Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.
Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [0:26.1]
Brad: Welcome to Make your Money Matter. The show for truth seekers who are fed up with outdated financial advice. My name is Brad Barrett, I'm a Managing Director and Partner here at One Capital Management. And it's my goal on this show to reaffirm what you know, to be true and to challenge the advice you may have been told is true. Here at One Capital, our mission is simple to help our clients and you listeners live well and not just survive, but thrive. Friends, we're in a world where we are consuming information at warp speeds, and it's easier than ever before to access information yet more difficult to find the truth. And that's what we're after because after all your money matters and knowing how to plan your financial future is vital to your financial success. If you haven't subscribed yet, you can go to our website at onecapitalmanagement.com and on the media tab, you can click subscribe to our podcast, or you can go to any platform where you download your podcasts and hit subscribe. We urge you to do so. Let us know what you think. And if you haven't listened to us on our radio program, you can listen to us every Saturday morning at 6:00 AM and 10:00 AM. We'll be hosting the, Make your Money Matter, radio show on K V TA, 1590 am. [1:38.4]
The famous French philosopher. Denis Diderot lived nearly his entire life in poverty, but that all changed in 1765. You see Diderot was 52 years old at the time and his daughter was about to be married, but he himself being in poverty could not provide a proper wedding. Now, despite his lack of wealth, Diderot’s name was well known because he was the co-founder and writer of what we know today as the Encyclopedia. And he was a prominent figure during the age of enlightenment. So, as it came to be 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 pounds, which is approximately a little over $50,000 in 2021 dollars. Suddenly Diderot had money to spare. So shortly after this lucky sale, Diderot acquired a new Scarlet robe, that's when everything went wrong. That's what we know today as something called the Diderot effect. Diderot’s scarlet robe, this thing was gorgeous, right. It was just beautiful. In fact, he immediately noticed how out of place it seen when surrounded by the rest of his common possession. In his words, there was and a quote, no more coordination, no more unity, no more beauty between his robe and the rest of his items. [2:55.6]
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 from Damascus. He decorated his home beautifully with sculptures and even 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. These reactive purchases have become known as I mentioned before, as the Diderot effect. The Diderot effect states 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 what, buying things that our previous selves never needed to feel happy or fulfilled. And to me, I bring this story up because it explains a question that I think we all have asked why we want things. We don't need it. Like many others. I have fallen victim to this. I know you have too. I recently bought a new car and ended up purchasing all sorts of additional things to go with it. The premium tire package, some of the little ancillary things inside the car. And I realized, what did I just do? I didn't need those things. But I felt with the new car, these things were in there. They should go in there and allow me to point out that I've owned my car previously for many years. And at no point that I feel that any of the previously mentioned items were worth purchasing. [4:14.5]
And yet, after getting the shiny new car, I found myself falling into the same consumption spiral as Diderot. Why am I bringing up Diderot effect? Because over 15 years of being an advisor and then talking to my many colleagues here at One Capital Management, we see constantly that we as human beings fall into what we know as the Diderot effect, wanting things that we may not actually need. And in doing so can cause debt. And today we're going to be talking about how we manage that debt, debt of any amount. And I wanted to start today's podcast by defining what good debt is and bad debt is. [4:51.5]
Now, these are not definitions in a vacuum that serve for every purpose, but in my view, good debt has three things with it. It's low interest it's for an asset, and hopefully it has some tax ramifications, hopefully it's tax deductible. So, the one that comes to mind automatically, as you're probably thinking about this and listening today is mortgages. They're low debt, they're for an asset and investment asset or real estate asset. And you can get scheduled deductions for your interest. So, the world of debt or leverage, there are such things as good that that can work for you. Another example might be student loans. Again, it's typically lower of interest sometimes depending on your income, it can be deductible and it's for an asset, the asset being you. So those are the two examples. I'll bring up a good debt. Now on the inverse side of things, let's talk about bad debt. [5:38.2]
And again, it's not something we want to dwell on, but I want to talk about debt that would be somewhat unsecured, meaning it's not backed by an asset. Typically carries a higher rate of interest and really has no tax ramifications or deductions. And you probably know where I'm going with this. It's typically things like credit card debts. These typically tend to be higher in interest, no real tax ramifications or deductions from them. And they're not really for an asset. This category typically falls into what the deter effect would describe as things that we may think we want, but don't necessarily need. Now the original purpose for a credit card or credit was to have liquidity if you will, for oh oh, you know certain events that may happen, that you don't have enough cash on hand to support, big medical events and items like that. So that's why they were originally invented. And we've used those, typically when you put that in someone's hands, life will go by and the Diderot effect will happen where you bought something like, let's say you were reorganizing your living room and you bought a new couch. Well, now all of a sudden you realize that the picture frames or the mirrors or the rugs don't go with it. [6:42.2]
So, you find yourself going back to Home Goods or some other place, right? Anyone, any husband listening here has been to Home Goods that they have a wife, right? So, you go there and you realize, okay, it's not your $80 for a rug or a lamp or something like that. Then all of a sudden you realize like, wait a minute before with the old couch, I didn't need it, those lamps worked fine. So, you get into this trap of where all of a sudden, you're starting to use money and spending things. And that's how we get into this debt trap. It happens to everyone. So that's why I thought it'd be a really great episode to talk about. And something, we here at the firm at One Capital Management and our advisors talk heavily about Debt Management. And it's important to note that debt isn't something that some people have that is something that most people have. So check these stats out. This is from debt.org, facts and figures about American debt. More than 189 million Americans have credit cards. The average credit card holder has at least four cards that stat actually thought it was crazy. Now on average, each household with a credit card carries $8,398 in revolving credit card debt. The total US consumer debt is at 13.8, $6 trillion. Now that number, that last number, I just mentioned that includes mortgages, auto loans and credit cards, as well as student loans. So real quickly, I'm pointing this out largely because you're not alone. I really want to share in this conversation around debt. And I want to share to all my clients listening and all of our clients of the firm is that we're not alone in this. [8:03.3]
Some of us that we need, you know, putting equity in a house or putting a roof over your family. That's part of the good debt. It's also one of those things where we look at life and life is especially those of us in California. We know it's a state that's expensive to live. We live here, we know it. So, if you're listening to this across the nation, you're in New York and other expensive States, you know, that debt is a part of life sometimes. And by the way, speaking of California, the average Californian owns $334,925 in mortgage debt, which by the way, that dollar amount surpasses every other state in the country, the national average is right around 190,000. And on the consumer debt side, the average Californian carries around $10,496 of credit card balance, which has roughly $2,000 more than the national average. So again, I'm expressing this because those of us in California know it's an expensive place to live and debt can be a part of our lives. And further, if you're listening to this debt means different things to different people. I have plenty of clients I talked to who have $2,000 of debt and can't sleep at night. And I've got others that carry $80,000 lines of credits for their businesses and sleep perfectly fine. So, contextualizing your debt in relation to your overall wealth management is a part of what we do here at One Capital Management, to make sure that we custom build the planning and the investment portfolio, that the engine that drives that ship to you, because your situation and your tolerance level may be different than someone else. [9:26.7]
So, in meeting with our clients here at One Capital Management we talk about how to manage debt, let's start with the basics. I'm going to go very basic here, right. First and foremost, know who and how much you owe. Know who you owe it to, and how much make a list of your debt. We will help do that here at the firm as well in our discovery process we'll talk about your dad's, the interest rates, the duration of the loan, things like that's. So, we wanna make a list, including the creditors, the total amount of it that you owe and then the monthly payments. Again, like I mentioned, we'll still get the interest rate and the due dates, and you can use actually your credit report to confirm the debts on your list. So, having all the debts in front of you will allow you to see the bigger picture and I guess stay aware of your complete debt picture. So, starting again, like I said, at the very basic level, know who you owe and how much you owe. And then again, continuing with the very basics here, pay your bills on time. That's one of the biggest items when it comes to messing with your credit score is late payments and late payments, make it harder to pay off your debt. Since you'll ultimately, you start to have to pay that and a late fee. [10:30.8]
So again, basics here, pay your debts off and pay them on time. All right, let's get into some strategy here. So, we want to create after we've understood who we owe and how much we owe we want to decide which debts to pay off first. So, paying off credit card debt first is often the best strategy I'm going to go right into it because credit cards have higher interest rates typically than other debts. Remember I mentioned earlier, the good debt versus bad debts, unsecured debt, like credit cards typically carries higher and straight. So, of all your credit cards, one with the highest interest rate usually gets priority on repayment because it's costing the most money. And I'll be honest most people actually think they want to attack the larger balance first and again, it's not really right for me on this podcast to say which one makes sense to you. That's where you want to sit with an advisor and talk with them one-on-one about your specific strategy, but the overall goal to start this, how to manage your debt conversation, do you want to look at how much money you're paying relative to the balance and the ones with the higher interest rates typically carry the most risk and really the most cost of carrying the debts. You want to focus on those first. [11:38.1]
Now, many people listening, might've heard of the snowball method. Dave Ramsey is someone who I massively respect has talked about this a lot. And the snowball method is a debt reduction strategy in which you pay off the bills in order of smallest to largest, regardless of interest rates. And I like that philosophy. However, I like the snowball method along with an interest rate function, meaning you still have the snowball effect, putting all your debts in order the payoffs. And then once you pay off one, you roll that payment to the other and you create the snowball effect. That's the mentality behind it. But I like focusing on the interest rates as well, because again, you're still the highest cost of carry. So, utilizing a snowball method is a great way by the way, to pay off debt and debt of any amount, especially if you have multiple types of debt. So, some of our clients that have done this method for, and we've designed a plan around it. In fact, I just did one, two weeks ago for a client who had, and I'll bring it up a mortgage credit cards, student loan, and a trailer, a RV that the family had for their trips. And they had those four or five different interest rates and debts. We put a snowball calculator together, something our wealth analyst team build, which I think was a great design for any of our clients. And we put it together. But in those, we focus on the higher interest rates and we just took and rolled every time they paid off one in a few years, we rolled that payment into the other, and it minimized the amount of years that they were effectively paying this overall debt. And over the same time period, they were minimizing the amount of interest they were paying. [13:06.6]
And as an advisor and in my colleagues here at One Capital Management, we're talking with clients when we're talking about building a retirement plan, a retirement income strategy, when they go into retirement and investment plan that fits into their specific risk tolerance and overall objectives, the concepts and the items around debt and cashflow are largely a part of those conversations, believe it or not. And I want to use this show to help educate around that as well, because most people think in singular fashion, they think, Oh, an investment manager just does investments. They'll just do portfolio management. Only very clear to us here at One Capital Management wealth management, which is what we do essentially is a three-legged stool, one being investment management, two being relationship management, knowing you as the client, building that trust and having a great relationship so we can be your advisor for a long time period and three advanced planning. [13:59.2]
And in that advanced planning discussion comes well forecasting comes estate planning, insurance planning, tax planning, all of those items that need to fit into a holistic plan. So, the topics of debt or interest rates are very important to us as advisors for you as clients, because think of it this way, debt can be like the quicksand to your overall investment strategy. If you're paying debt on average of 8%, let's say between all of your debts, you have between credit cards, mortgages, car payments, right? And we took the weighted average of all that debt and it was 8%. And your rate of return that you're making your portfolio is only doing 6% well we're underneath what you're paying on the debt. So, for a constant, while your assets and liabilities, your balance sheet is somewhat out of wax. We want to combine those two to make sure that we understand you as the client, understand what your weighted average is. Most people don't know that they say I got 12% on the credit card over here. I got a 2% car loan. I got a 6% student loan. Well, let's put all those debts, the amounts together. Let's give you the weighted average so you know what your overall cost is for the debt that you carry. [15:12.7]
Because again, at the top of the episode, I mentioned the Diderot effect. We're going to get things and a part of getting things as human beings, we're going to want to expand what we think we need. We will get that new car and you will get that tire package. It's something we talk about constantly. And those of you that avoid that kudos because it's hard. Nowadays more than ever, we are thrown in front of us. I mean, you just drive down the 101 here in Los Angeles, you're going to see billboards and ads and all this kind of stuff for everything you may think you need, but really just one. So, quantifying those two words when it comes to debt management. And by the way, I'm talking about debt management for what you have in place now. But a part of being a good advisor to our clients is also discussing the behavioral traits and the philosophy around debt management for the future. [16:01.1]
We don't want to be an advisor, just slaps a band aid on it. And just doesn't really talk about the root effect. If there's a root causing this, and we're continually getting back into debt, we want to discuss that so, we help our clients avoid that. We can help them by putting money aside as a liquidity account, building up some savings. So, we can start managing that debt or using some of that for things in the future that they may want to spend on. There's a lot of ways around that and tying in your investment returns that, you know, on a balance sheet, if you looked at it on the whole, you are earning more than you're spending. That right there in fact, as a topic we discuss with those of our clients and those of you listening that are entering into retirement, what we call our sustainable distribution rate, understanding what your investment accounts, the savings that you've worked your tail off for, right? And earn and save what those need to earn your portfolio relative to how much you need to take. So, a rate of return in particular is only one half of the story, I will continually say that. Understanding what that rate of return, the context around that, meaning how much you're taking, if you're taking 3% of your portfolio. Well, we want to make sure that we earn at least 3% to keep pace with everything. We've got to add a little bit for inflation. We'll go through all that. The same concepts can be around your debt. [17:16.5]
If you're paying on average in my example, a weighted 8% you want to make sure that you're out earning that. So, we want to reduce that debt, look at potentially refinancing structures if we need to. A lot of people doing right now with mortgages and refinancing, those are all important strategies to lower the cost of carry, the cost of debt. These are all great shapes to put together, but they shouldn't be put together in a vacuum, it should be put together an overall cohesive retirement plan. Something that we had the firm here do. And that's the topic around managing debt and debt of any amount. So, starting at the very basics’ elementary levels, make sure you know who you owe and how much you owe. If you haven't done that before, put a list together, we can help you do that as well. Make sure you always make your payments on time, because that's the number one thing that affects credit scores, at least your minimum payment, and then develop a strategy of how to pay your debt down, whether that's a snowball effect or also known as the avalanche effect, taking a look at interest rates versus the amounts, getting a plan together, know what your average weighted cost is for the debt, and then tailoring your plan to make sure not only you amend or fix the debt that you want to fix, that that's important to you. We'll help you with that, but also define an investment strategy and an overall behavioral trait plan if you will, to avoid those debts in the future. [18:34.8]
Thanks for listening to Make Your Money Matter. If you haven't heard us on our radio program tune in every Saturday morning at 6:00 AM and 10:00 AM on KV TA 1590 am. You can also go to our website at One Capital Management, hit the subscribe button, leave a comment, let us know what you think. And if you want to talk with myself or one of our credited advisors here at the firm at One Capital Management, give us a call (805) 410-5454. You can also text us, text the word track T R A C K to (805) 410-5454 and we'll reach out to you. Let's set that what we call our retirement track review meeting that complimentary retirement track review to figure out if you're on track to meet the goals and objectives you have with your money. And if you don't know what your goals and objectives are, call us, we'll help you to find that that's what we're good at in our discovery process. And we'll be able to help you understand your unique and specific goals and objectives as it relates to again, not only your investments and your money, but also your overall plan and where you want to go in the future. And that may encompass items like we talked about today around debt management strategy. Next week on Make Your Money Matter podcast we're gonna be talking about how much you should be contributing to your retirement plan. I'm looking forward to it. I hope you have a great week and always remember, Make Your Money Matter. [19:53.3]
