The ABCs of Personal Finance

The ABCs of Personal Finance

Hollis Walker: This is Away from the Noise, a podcast for financial advisors and their clients. Hello, I’m Hollis Walker, here with Jan Blakeley Holman, director of Advisor Education at Thornburg Investment Management. Welcome back! Thanks for joining us for another episode of Away from the Noise. Hey Jan, how’s 2024 treating you?

Jan Blakeley Holman: Going alright, Hollis. We’ve got some time for it to fall apart or get even better.

Hollis Walker: Right. Yeah, well here you know it’s spring and the wind is blowing and my allergies are kicking in. But, it’s gorgeous, the weather’s just been gorgeous. I can’t complain.

Jan Blakeley Holman: Well, Minnesota’s been pretty amazing, too. You know what it’s going to be 50 degrees today. So what’s going to happen Hollis is that people will stop vacationing in Arizona and Florida in the winter and they’ll start coming to Minnesota because it’s so warm. Hollis, when you and I met to discuss this podcast, we talked about the “Ask Jan” segment and a question that we received from a listener that gave us an idea for what we want to do in the podcast throughout 2024. Why don’t you read the question and then we’ll let our listeners in on the secret.

Hollis Walker: Ok, Jan, here’s the question we received.

Dear Jan,

I appreciate the conversations you and Hollis have during your podcasts, but I think I may need a bit more assistance with the basics of personal finance. My question may come from my career as an elementary school teacher, but could you please give me some additional background on the ABCs of investing?

Thank you. Signed

20 Years Later, I Still Love Working with Young Kids

Jan Blakeley Holman: Bless that person.

Hollis Walker: Right? And their patience. I think our elementary school teacher has a point. There seem to be so many words and expressions and concepts that people need to know to become well versed in personal finance and investing. And I know there’s a lot of information out there, but too often the information we hear from experts assumes we are all grounded in the lingo of personal finance, when we’re not. And I’m including myself in that we. The acronyms alone make me feel like my head is going to explode.

Jan Blakeley Holman: I hear you, Hollis. The “assumption” that everyone knows the basic concepts and rules of investing has bothered me throughout my career. Often, I tell people how grateful I am to have chosen a career in the financial services industry because if I had chosen some other career, I can’t imagine how I would have learned the things I’ve learned about investing and personal finance. Now, the fact that I’ve been doing this for almost 48 years doesn’t mean I’ve done everything correctly. Actually, quite the contrary. But the fact that I do know what should be done has helped me make better decisions when I’ve gotten off course. That said, Hollis, as you and I discussed, this year we’re going to commit to focusing some time on our podcasts to the ABCs of investing. We’ll cover other timely topics of course, but we thought it would be beneficial if we provided our listeners with a primer of sorts.

Hollis Walker: Ok, Jan, you’re killing me! Are we going to go through the entire alphabet in one year? I mean we could alienate some of our listeners.

Jan Blakeley Holman: I know Hollis, it’s a lot of stuff. The last time I saw somebody try to accomplish the alphabet was Sue Grafton, the mystery writer, who wrote all her mysteries using the alphabet. Of course she began “A is for Alibi”, “B is for Burglar”. She was great, her books were great, her hero Kinsey Millhone was great. And I thoroughly enjoyed reading the books. Unfortunately, she died of cancer and never finished “Z is for Zero.”

Hollis Walker: Ok, Jan, she was one of my favorites too. But let’s hope that nothing happens to either one of us and we can get all the way through the alphabet. So, let’s start with “A, B, C” and see how many of these we can knock off in this year’s podcasts. Forgive me if I sound like a high school cheerleader, but, Jan, “give me an A!”

Jan Blakeley Holman: Ok, Hollis. Here it is. “A” is for Accumulation. It’s a perfect place to begin, and here’s why:

The goal of every investment program is to accumulate money. Because if we fail to accumulate money, we won’t be able to achieve our financial goals or our life goals. For most of us, the accumulation stage of investing begins once we get our first full-time job. One that offers us the opportunity to set money aside in a retirement account like a 401k or a 403b. The reality is, if you’re not going to inherit millions and you don’t accumulate money, you won’t achieve your goals. Boom, end of story. It’s that simple…or not.

Hollis Walker: Okay, well maybe this is a dumb question, but does the accumulation phase end with retirement? Meaning, when we no longer have an income from a job?

Jan Blakeley Holman: Well that’s a really good question because logically one would assume that. You’d think we’d stop accumulating money as soon as we begin living off the money we’ve accumulated, but actually that’s not the case. The balance of our investment and retirement accounts probably is going to go down in value while we’re withdrawing money from those accounts. But we want the money that remains invested to keep growing. So I call that grow additional accumulation. These days, that’s more important than ever given the opportunities we have related to longevity. To fund our long lives, we’re going to need a lot more than Social Security. We’ll need retirement accounts, investment portfolios, and we’ll need them to keep growing even while we’re taking distributions. Which, Hollis, leads us to “B”.

Hollis Walker: Ok, I’ll Bite. what does “B” stand for in the world of finance?

Jan Blakeley Holman: Hollis, “B” stands for Behaviors. To skillfully manage our financial lives, we must develop behaviors that make it easy for us to manage our ongoing expenses and also set aside money for the future all at the same time. It’s somewhat like that old exercise we used to do where you have to pat your head and rub your stomach at the same time. At first it feels really awkward, but once you get the rhythm, you’ve got it. It’s important to know that, in any endeavor, developing behaviors that are good for us, requires discipline. Ick. I mean who likes discipline. It’s one of those words that people dislike because it feels painful or so restrictive. I’m here to tell you that while there may be some short-term pain while you rein in spending, the long-term gain will be well worth it.

Hollis Walker: So Jan, what kinds of behaviors will set people up for success?

Jan Blakeley Holman: Well I’ll name a few. Budgeting, another “B” word. I know that’s an ugly word, it’s not a four-letter word, but it should be because people are so resistant to the concept. For some reason, we Americans are all about immediate gratification. And all the technology we have hasn’t helped that because we expect everything now. Or actually we expect it before we even thought we need it. The way most of us approach things especially when we’re young, is I want it, I’ll buy it, and it doesn’t matter if I can afford it, because I’ll put it on a credit card. That I want it, I’ll charge it mentality creates huge problems in our lives because often I want it, get it, want more, get more, on and on, and then you have a huge credit card bill. Instead of that, how about this approach. See how much you make after taxes. Subtract from that amount the expenses you pay monthly, like housing, food, transportation, clothing, etc. Once you have that number, look at what you have left. If you don’t have anything left, that’s a problem. It means you’re not making ends meet so you have to refigure out how to make that work. If you do have money left over, that residual amount should go toward our next behavior which starts with an R, regular investing. Regular investing is putting money from each paycheck first into an emergency fund that we’ve talked about so many times, comprised of 6-9 months of expenses that are easily accessible at any time without a penalty. Once you have the emergency fund, making regular contributions to an account where the money will sit for years like a retirement account is critical. Finally, the last behavior I’ll talk about is the most important one for all investors. And that is remaining invested. Once we become investors, it’s important for us to remain invested. But the way things are, we are challenged possibly daily, to keep that promise to ourselves that we will remain invested. That’s because the market doesn’t go straight up. And if the volatility and the resulting changes in the value of your investment accounts makes you uncomfortable, you may think, ok, I’m going to pull my money out of those investments until the market “calms down”, and then I’ll put it back into investments. Well that’s called market timing, and what do we know about market timing, Hollis?

Hollis Walker: Well Jan, you’ve taught me well. Marketing timing is a fool’s game.

Jan Blakeley Holman: That’s right, it is.

Hollis Walker: So, Jan, what word corresponds to the letter “C” in the world of personal finance?

Jan Blakeley Holman: Hollis, the “C” word in personal finance is “Compounding.” If Albert Einstein was here on this podcast with us, and we asked him to tell us what the eighth wonder of the world is, he would say it’s compounding. And here’s how compounding works. You put money into an investment, and that investment may earn interest, pay dividends, or distribute capital gains. Now if you take that return, the interest, dividend or capital gain, and reinvest it into the same investment or another investment that also pays interest or dividends, or capital gains, you benefit from compounding because you are earning money on the money you invested plus what it earned and then what that amount earned, etc. etc. It’s almost like sifting sand or something. So, if you deposited $1,000 in an interest-bearing instrument for example and that earned 5%, or $50, by the end of the year, you would have a total of $1,050. If that remained invested and earned 5%, you would earn the 5% on the $1,050 and on and on and on. It’s amazing. And Einstein was right. I’m sure he was right about the other things he taught us too. But I have no idea what any of that means.

Hollis Walker: Thanks Jan. I’m sure that Albert Einstein would appreciate your faith in him. That’s all the time we’ve got today though. We’ll pick up with the letter “D” next time. You’ve been listening to Away from the Noise, with me, your host, Hollis Walker, and Jan Blakeley Holman, director of Advisor Education at Thornburg Investment Management. If you’d like to suggest a topic for us, email us at awayfromthenoise@thornburg.com. If you’d like to hear more episodes of Away from the Noise, you can find us on Apple, Spotify, Google Podcasts, or your favorite audio provider. Or by visiting us at Thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe, share us on social media and leave us a review. Until next time, thanks for listening.

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