Robert Leonard  03:50

Specifically at the beginning, have you found it difficult to help individuals and really get them to understand or believe that their finances are really up to them? And that you can’t give them a specific answer or a specific solution? Because I think, a lot of times, people come and want the exact answer. They want to be told exactly what to do. But as a finance professional, I know it’s difficult to do that because everybody’s situation is different. Everyone has a higher or lower risk tolerance. Everybody has a different time horizon. So it’s difficult to give just one piece of advice. Have you found that difficult?

David Flores Wilson  04:22

For a lot of the people we work with, we explain the logic behind some of our recommendations. Like most things in financial planning, there might be two competing reasons. There might be a purely economic reason, and then there might be a behavioral finance reason. For example, emergency funds. The purely economic thing is to fully invest so that you minimize that opportunity cost. But at the same time, if that doesn’t work, when you have a dire emergency and you need money right away, you think about whether or not you should be selling your stocks or bonds. It’s less economic to keep some cash drag and to keep some money in a checking account, but it’s there when you need it for those sorts of emergencies.

Robert Leonard  05:12

I’m also a finance professional. I’m not a financial planner, but I had started down the CFA path, as well. I also have a different financial designation, so I’m pretty familiar with a lot of them. But you have one that I haven’t heard of, and that’s the certified college financial consultant. Using that, what advice would you give to someone in the audience who is wondering if they should get an advanced degree? And if it’s worth it in today’s world?

David Flores Wilson  05:34

Yeah, we could play off alphabet soup with all these different designations coming out nowadays, right? That’s sort of a newer one out in the marketplace. I went through the coursework because the practice I work with focuses on different life events. I think that’s where the real stress is in people’s lives. Whether it’s getting married or having kids, or buying or selling a business, there’s some real value to add in those very stressful times. If people don’t make mistakes, they can really move the ball forward when it comes to financial planning.

When it comes to the grad school situation, we want people to be pretty intentional about the financial implications of it. People go to grad school for a variety of reasons. Lifelong learning is a wonderful goal and provides self-fulfillment. But I do think that people need to be intentional about the rate of return, the return on investment on this very expensive investment. It’s important to really research around the internships that are available in their program, the job placements, how much money people make once they graduate from that program, whether it’s a master’s or a Ph.D. program, and then looking at the cost of that against the expected income. We run projections, and not just look at the grad school part of it, but if that person can achieve, realistically, all the different goals that they want to have or at least that they know that they want to have, whether that’s having kids, getting those kids to college, or retiring at a certain age. And so, we really think that people should be looking at how much debt will you have coming out of it, and let’s get the most, at least financially, when you’re kind of looking at the landscape of different schools.

Robert Leonard  07:23

I’m glad you mentioned calculating the return on investment that you’re getting for making that large investment. When somebody starts to think about this, how do they calculate that? What numbers are they using? And maybe it’s not specific, and maybe you’re not going to say I’m going to earn a 12.7% return on that investment of getting a graduate degree, but in general, how would somebody go about thinking of what their return is going to be on that degree?

David Flores Wilson  07:46

It is definitely easier if someone has a background in spreadsheets or if they have the financial software available to them, but not that the quantitative part of it should overrule all the qualitative things and benefits of going to grad school. It’s a matter of having certain assumptions about the cost in year one and year two, or however long the program is, and then what the net present value is. We recommend people do a net present value calculation on various programs and be realistic about entering a program in a particular school. Realistically, you might also stay in that region after the graduate program. I say that because, sometimes, people look at expenses and costs in the state they live in now, but the cost might be less expensive than the region of the school that they go to and where they’ll end up continuing their career afterward.

I think the real thought should be around what they will do post graduate school, rather than saying, “Hey, I just want to shake things up and go to grad school.” I think that’s a luxury people had 10-30 years ago. It’s as well for people who go into undergrad school. The cost of higher education has gone up so much higher than inflation and wage growth. We can’t really use the same framework 20-30 years ago because grad school prices are dramatically higher than, in many cases, the expected rate of return.

Robert Leonard  09:14

What are some of the other topics that you discuss as part of your role as a college financial consultant?

David Flores Wilson  09:21

When it comes to my use of that designation, it has to do with parents sending their kids to undergrad. A lot of our industry has done a disservice to too many families. When it comes to funding higher education, a lot of times, the advice has been to put money in a 529 plan, and good luck to you. I think that there are ways to save on the cost of college, like doing the research on all these different schools before you ever set foot on campus. Whether it’s undergrad or grad school, higher education is a big, big business. Given that, they are highly skilled at developing emotional connections with prospective students and getting people to enroll in schools they just can’t afford. And so, before even stepping foot on the school, you would want to know what the finances are, and what the expected rate of return is.

Robert Leonard  10:14

Our audience is obviously targeted towards millennials. Most of the people listening to the show today probably aren’t parents with children that are of college-age or going into college soon. So they may not need to know necessarily what’s best for them in terms of saving for retirement for their children yet.

But as a lot of the audience is young, they themselves might be going into college soon, or they might be in college. So I want to talk about some of the best ways that they should think about funding their college. You mentioned that a lot of people are misguided about how their parents should fund it. I think, if we can get the audience in the right frame of mind and understand where their parents are coming from, that might help them a little bit in terms of funding their own college. So, how should someone that’s going into college, or might need to pay for the next two to three years of college, think about that?

David Flores Wilson  11:03

I think it starts with assessing your financial resources. See how those resources fit in the various formulas, like the FAFSA, to come up with an expected financial aid package that you might get. Compare that to the schools you’re going to, and then develop a budget.

I think that people should develop a budget. People usually come out of school with no more than the first year of salary that they’re going to earn once they finish undergrad. Parents often don’t have more than a whole year salary of debt once a child graduates, with every ~$50,000 of debt is approximately $500 payment for 10 years. If you take that same $500/month payments over and you invest it, that same student could have a million dollars once they’re 65 years old. It’s so impactful how much debt you’re going to put on the balance sheet.

I think that there are just so many diamonds in the rough when it comes to schools that, a lot of times, people just look at the US News and world report rankings and base their decisions on them. They decide to get in the “best school” possible according to the rankings, even when there are vast differences in quality within schools by major and degree. Some schools, for example, make it a priority to get students out in four years, while there are also schools that want you to go through a fifth year as there’ll be more revenue. There are some schools that are really good about placing students once they graduate, and others where it’s not really a focus of theirs. So, that’s kind of how we think about it.

I think that when it comes to undergrad, sometimes people can be intentional about checking if they have higher than average SAT scores and average financial aid packages. That means you could go back and leverage the offer and say, “Hey, we beg you to consider sharpening your pencil and giving us a better offer.” That’s where applying to different schools that compete against each other might help. And then, a different set of analyses is required for once people graduate with student loans. How do you think through paying them down? And what are your goals to earn it?

Robert Leonard  13:25

Let’s talk about those strategies a little bit. That was going to be my next question. For someone that’s graduating college soon, or maybe they graduated a couple of years ago, how should they best tackle their student loans?

David Flores Wilson  13:36

We have different goals, right? Some students are just focused on cash flow and want the lowest monthly payment possible, others want to increase net worth and minimize interest costs or the lifetime of the loan, and others are going to focus on public service and loan forgiveness. But, generally, if you’re a high-income graduate relative to the debt you have, your strategy’s going to evolve. It will most likely evolve to overpaying debt and prioritizing higher interest rate debt. If you have low income relative to the amount of debt you have, you might pay your debt slowly and look at income-driven repayment methods. You will probably then save for the tax consequences of your debt being *inaudible* after 20 years if one of these income-driven repayment programs gets taken away.

The approach differs depending on the situation. Regardless, people can use the general framework of learning about their student loans. They can go through the National Students Loan Data System and getting their credit reports to catalog what kind of loans they have, like if it is federal or private, and then go from there. If it’s private, then let’s get the promissory notes, understand the terms of each one, and then look at refinancing options on the private side, and potentially, consolidation on the federal side.

Robert Leonard  14:57

My next question is one that is often too baited in the personal finance world. I’d like to get your opinion on it so that the audience can hear just varying perspectives, and make the best decision for themselves. Do you recommend millennials who have student loans to invest while they’re paying off their loans? Or should they wait to invest until they’ve paid off their student loans completely?

David Flores Wilson  15:19

That’s a good question. I think there’s a push-and-pull there between two factors. There’s the purely economic capital allocation decision. What can grow my net worth the most? Sometimes, that involves expectations on the market. “If the market earns 8% over long periods of time and buy up debt over 8%, well, then it’s a no brainer, I should spend every dollar paying off debt.”

But then, there’s also the behavioral effect, as well, that we want to look at. It’s habit-forming to start investing early. If it’s a very, very small level, I think people should get in the habit of saving and investing whether that’s $10 or $50 a month. In conjunction with that, people can come up with a strategy to pay down their debt.

I don’t want to get too dogmatic when it comes to pay off versus start investing. I think that the answer probably is in stages. You probably should put together an emergency fund, and then you focus on paying off that debt over 10%. And then the third stage of that is investing in a company 401-K if you have a match, and then allocating capital until you’ve sort of maxed out the match there. And then go back and focus on debt, and then also start to invest a little bit more. If you were starting with $25, maybe it’s time to kick it up to $50 a month.

Robert Leonard  16:39

The emotional component of that is such a big piece that I don’t think a lot of people think about because there are some people that might have loans at 5-6% that aren’t necessarily super high interest, but that keeps them up at night and they just don’t like having that debt. And so, if it makes you feel that way, then paying off that debt has an emotional or qualitative value to it that makes it even better than the quantitative value that you might get from just earning a higher rate of return in the market.

And then there are people who are more like me who don’t necessarily mind having the debt. What I did as my strategy for the student loans I had was I bought an investment property, a rental property, and then I just use that cash flow to cover all of my loans. Now, somebody else is paying my student loans and I don’t have to pay for it. By the time properties paid off, all my student loans are also paid off. Having that debt doesn’t bother me because somebody else is paying for it. So, there are a lot of different ways you can go about it.

David Flores Wilson  17:31

You really hit the nail on the head in terms of you have to do what works for you. There are some broad economic principles at work here, but there are many different paths to financial independence, and it looks like you found a really good one.

Robert Leonard  17:44

Yeah, so far, it’s been working out really well for me. So, thanks to the huge popularity of the FIRE (financial independence retire early) movement, I’d argue that now, probably more than ever, people are interested in reaching financial freedom and are focusing on their retirement. Are the strategies of old going to work for the millennial generation going forward? Or are there new ways to save and prepare for retirement that need to be implemented by today’s generation?

David Flores Wilson  18:13

I think in terms of the strategies and tips, the levers are the same. The five levers of financial planning, I think, are always going to be there. Saving, investing, protecting what you have, minimizing taxes, and managing debt correctly.

I think, when it comes to FIRE, more specifically, there’s definitely some secondary effects and maybe some hidden risks that people should also consider as they’re trying to reach financial independence and really early and sort of leaving the workforce. One thing to think about is that your social security benefit is based on the highest 35 years, and the later years are weighted more than the earlier years even though they’re all indexed. And so, if you’re only going to work to 55 years old or so, you may not get those full 35 years and get that very valuable money from the government that might not even be taxed.  It comes in a time when expenses are lower. A lot of people just don’t see it as an asset.

There’s also the hidden risk of unexpected inflation. What we’ve seen over the last decade or two is high inflation in healthcare and higher education, but where will the next acceleration inflation be? That will be hard to combat if you left the workplace. But I think that we see more and more people who stepped out of the workplace and went back in and living very fulfilled lives and reaching financial independence. And that’s wonderful.

I think that we just have to be aware that it’s a very dynamic business world, and that more and more industries are getting disintermediated. And so, I think that the way to combat that is to commit to lifelong learning and maintaining relevant skills as people kind of move in and out of the workplace. I think that’s what’s fundamentally different.

Robert Leonard  20:06

Now, I want to talk a bit about retirement accounts because I don’t think it’s ever too early to start investing in retirement. A Roth retirement account offers great tax advantages that are unmatched by many other programs or accounts. What makes them such powerful accounts?

David Flores Wilson  20:23

Roth IRAs or Roth 401-Ks are fantastic. Once the money goes in, it grows tax-free, and the distributions are not taxed. Now, that being said, we like to see people diversify a little bit when it comes to their type of retirement account. The tax laws are changing seemingly every year now. We just had more changes to retirement laws in late December, and also the TCGA in 2017. It’s very possible that they may change the rules on the Roth one day.

So the Roth IRAs are fantastic in that we have some distributions you can take whether that’s from higher education or your first time home. We even recommend that when people have kids and the kids have summer jobs, that means earned income, and so even they can have Roth IRAs. We recommend a lot of times to people in their early 20s who are entering the workforce to really dive into those Roth IRAs. Because when they progress in their careers, they might be not eligible anymore because there are income limitations. Even though those are index, as people are making more and more money, they might not have the opportunity to invest in a Roth IRA. Not everyone has a Roth 401k at work, either.

Robert Leonard  21:34

One of my favorite features about a Roth IRA is that the contributions that you make to the account can be withdrawn at any time tax-free and penalty-free. You can’t remove the gains, but anything that you’ve put in for contribution, you can take out. Do you see that as a powerful benefit of this type of account? And do you think it’s a potential opportunity for somebody to use as an emergency fund? I’ve heard some people throw that around. I don’t personally use it that way. To this date, I also haven’t had to withdraw those contributions, but it seems like it could be a powerful thing. So, do you see people using that as an emergency fund? Is that a good strategy?

David Flores Wilson  22:09

That is one possibility. I think that I do feel that emergency funds should be liquid and relatively safe. I think that the nature of Roth IRAs is that you put your riskiest investments in there because they have the most appreciation potential. Then because you won’t be taxed on those again, you would want to get the most investments that gave you the biggest gains and put them in the Roth IRAs.

Sometimes, we recommend that you put the emerging markets, for example, the exposure that you had, in Roth IRAs. If you’re going to do something like that, it might not be the best use of your emergency fund. I say that just given that you don’t want to be thinking of what will happen to your overall asset allocation if you take your money from the Roth, and how much of that was earnings versus contributions. I’m a big believer in keeping things like that simple. And emergency funds are very unique to the situation, but I think that you’d want them to be easily accessible and relatively safe. That is unless you’ve already reached the financial independence portion of your life where you can almost self-fund, and you don’t have to put very much in a liquid investment emergency fund.

Robert Leonard  23:19

For those who might not be familiar, can you tell us the difference between a Roth retirement account and a traditional retirement account?

David Flores Wilson  23:26

In a traditional retirement account, like traditional IRA or traditional 401k, any contributions to those accounts are their pre-tax, so you don’t pay income taxes on those contributions. In a Roth IRA, you’re taking after-tax money, putting it in that account, and it’s never taxed again. When you think about it, with the regular IRA, you have to pay taxes when you distribute the money. That’ll be after 59 and a half. And so, in some ways, you’ll want to put into the regular IRA when you’re hitting your peak earning years. At the same time, you’ll want to be also putting in your Roth IRA, because you’ll never pay taxes on the gains again.

It’s a bit interesting as I don’t work with that many retirees. Most of the people I work with are in their 30s and 40s. But the people that I work within their 70s, and 80s, they all sort of had to take these required minimum distributions of regular IRA balances that they have every year. They all groan about it. It seems like, for many of the people I work with, it’s the last money they ever want to use. They frankly wish that they had bigger Roth IRA balances, but they have very large regular IRA balances. Sometimes you have to remind them that they got a deduction on that very large IRA along the way, but sometimes they tend to forget that.

Robert Leonard  24:09

Yeah, I actually worked at a bank for a few years when I was in college. We sometimes had to do those RMDs (required minimum distribution) from the retirement accounts for some of our members. I remember they all had the same type of reaction. They didn’t really want to touch that money. When they add to it, they didn’t really like it, so I definitely understand where you’re coming from on that. At what point does someone start to need a financial advisor?

David Flores Wilson  25:17

There is some research that we’ve seen around the type of people that build wealth. Some of the factors are what you would guess they would be. People that view shopping, for example, as a task, as opposed to as a hobby tend to build wealth. People that believe budgeting is a tool as opposed to something that should be dreaded, build wealth. And so, one of the other factors that build wealth in the research is that people that have planning behaviors don’t need advisors. They can look at their situation objectively. They can be vigorous about learning different strategies and techniques. And they can put a plan together and then implement it.

So, when it comes to hiring an advisor, it’s really just an assessment of the value that an outside party is going to bring going to help advance the plot of your financial life? Is that going to outweigh the cost? A lot of times, for the people that we see, the impetus is these life events and getting married having kids, and so the stakes are higher. That’s when there are more people involved in the situation. That’s when they tend to come to our office.

Robert Leonard  26:25

Assuming that someone has decided that they are going to work with a financial advisor, what are some of the most important things that they need to consider when deciding on which financial advisor to work with?

David Flores Wilson  26:35

When it comes to the fundamentals, it’s investigating that advisor’s background, expertise, certifications, approach, and philosophy. How do they work with clients? How do they think about planning and investing? I think that as time goes on, someone should be able to get a sneak peek in terms of what that client experiences with working with an advisor, whether that’s the references or maybe the content they provide in the market. But I think that the biggest thing, at least in my opinion, is the objectivity of the advisor, and if they are going to be acting in the best interests of your situation. Those are some of the things to think about.

Robert Leonard  27:13

And how about being a fiduciary? How important is that?

David Flores Wilson  27:17

It’s my opinion that it’s very important. I think there are a lot of judgment calls when it comes to giving financial advice and putting portfolios together. I’ve been a fiduciary since day one. So I don’t really know how advisors can do it without being a fiduciary, but there are people that are in a non-fiduciary capacity.

Robert Leonard  27:39

What exactly does it mean to be a fiduciary?

David Flores Wilson  27:43

Fiduciary essentially means that the advisor acts in the best interests of the client and puts their interests first. If not, they get in trouble by the regulator and could lose their certifications and other things.

Robert Leonard  27:54

We briefly talked about that one of the hardest parts about personal finance is just the psychological and emotional components. With that said, have you ever broken any of your own financial planning rules that you’ve set for yourself?

David Flores Wilson  28:08

You’re going to put me on the spot? Yeah, I definitely have. I think that I mentioned earlier that there are different pathways to financial independence and success. I think, on a personal level, I probably put too much concentration into real estate about 13 years ago. I think that I put a large portion of my net worth in it, and there were some years where I was feeling the pressure. I changed careers from investment banking to being a financial planner. And I think that that’s what’s interesting about real estate. You don’t have to be right on the timing. If long term, it’s a good investment. Some other investments are not like that, but I think if you can hold on until when the demographics and some of the investment characteristics are right, then things are going to work out. So but there were moments where yeah, for sure, I felt like I made a mistake.

Robert Leonard  28:55

After you made those mistakes, how did you get back on track and how did you correct them so that it didn’t happen again in the future?

David Flores Wilson  29:02

The important thing is to learn from these mistakes, and then at the same time, not make the opposite mistake. I think sometimes when people make a mistake, they might cop and say by making the opposite mistake. They might be too concentrated in stock, and then all of a sudden, get burned by that. And from that point on, maybe they’re invested in 1,000 different stocks, and then you have the opposite problem as you’re too diversified. It would be too unwieldy and can’t really be managed. So I just think that there are these different categories. As long as you’re doing a few of the things right, you’re moving in the right direction, and the power of compound interest works. It’s just so powerful. And so, as long as you’re staying invested, as long as you’re saving a good amount relative to your expenses, and that you’re also thinking about how to protect what you have and manage debt and so forth, you’re moving in the right direction.

Robert Leonard  29:54

Which book or maybe financial expert that you’ve studied has had the biggest impact on you and in your desire to help the world with financial planning?

David Flores Wilson  30:03

I definitely remember reading The Millionaire Next Door right out of college. I think that it shows you that anyone can do it and that achieving your financial dreams is attainable if you have the right discipline and the plan.

I also read Rich Dad, Poor Dad in college. It made me look at the income side of it and making money through real estate. I had a stepfather and a father, so from that book, I learned that there are different approaches. We can just try to piece together these different philosophies and take from them a little bit here and there. That’s what I learned from that book. Gosh! I also remember reading David Swensen’s investment books in my 20s. A lot of what he said made sense. A lot of different things also guided my philosophies and overall strategies.

Robert Leonard  30:50

What is a piece of financial advice that you often hear given by other financial experts that you don’t think is necessarily good advice? And how would you improve that advice to make it good?

David Flores Wilson  31:01

It’s interesting because financial literacy is not really taught in the schools in a systematic way in this country. It’s a tragedy. I think that it’s no wonder that people are drawn to the financial influencers and media types, and look to those people a lot for the advice. I think it’s very motivating. A lot of times, one-size-fits-all advice can be very motivating. It can get people moving because it can make complex things very simple, but I will state that a lot of times, to anyone listening to this podcast, your situation is different. I think that, many times, applying some of the very dogmatic statements, like “You must save X percent every year,” or “You should not have any debt by this age,” are sometimes a disservice to people because their situation is different. I think it’s just a little more complex than that, but I can recognize that people are adding a lot of value by having these rules of thumb. But at the same time, we should be careful.

Robert Leonard  32:02

David, thanks so much for your time. I think our conversation tonight is going to help get a lot of millennials on the right track and help answer a lot of the personal finance questions that they’re probably having. I think they’re really going to enjoy this conversation. For those in the audience that want to connect with you further, where can they go to learn more about you?

David Flores Wilson  32:19

They can find me on the Planning to Wealth blog. In the blog, I try to provide some actionable content for people in various life topics. If people want to talk further, they can reach out or schedule a time to chat.

Robert Leonard  32:31

Awesome! I’ll be sure to put links to some of the different books you mentioned, some of the different topics we talked about, and books related to those in the show notes, as well as the resource you just mentioned where the audience could connect with you. That will all be in the show notes. You guys can go check that out later.

David, thanks so much! I really appreciate it.

David Flores Wilson  32:46

Thanks so much, Robert!

Robert Leonard  32:47

All right, guys! That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week!

Outro  32:54

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