EP: 266 Your Financial Advice is Probably Wrong

Hey, everybody, this is David Chudick, and today I want to talk to you about the financial advice that you are receiving.

You're receiving financial advice From Instagram, from TikTok, from radio shows, from books, from your broke relatives, from your friends and everybody in between.

I want to talk about some of the financial advice that you're getting that may not be the best.

And I also want to talk about why blanket financial advice is not always the best for anybody.

Hope that you enjoy this episode.

And here we go.

Welcome to the weekly wealth podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

Welcome to this week's episode.

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We're doing the best that we can to put out a lot of amazing content.

Like I always say, how we handle our money should positively impact our lives and the lives of those around us.

And I want for this podcast and our social media content to be a little piece of that puzzle in your life and the lives of those people that you care about.

All right, so now that we got that out of the way, let's talk about financial advice.

Now, there's somebody in your life right now that's giving you financial advice.

Could be your uncle at a cookout.

Maybe it's your coworker who, quote, got into stocks.

Maybe it's some guy with a podcast named David Chudick.

Who knows?

Maybe it's some dude on YouTube that has a whiteboard that's turned into a personal finance guru.

Maybe.

And please don't take this advice.

It's somebody on TikTok or Instagram that's talking to you about a quote, properly structured IUL as the best possible investment all the time.

Side note, Iuls are not bad things.

But anybody who's trying to tell you to only invest in Iuls, please don't do it.

Okay, that rant is over.

But here's the thing about all of the people trying to give you advice.

They're confident.

They say it like it's the gospel, like it's settled science.

They'll say things like, always pay off all your debt before you invest, or wait till the market calms down before you invest, or your house is always your best investment or always max out your 401k first.

Now, I'm here to tell you every single one of these can be wrong.

They can be dead wrong, depending on your situation.

Not because the people saying them are bad people, but because they're handing you a prescription without doing the diagnosis.

And in financial planning, that's how people end up broke.

Or at a minimum, that's how people end up behind where they should be.

So today, we're going myth by myth.

I'm gonna show you why these pieces of advice break down what the real answer actually looks like and why the difference between generic financial advice and maybe radio talk show hosts and generic financial books and a real partner might be the most important financial decision you ever make.

So welcome to the weekly Wealth Podcast.

My name is David Chudick, and we are about to step on some toes.

All right, let's start with a myth.

And this one is not always wrong.

It's not always right.

But it's something that you probably hear often, and that's to pay off all of your debt before you invest.

So let's start with the one that sounds the most responsible, right?

This one feels virtuous, the one your grandparents would not at.

Pay off all your debt before you start investing.

And look, I get the appeal.

Debt feels bad.

It keeps you up at night.

Getting out from under, it feels like freedom.

And I'm not going to sit here and tell you that debt is great and you should love it.

If you are someone who makes a true biblical or moral argument against debt, then by all means, go ahead and get your debt knocked out as soon as you can.

But here's the problem.

Math doesn't care about how you feel about debt.

All right?

So if you have a car loan at 4.9% interest and your employer offers a 401k match up to 4% of your salary, and you skip the match to pay off your car faster, you just turn down a 100% return on your money to avoid a 4.9% interest rate.

That's not smart.

That's just painful math dressed up as discipline.

Now, again, is there some room for discretion here?

If you feel like there's a moral obligation to pay off your debt, then maybe you should do that.

But then there's other kind of debt, and there's debt that you should pay off aggressively before investing.

If you're carrying 22% interest credit card, that's a guaranteed 22% return.

To pay that off, you're not going to beat the market consistently and get more than 22%.

So, yes, high income consumer debt, get rid of it.

Get rid of it quickly and make sure you put processes in place to ensure that it never happens again.

But that's not what the blanket rule says.

The blanket rule says all debt, that's where it falls apart.

Here's how I think about it.

With clients, there's a range.

On one end, low interest, tax deductible or employer match situations.

Investing often wins.

On the other end, high interest debt payoff wins.

Most people are somewhere in the middle, and the answer depends on your interest rate.

Your match, your tax situation, and honestly, your sleep.

If debt genuinely keeps you up at night, that psychological cost is real and it matters.

Now, personally, I'm not gonna lie.

I have three mortgages.

Those mortgages are helping me to build wealth.

So I am in no hurry to pay them off because of what their interest rates are.

So keep this in mind.

A real financial planner helps you run that math.

They just don't hand you a bumper sticker.

All right, here's one that I hear all the time.

And I'll hear people say, okay, I'll start investing.

I have some cash on the side, but I'll start investing when things settle down.

I'll.

I'll start investing when the election is over.

I'll start investing when that war in XYZ part of the world is over.

All right, so raise your hand.

Not if you're driving, but raise your hand if you've thought this or if you know someone who's been saying it for 15 years.

I'm gonna wait until things calm down.

A couple years ago, I had a guy come in.

He didn't become a client.

He should have, but this would have been in 2020, 2021, something like that.

He had $2 million in cash.

Okay, $2 million in cash.

Now, that money had been sitting in cash since 2008, so roughly 13 years.

Now, if that money had been invested in just some sort of a very standard portfolio, if you understand the rule of 72, you divide an interest rate or rate of return into 72.

That's how long it takes that money to double.

So let's say that guy would have gotten 7.2%.

It would have doubled every 10 years.

Okay?

But he was worried about the other political party.

He was worried about some geopolitical events.

And the opportunity cost was just amazing.

To the tune of millions of dollars.

So think about every period during the last 25 years or more where you might have said things are too uncertain to invest, right?

So we had the dot com crash, we had nine, 11, we had the 2008 financial crisis, European debt crisis, Brexit.

We had a global pandemic, which by the way was a great buying opportunity for those who took advantage of it.

War in Ukraine, inflation hitting 40 year highs, rate hikes, rate cuts, elections.

Always something.

There's always something.

Meanwhile, someone who invested $10,000 in a diversified portfolio in 2000 and just left it alone through all of the chaos and all of the things that we feel were legitimate reasons to not invest, they would have quadrupled their money by now.

Not because they timed it perfectly, but because they stayed in.

The data is relentless on this.

The in the market beats time of the market.

Missing just the 10 best trading days in a decade can cut your returns in half.

And here's the kicker.

The best days always come right after the worst days.

When it feels the most terrifying is often the best time to be in.

Now, you always hear me talk about buckets of money.

So please, depending on your situation, don't have all of your money in an aggressive stock market equity based bucket.

We should all consider having some money in a cash bucket for emergency funds.

But we want to make sure that for our bucket that is meant to grow, we absolutely are spending time in the markets.

Now, there are real legitimate reasons to modulate how and when you invest, but when the market feels scary is not one of us.

That's just fear.

A good financial planner helps you to separate legitimate timing considerations from the emotional ones.

And when they help you build a plan, you can actually stick to when things get weird, because they will get weird.

You can count on it.

All right, let's talk about your home.

And I want to be very clear.

I am not anti home ownership.

I'm actually very pro home ownership.

Okay, But a lot of people say your home is your best investment.

Now I own a home.

Homeownership builds equity, it provides stability, and for a lot of people it is one one of the best financial decisions that they make.

But calling your home your best investment is a stretch that the math does not support.

And it's a belief that leads people to systematically underinvest in actual investment accounts while sinking everything into their square footage.

So reality check time here.

The national average home appreciation rate over the last hundred years is roughly 1% above inflation annually.

That's it.

The stock market over roughly the same time period has returned 7% above inflation annually.

That's a massive gap over 20 to 30 years.

And here's what people forget to count when they brag about how much their house has appreciated.

You're paying property taxes every year.

You have home insurance.

You have maintenance, which historically runs about 1 to 2% of home value per year.

Interest on the mortgage, closing costs on the way in.

Real estate commissions on the way out.

By the time you do the real math, a lot of great investments in real estate are more modest than they feel.

Now, does this mean that you should never buy a home and you should rent forever?

Absolutely not.

In many markets and many situations, buying makes tremendous financial and personal sense.

Stability matters for saving through equity matters.

Tax deductions if you're able to deduct your mortgage interest matters.

The ability to do whatever you want to your own space matters.

Your rent increases most years.

Your mortgage payment will not increase typically if you have a fixed rate mortgage.

So all of those things are incredibly important.

But the decision of whether to rent or to buy, how much house to buy, and whether to put extra money into your mortgage or into an investment account.

Those are not simple questions with universal answers.

They depend on your local market, your income stability, how long you plan to stay, and your other financial goals and your interest rate.

I've worked with clients who were told their house was their retirement plan.

It was devastating to have that conversation when they were 61 and realize it wasn't enough.

Your house is a valuable asset.

It's not a substitute for a portfolio.

And remember, there are only two ways to get money from your house.

True ways to get money that you can spend.

That's to borrow against it and that's to sell.

So a paid off house, yes, that does.

That eliminates having a mortgage payment.

But if you are in a scenario where you need money, you'll still have to either sell the house or borrow against it in order to access that equity.

Just keep that in mind.

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So I hear this one a lot.

And you'll see some talk show hosts talk about Always max out your 401k first.

Now how could this possibly be a bad thing, right?

Contributing to your 401k is generally excellent advice, and I'm not here to talk you out of saving for retirement, but anytime there's an always.

I want to look at some of the other sides of the story first.

Are you getting an employer match?

Not all 401ks give employer matches.

If yes, probably a good idea to contribute at least enough to get the full match before you do anything else.

That's free money.

Probably a good idea not to leave it on the table.

Unless, of course, you do have some high interest credit card debt that you need to pay off.

Or maybe you're saving for a house that we just talked to you about very soon and you need to save up that down payment.

So this is part of, like, why we don't have absolute strict rules, okay?

Because there are rarely situations that are either always right or always wrong.

Now, beyond the match, though, things get nuanced pretty quickly.

So are you in a traditional 401 or a Roth 401?

If your employer only offers traditional and you're in a lower tax bracket now, but expect to be in a higher one later, it might make sense to put additional savings into a Roth IRA where that money grows tax free.

And here's the other question.

Do you have adequate liquidity?

A maxed 401k is locked up until 59 and a half.

Roughly speaking, it's really hard to get into.

If you put every dollar into a retirement account and have no taxable brokerage account, no accessible savings beyond your emergency fund and a business that might need capital, you could find yourself in a situation where you're technically wealthy on paper, but cash poor in practice.

So let's say you are just a regular plain old family with two working spouses.

And let's say you have, I don't know, $10,000 in your checking account, typically, and between both spouses, you're in your 40s and 50s, you have, let's make up a number, $700,000 combined in 401ks, but you really don't have anything outside of the 401ks.

And now let's say one of the spouses works for a small business and they have the opportunity to buy the business from the owner.

Right?

The owner is maybe sick or just ready to sell, but they don't have money available, right?

They can't get to that $700,000 in the 401k to use to buy the business.

Now, maybe if you could go back in a time machine and if they would have put a little Bit less money into the 401k and a little bit more into an outside brokerage account, they would have enough down payment that's available in order to make a down payment and take advantage of an opportunity.

They say the rich get richer partially because they put themselves in a position to take advantage of opportunities.

Opportunities require cash, and your 401k money is really not liquid cash.

And if too much of your money is tied up in your 401, you are not in the position where you can take advantage of opportunities.

So maxing out your 401 is often right.

But the right answer is contribute strategically based on your tax situation, work with your advisor or make some calculations yourself as to if you should be.

If it's possible in your 401k, go in pre tax or Roth and then contribute the right amount for you.

But remember, diversification does not only apply to having different holdings, it applies to having different types of accounts with different tax structures and, and different accessibility features.

All right, so should you always max out your 401k?

I don't think so.

I think it's not quite that simple.

So let's look at what all four of these have in common.

All right, so every single one of them contains some truth.

And maybe they may be true for you and not true for me or vice versa.

And that's what makes them dangerous.

They're not completely wrong, they're not completely irresponsible, and that's actually worse because they feel right enough for people to follow without questioning.

So pay off debt before investing.

Like I said, I have three mortgages.

I'm not putting a dollar extra towards any of them because they have really low interest rates and they are helping me to build wealth.

So it's right for some debt, wrong for others, right for some people, wrong for other people.

Hey, what about waiting for the market to calm down?

What about waiting till after the election?

Or what about waiting until the conflict in any part of the world calms down?

There's always something happening.

If you look back in the last 50 or 60 years, we've had wars, we've had both political parties, we've had 9, 11, we've had.com, we've had Covid, we've had Vietnam, we've had the gas crisis.

And through all of that, not every year, but over time, the markets have done very well.

So there's some part art, some part science with how much money you should have invested, how much money should be on the sideline for emergencies, and how much money should be invested for short term goals.

And that's what you and or your financial advisor should be talking about.

But to simply say, I'm going to wait to invest until things calm down, probably not the greatest idea.

Now, should you max out your 401k first?

I think this one is really complicated and I think there are a lot of positives and negatives, but it depends on your timeline.

It depends on your tax situation now, it depends on what your tax situation will be when you retire.

It depends what other money you have.

It depends on your debt, your goals, your risk tolerance, your business, and a lot of different things.

So maxing out your 401k is certainly not like a slam dunk.

This is exactly what you should do.

And here's where I come in with my clients.

Because what a good financial advisor actually does is helps you to determine what are the pros and what are the cons of certain financial decisions.

So there are some things in financial planner where there is actually a right answer.

All right, so if you're my client and you're a 25 year old married couple and you have a baby, I am going to insist, like almost to the point of violence, that you have life insurance.

Now, should it be term insurance, should it be permanent insurance, how much insurance?

I'll have some ideas, but I think those would be more open to some preferences.

But in that hypothetical situation, if one of the parents doesn't make it home, then there's a huge financial burden on the family and life insurance solves that one.

So that's a really simple one where there would be a strict rule.

Now there are other things where there's a range of acceptable actions, but the best choice depends on your specific situation.

Like how much house should I buy?

If you are in a industry where your income is going to significantly increase and maybe if you're young and you buy a little bit more expensive house than what's comfortable, but you're more than sure you're going to start making more money in the next few years, maybe that's okay.

You know the risk.

You're taking a calculated risk and you're going with it.

Do you choose Roth or traditional?

How do you sequence your accounts when you start taking distributions?

We talked about it a couple weeks ago, the psychology of Social Security, right?

Should you take it early and have the guaranteed money sooner?

Should you take it later and maybe have the comfort that you're having bigger payments?

That's where expertise and personalization actually matter.

There are financial considerations that really just comes down to what's comfortable for you, your emotional relationship with debt.

That's something that you need to decide.

Do you hate debt and you want to get it paid down as soon as possible?

Are you okay on a slower timeline?

How much volatility can you handle without making a bad decision?

How important is it for you to be liquid as far as your investments?

Those are legitimate inputs to a financial plan.

They're not weaknesses.

They are data.

And that's really what I do for my clients, is I help them to figure out which bucket each decision falls into.

Because mixing them up, treating preferences like rules, or ignoring real rules because you're uncomfortable, that's where the damage happens.

So, you know, my philosophy is pretty simple.

And I believe that how we handle our money should positively impact our lives and the lives of those around us.

Not just optimize it for a spreadsheet, not just follow a rule.

Because that's what somebody on the Internet said.

Actually, design a financial life that reflects who you are, what you're building, and where you want to go.

That's what a partner does.

That's not what a financial book does.

That's not what a TikTok quote financial advisor does.

That's not what a cookie cutter advisor does.

That's what a partner does.

So if you're a business owner and if you've been running on autopilot with your finances following rules you've heard repeated so many times, you've stopped questioning them, I'd love to have a conversation.

There's a free strategy call.

I offer a vision call.

That's a free strategy call.

You can go to www.weeklywealthpodcast.com vision.

There's no pitch, there's no pressure.

Just a real conversation about where you are and whether there's a gap between where you are and where you want to be.

If there's nothing there, I'll tell you that, too.

And if you own a business, and if you haven't thought seriously about what it's worth or what it would take to sell someday, go to www.weeklywealthpodcast.com sellabilityscore.

It's a free assessment.

It takes about 15 minutes, and it gives you a real score on how sellable your business is right now.

And it gives you a range of values for what purchase price your business might sell for.

It's not a certified appraisal, but it's a really good first step.

Most business owners are shocked by what they find out.

Sometimes in a good way, sometimes in a bad way.

I'll put those links in the show notes.

And if you're not a business owner and if you have any financial questions at all, again, let's do a vision call www.weeklywealthpodcast.com vision thanks for listening to the show.

If this episode made you question some advice you've taken for granted, good.

That's exactly what it was supposed to do.

So share it with someone who needs to hear it.

And until next episode, I wish you a blessed week.

The information presented on this podcast is for general educational purposes only only and does not constitute financial investment, legal or tax advice.

Parallel Financial is registered with the U.S. securities and Exchange Commission as a registered investment advisor.

Registration does not imply a certain level of skill or training, nor does it constitute an endorsement.

And here is this week's bonus content.

Now, we talked about preferences, and that's with one person.

It gets that much traffic trickier when you're married and your financial decisions need to be agreed upon.

So take some time, discuss with your spouse what their preferences are and make decisions based on that.

All right, everybody, have a great week.