inside the deferred comp plan. Something we'll talk about with clients, whether traditional or Roth makes sense for you, but having that other asset class is unique. And it's a good thing to look at. [11:01.6]

Again, not saying it works for everybody, but that's also a good mid-range bucket. So back to the percentages, how much should we be contributing? I like to use that rule. Again, it's a rule of thumb. It's not for everybody, but it's a great place to start. So, key in right here. If you're listening right now and you only got maybe five or 10 years on, you're getting through the, the job coming from maybe another department or a hand crew, and you're just getting your income underway, that rule of thumb is a really great rule. Take 70% of your take-home pay live on that. Take 10%, put it into short term savings, anything less than two years again, that's your, that's your Vegas money, right? That's your, that's your short-term saving up for a small like TV or something like that, or a trip with the boys, something like that, that's your short term. That next bucket at two to 20 years, anything beyond that short term savings that short-term trip or something like that, you want to take a look at from an investment standpoint potentially cause you've got some longer time horizon on that. And then your third bucket that last 10% is your deferred comp plan. Find out your affordability there. Start with 10%. We'll work your way up to maxing out. Everyone wants to talk about maxing out. I love that topic. I love to hear that, but we want also put it in context of living for today as well. [12:11.3]

We'll see, we'll come in saying Brad. I know you're going to say, I'm gonna ask you about how much I should contribute to my deferred compensation plan. And you're going to say should max out. And believe it or not I say actually, no. What I really want to find out is where is your lifestyle right now? What are your goals and objectives? Sometimes has to be, Hey, you know, I really want to save for a house. Well, how does that play into maximizing your deferred comp plan? We want to have our cake and eat it too. And I promise you this, there is a way to design that for each of you. It doesn't have to be the traditional I have to max out because that's what's right. Well, yes, that's a great thing. You get a great deduction for it and it grows much quicker and over time becomes a bigger asset. Sure. But we have some goals to take care of in the short term and mid-term, which is why this topic of savings and specifically savings as a bucket planning that I call it, short-term mid-term, long-term had a lot to do with tiers of your goals and objectives. [13:03.0]

So, tiering it out like that into again, short-term, mid-term long-term is a great way to organize your overall savings. It's also a great way to put into context what you're saving for today, aligning your goals and objectives for what you're trying to save for five or 10 years from now, which would fall into your midterm bucket and then how that relates to what you're deferring in your deferred compensation plan. Because some of those midterm buckets, as an example, will go away. You will attain that house; you will have bought that house. Now, all of a sudden that goal for those first five or 10 years of saving for that is gone. So, now's where we replace that savings, right? With your deferred compensation plan. And we'll put this together over a 20- and 30-year forecast, so you can see the impact. A lot of times what I've seen and why I talk about this so heavily is we will make financial decisions in somewhat of a vacuum like singularly. We get this tonne of focus on one topic, like gotta do this. I gotta do this. But what I want to do is open up your eyes a little bit on the vision to kind of say, well, before we just go headstrong into that, let's take a look at the entire picture. How does your debt, you may have, as an example, come into play with your savings? [14:14.5]

We talked about that a few weeks ago on Pension Attention, if you haven't looked at that episode, go take a look. It's important to understand how debt combines with savings. And then ultimately when debts paid off, we've talked about the snowball effect a little bit, which is a great strategy. A guy like Dave, Ramsey's talked about it. I have some differences I do with our snowball or avalanche effect with paying off debt. You can also use that same effect for investments. Hear me out. You take a short term; you build up your three months bucket. Good. You're done. You still got cashflow. You multiply that into your midterm bucket. Then from your midterm bucket as I mentioned, that investment or that midterm you were saving for has now been obtained. You've now purchased that house as an example. Then you take that savings and you multiply that towards your deferred comp plan. Ultimately, you'll get to the, the strategy of maxing out or funding your long-term bucket. And you do want to start somewhere, which is why that rule of 70 10, 10, 10 makes a lot of sense, right? [15:11.3]

Because even if it seems smaller than what would normally feel like conventional wisdom is I should max out my deferred comp plan. You're only putting 10% in there. You might not be maxing out as an example, but you're starting somewhere. And what we do is when we fill up that midterm bucket of savings, we hit that goal. We'll funnel that over to your long-term, or maybe funnel it back to your short term. Because the other thing about goals and objectives is they change;our life evolves, setting a plan in your late twenties, early thirties. And I have countless amount of clients that can live. For example, many brethren that you know about, you're probably listening right now where your goals have changed, right? And we've adapted and adjusted our planning to encompass things like a debt payoff or a kid going to a private school or a college or a new wonderful baby boy or girl is being born into a younger family. Now our insurance needs have changed. Our estate planning needs to be updated. Things change. Life happens. We all know this. You guys know this better than anybody. You're the ones first on the scenes. You're our first responders. You see life happen and change and evolve for our community around us pretty much every day. [16:14.8]

So, when we come to the planning, when we meet with you and we go through your specific planning, we want to bring that into context when it comes to managing your debt, managing your savings, which is what we're talking about today and how those two things intertwined. And then the investment conversation, the engine that drives that ship. Something we do here, here at ONE fire and police, we manage over two and a half billion dollars for our clients. We do that in-house we build it in-house but we get to that point by designing the right structure. You've heard me say this before we design it like a car. We have to have the, the frame and the body and the tires on that car and built for the engine to drive the car. You can have the frame and the tires, but it won't go anywhere. You can also have the engine without the tires, it won't go anywhere. So, putting it together makes a lot of sense, doesn't it? So, having that investment, this case is the engine, which drives the whole thing, you gotta have the framework in place. You have to have your assets, risk managed. I talked about that last week. You have to have it insured. You have to have it protected and built and structure built on the rock biblical, right? [17:17.1]

You have to have it built and structured solid so that when that engine drives it, it's not falling apart on you, that's where planning comes in. Having your savings in order your short-term bucket, knowing that's taken care of. Having your midterm bucket discussed and managed, having that being saved for. And all the while still putting money aside for that long-term. It makes a lot of sense when you actually put the investment together now for that long-term or that midterm event, because now the whole car is moving forward and it's moving forward together. It's not moving forward with two tires, trailing off a hundred yards in behind you, right? You want to move it all in unison, so it's not falling apart. And then to my point about life-changing keeping up on our portfolio and our planning is that car needs gas. It needs things to be put into it. It needs change. It needs oil. It needs all those things that we upkeep for a car. We need it for our own life as well. So, if we're going to do all that stuff for a simple thing, like a car, we need to make sure we do it for something as important as our retirement and our investment life. And so, the topic of savings, although it has many layers to it today, I wanted to go through that rule, 70 10, 10, 10 or 70 30, right? Live on 70%, save 10 for short term 10 for midterm and 10 for long-term. We went through what short-term mid-term and long-term are. Those each have their own conversations and they fit into an overall plan that makes sense when you talk anything about your pension or your deferred comp plan or your overall retirement plan. [18:43.1]

To find out more about this subject matter, you can go to our website at PensionAttention.com and you can actually on our media tab there, you can hit the subscribe button to subscribe to Pension Attention or go to any place where you download your podcast type in Pension Attention and hit the subscribe button. Leave your comments, let us know what you're thinking about these episodes as we talk about some of these really important strategies, when it comes to savings like today or debt management strategies that we talked about a few weeks ago, or even our insurance discussions, we talked about last week. All the way down to the investments, which is the, again, the engine that drives the ship and what we do here at ONE Fire and Police. And if you haven't had that advisor, you haven't had that partnership to create, to help you with your planning, regardless of where you are in your career. You could be two years on listening to this right now. It's important to put your planning in place. In fact, the rule I mentioned today that 70 30 rule is really important for someone with a couple of years on the job, just getting into their cashflow. It's the most sound advice I feel like you can get to start somewhere and then meet with that person to say, Hey, I started doing this, how does it impact me five years from now, 10 years from now. Let's forecast that out. And if you're listening here and you've got 15, 20 years on, and you're closer to retirement, putting these strategies in place, make a ton of sense, because now we're going to be talking about debt strategies and how those play into your savings and ultimately where your deferred comp plan and drop is relative to when you leave the job, when you go from active duty to retirement. So, if you haven't found that person, you can give us a call (805) 409-8150. Again, you can go on our website at PensionAttention.com and you can schedule some time with myself or a team member here at ONE Fire and Police. [20:20.5]

Thank you for listening to pension attention before acting on anything discussed today. Remember to speak with a financial advisor near you about your specific situation, or if you'd like our help again, you can visit us at PensionAttention.com or give us a call at (805) 409-8150. Next week on Pension Attention, I'm going to be talking about How Defense Wins Championships and Diversification Wins Returns. I'm looking forward to it until then stay safe. [20:48.6]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [21:12.0]

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