Personal Financial Plan ABC's

May 9, 2022

In this podcast, John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts talks with John Maher about personal financial planning. They cover the essential ABC's including why you need a financial plan, what to prioritize, and how to get started.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher and I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is personal financial plan ABCs. Welcome, John.

John Brennan: Hi, John.

Why Does Everyone Need a Financial Plan?

John Maher: So John, in terms of a personal financial plan, why should somebody create one for themselves?

John Brennan: Well, the main reason I think anybody should have a personal financial plan… a big one is retirement. If you hope to stop working someday, you have to achieve financial independence. So to do that, think of retirement as coinciding with social security and age 65. But one of the things that has happened, really say starting in the '70s, is individuals became responsible for their own retirements whether they know it or not.

And so that means that people have to save their own funds in order to make sure that they will have what they want in retirement. It's not a nice conversation to tell them that they really just don't have a heck of a lot of money in retirement because it can be pretty lean. Social security will keep you alive, it will support you at a bare minimum, but that's about it.

The other thing too, another reason why to have a financial plan, is that even what people call the American dream, the middle class life, is becoming more expensive in real terms. I think for our grandparents, houses were cheaper, education was cheaper, healthcare was cheaper. But now all these things, I think in real terms, both obviously in inflated dollars and just what they cost from what you make just is more expensive.

John Maher: Yeah. It's not just inflation. My father who graduated from Boston college in the 1950s was able to work in the summer and make enough money to pay for his tuition for that whole year.

John Brennan: Yeah.

John Maher: There's no way that somebody would be able to do that these days.

John Brennan: There's no way somebody would be able to do that these days. And the other thing too, the cost of certain goods has become very cheap, even on a relative term. So, say something like a lot of consumer goods that we have that maybe used to be made in this country, as things were made in China, the prices have really stayed low or stayed the same, meaning they've become relatively cheaper. I think things like clothing, certain toys, there are certain just consumer goods which the prices stayed the same, meaning they've become cheaper. But meanwhile, education, housing, and healthcare have all become more expensive, both in real and relative terms.

What Is the Purpose of a Personal Financial Plan? 

John Maher: Okay. So, in terms of a personal financial plan, what is that really for?

John Brennan: Well, there's three big things and I've touched on them already because they are the biggies. Obviously there's retirement, stopping work, achieving financial independence. The other big thing that people save for is educating their kids, or unfortunately for a lot of younger people, paying for the education that they might have already received. Paying back that debt and being able to live your life.

And then the other is healthcare. I should have looked up the stat before this podcast, but I think it's around a third of bankruptcies originate from a healthcare crisis. Where people aren't properly insured, they're hit with a big bill, and they never really recover. And that can not only happen in the healthcare setting, but we all talk about ... Some people are "good with money." One of the things about being good with money, sometimes it's just avoiding catastrophe, not making a big financial mistake. Because overbuying on a house or overbuying on a car or having a lifestyle you realize that you really can't afford…

John Maher: Right. Paying for everything on credit cards or something like that, yeah.

John Brennan: So when you look at, say, the trend lines on a financial chart, it's the old Ernest Hemingway line about bankruptcy. It's in "The Sun Also Rises". Talking to his friend and he said, "How did you go bankrupt?" And he said, "Gradually, then suddenly."

Because the trend lines… we're going to talk about this later, but with cash flows, it can take time to diminish and you might not realize that you're like, "Oh gee, I don't have as much in my savings account. I'm falling behind on my bills." It adds up. Just as successful financial planning will add up and hopefully the dollars will start to stack on one another, financial problems do the same. You can have a leak in the bottom of the boat. If you make a bad financial decision, it might not knock you off stride the day it happens. It might add up to something that happens years later.

How Do You Start a Personal Financial Plan?

John Maher: Right. All right. So how do you get started with creating a personal financial plan?

John Brennan: So even though I am a financial planner, I'm a big simplifier. I know some people love the numbers and they want to meticulously track each dollar. That is not for everybody. So, I start and I tell people to keep it simple. Beginning of each year, get yourself a portfolio accordion folder. It opens. I like the portfolio accordion folder because each month you can use it to capture that month's expenses.

And I say this realizing that I might be dating myself, considering I'm still thinking of paper invoices, paper receipts. But if you only have 12 slots that you have to organize, I think that's very manageable, even for people who really ... A lot of people just hate that stuff. They hate the paperwork. But I think something that simple, 12 slots, I think almost anybody can do it.

And the next thing I would say is simplicity. I really always encourage people. One checking account, one savings account. As much as possible, one or two investment accounts. Keep it simple. Don't get too complicated and have your finances arrayed in all these different places where you really can't look at them. I think you want to just keep things really straightforward, consolidate as much as possible, have an organization system that works for you and don't make it too hard for yourself. Don't think you have to start with meticulously organizing everything.

Then when you get that data, the best way to analyze what your needs are, is when you have a calendar year's worth. Because that way, any premiums that come up annually, things like costs which can fluctuate. Like energy, home, heating oil, electricity, you capture a year's worth of that data.

And then you really have a data set to work with that'll give you something that you can analyze. If you do it for a month, sure you could multiply it by 12 and extrapolate out. But I think usually for individuals, a year's worth is good. But also I always try to meet clients where they are. 

I think a lot of times when you do financial planning, I don't want to scare people because if you give them all kinds of homework, if they feel they really have to gather all this disparate data, I don't know if you're doing them a service. A lot of people are kind of scared talking about finances because they think, "Oh no, I'm going to find out. Find out I'm doing terrible." So, there's a lot of avoidance. There's a lot of procrastination.

John Maher: Yeah. And it could be easy to become overwhelmed as well and then not start and that's not where you want somebody.

John Brennan: So, I always try and encourage people to start simple and early and then don't expect to be perfect. Don't demand perfection. There is no perfect here. But what you can do is you can do better. It's just a question of do a little better than you did before.

John Maher: And if you start with the organization and then a year from now, you know a little bit better about where you stand in your financial life and what your bills are, then you know more than you did a year ago and then you can start to plan from there. That's a good place to start.

John Brennan: This is my favorite. This is a Charles Dickens quote from David Copperfield. "Annual income: 20 pounds, annual expenditure, 19 and six." So, a little less than 20 pounds. "Result: Happiness. Annual income, 20 pounds. Annual expenditure, 20 pounds aught six." So, essentially a buck more. "Result: Misery."

And that's the thing. Even with a financial plan, if you're winding up with a little bit of savings at the end of the year, that's success. If you're winding up with a growing credit card balance at the end of the year, that's the hole in the boat. So, the financial plan, especially when you're starting out, that margin can be pretty thin. But if you can get on the right side of it, you're setting yourself up for success because those numbers, dollars, impacts will accumulate over time.

What Expenses Should You Track?

John Maher: Yep. Going back to that accordion folder idea. You said you have 12 pockets, one for each month of the year. What is it that you're suggesting that people keep in that? Is it all their bills that they get for various things each month?

John Brennan: Correct. Mortgage or you track your rent, that's a monthly bill. Tracking utilities, they're monthly bills. Maybe you have a healthcare premium. Just those expenses. What I want to hear from clients when I'm doing a financial plan is what is your nut?

Meaning your car, your house, and your groceries. All those routine expenses. What is that total? Some people spend 45 grand a year. Some people spend 20, some people spend 100. But going back to the Dickens quote, you want that nut beneath the cash that's coming in. But if you don't know what that nut is, you don't know what to plan for.

What Are the General Rules for Financial Planning?

John Maher: Right. So, what are some general rules in terms of your financial plan and the things that you should be doing?

• 1. Find Ways to Automate Savings

John Brennan: Yep. So, a biggie is to pay yourself first and the way I would say what that means is you won't miss money that you never have. So, for instance, a lot of us work at workplaces where you have retirement taken off your check. See, when you get your paycheck, what's going to be easier? If you never see the money leave, versus having to physically write out a check.

John Maher: Yep.

John Brennan: Every time you get a paycheck, you should put something in your retirement. What's going to be more successful? It's a rhetorical question because the answer is, if you'd never see it, you're never going to miss it. So, by paying yourself first, having that percentage disappear, go off your windshield, and go to one of your retirement accounts. You're never going to miss that money because it never really hit your pocketbook in the first place. Book, wallet, piggybank whatever.

John Maher: Right. What's the next tip?

• 2. Establish Emergency Savings

John Brennan: Well, the next is a lot of times people talk about emergency funds and you should have X months of expenses in cash in the bank. It's a financial planning chestnut. I think that can be tough for people. I think that can take a while to get that amount of savings. I always encourage people to have your checking account with your operations account, that the cash goes in and out of and have a savings account where $10 a paycheck, $50 a paycheck, $100 a paycheck, try and create that other cash reservoir, which would be your emergency fund.

But I think that notion you got to have three months or six months or whatever that is, that can be challenging for people. And I speak from experience. I think that usually that's, I would say midway, in the process. Especially for young people. I think it's very difficult to get to that point of accumulated savings. But again, longest journey, first step. Just start and things will work out over time. If you have to hit it, you have to hit it. The other thing too about emergency funds and this will segue into our next topic is, hey, let's say you can't do it. If you are in an emergency, the other option would be credit and going into debt, which not ideal. But that's what credit is for.

John Maher: Right. Yeah. So, if you have to do that, then that's what you have to do and then you start paying that back.

John Brennan: If you don't have an emergency fund and there's stats on this, there's an alarming number of Americans, which would be waylaid by an expense of a few hundred bucks. Again, I probably should have pulled up my quote here. But it's astonishing. A lot of people couldn't come up with, if they had to write a check for a thousand dollars, they wouldn't be able to.

John Maher: Right. Or if they missed one paycheck or something like that,

John Brennan: That can be tough and it can be stressful. So, that's the reason for an emergency fund. Give yourself a little bit of a cushion.

John Maher: Okay. What's the next general rule that people should follow for their financial plan?

• 3. Use Debt Wisely

John Brennan: Well, one of the things ... We touched on this with debt and let's talk about debt because debt's a reality for most folks. And the question is, is there good debt? So, I'll touch on that. Credit card consumer debt is the most expensive. It can be some of the worst kind of debt. By consumer, that's where the rates are highest. Credit card debts can run in double digit percentages in terms of interest that you have to pay on those types of debts.

So, they're the worst. But look, sometimes emergencies come up and you're stuck with a balance. Just pay it off as soon as possible. Other kinds of debt, mortgages… mortgages are almost inevitable debt for most folks because people just can't come up with the amounts of money that it requires to purchase a house.

The other thing too, and you're going to touch on this in taxes is mortgage interest used to be tax deductible. Probably less people are hitting that now. But it was considered good debt because there was a tax benefit associated with it. It might be less good debt now with the recent change of the tax laws.

The last kind of debt I'll talk about, because I think we're hearing about it now, is student loan debt. And I would say starting, maybe, I don't know, '80s, '90s, '00s, there was the notion that student loan debt was good debt because education couldn't be bad and education really had to be able to further you in your career and in your profession. And I think what we're finding out and we're seeing this culturally is that's not always true.

There's governance around people getting undergraduate degrees, but for graduate degrees, people can take out almost unlimited sums. Borrow and take out a lot of money. But sometimes you are spending $200,000 to enter a field where the starting pay might be $40,000, $50,000, where it's really not realistic that you're going to pay that debt back.

And I also notice, and this is certainly almost a millennial trope, is all these kids with student loan debt entering the workforce with $80,000 in debt and being responsible for writing a check for $500 a month. That's a lot of money. And I really feel for those kids. There is a notion where I think the concept that all education debt is good debt, I think that's been oversold somewhat.

And I also think vis-à-vis education, college is not the answer for everybody and for somebody who ... The worst was a college dropout where you don't get the degree where you just have the debt, the force multiplier that a degree would give you so you can pay the debt back. So, I'm not sure that path is right for everybody. And I think also culturally, we're going through a moment where we're asking ourselves about that value equation. Does college make sense for everybody? Is that good debt for everybody? I think more and more people are realizing not always.

Debt, Healthcare, and Personal Finances

John Maher: Right. And then you mentioned before debt because of healthcare, maybe a catastrophic event that happens or something like that. And healthcare just by itself is just so crazy expensive. Now, talk a little bit about debt and healthcare specifically.

John Brennan: So, with healthcare, healthcare debt can be ruinous because you hear these stories, which are true, you can wind up in an emergency room and let's say you're really sick or really injured. Most healthcare expenses are really designed to be paid by the insurance company, which is going to negotiate something and whittle that number down.

But if you as a consumer wind up with one of those healthcare bills, it can be ruinous. We can be talking about bills of $250,000. If you had a heart attack, say, and you were uninsured, I don't think it's unrealistic to think you could wind up with a debt like that. If you really got hurt and you were uninsured, you could be looking at a six figure debt for a week in the hospital.

And that just sets you down the path to financial ruin. And that goes back to what we mentioned, maybe earlier in this conversation, just this notion that those kinds of debts often lead to bankruptcies.

John Maher: My wife had some health issues when she was giving birth to our first son and both she and my son ended up in the hospital for several weeks, my son actually for a couple of months almost. And yeah, the bills. Thankfully we had insurance, so it was mostly paid, but we saw what the bills would've been. And it was well over $200,000 totaled up.

I was just thinking to myself, "Boy, if I didn't have insurance for this, this would just be the end of it. We'd be paying for this for the rest of our lives and never be able to buy a house or whatever." So yeah, amazing the bills that you get from healthcare.

John Brennan: So yes, that is the best way to prevent that is insurance. That's why healthcare insurance is vital.

How to Prioritize Savings Goals

John Maher: Right. What about savings, period? And specifically talking about retirement versus saving for education and things like that.

John Brennan: Yeah. I always tell people, save for your retirement first. I tell a lot of parents, don't save for your kids' education. It's your lowest priority. And a lot of people aren't happy to hear that, because a lot of people revere the notion of education and see it as a path forward.

John Maher: And they want to be, "Hey, I put my kids through college." You hear that all the time You got to save so you can put your kids through college. So, that seems like it's a goal to be able to pay for your kid's education.

John Brennan: Right. It's a point of pride. It reflects a certain value set and I applaud that. I've gone to plenty of school and there's no question it's valuable, but what I don't like to see is parents who are scrimping to pay for education at the expense of their retirement. Because once you hit retirement, if you don't have any savings, you can't make up for it. But if you save for retirement, A, it's tax advantaged. B, you have the money.

So, let's say you had to borrow for your kid's education. You will have a pool of money when you retire that you could potentially, if you realize, "Oh gee, I got plenty here." You can pay off the kids' student debt. But you can't make up for the years of not saving for retirement if you strictly weigh education first.

And the clients I work with are middle class and I really say, just given these crazy costs of college ... With college, you might get a scholarship. There might be some sort of manna from heaven that comes down and helps you out. Not with retirement, okay? No one's giving you a retirement scholarship. Your child might get a college scholarship, but you're not getting a retirement scholarship ever.

John Maher: Right. And as much as it's not what your goal is, they can get a loan, they can pay that back once they get a job and they get out of school. And so if they have to have that debt, like we were talking about before, they can manage that. It's not ideal. But maybe a combination of loans and scholarships or something like that can help with that.

But like you said, you're not going to get a scholarship for your retirement. You're not going to be able to take out a loan to pay for your retirement because you don't have any income at that point to pay that back. So yeah, that's not the time after you've retired to be thinking about trying to save.

John Brennan: Yeah. You don't want to find that out at age 62. So, that's just something I tell people.

John Maher: Right. All right. Well, that's really great advice and we'll be talking more about the details here in our next topic, which is personal financial plans beyond the basics. So, watch for that coming soon. And thanks again for speaking with me today, John.

John Brennan: Sure thing, John.

Contact Cape Ann Savings Bank to Talk About Your Personal Financial Plan

John Maher: And for more information, contact Cape Ann Savings Trust and Financial services at (978)283-7079, or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed and may lose principal value.