Next Gen Dollars and Sense

Preface

This book is 25 years in the making, starting when I first entered the industry and taught a personal finance course through the Orange County Adult Education Center. Since then, I’ve been privileged to engage in more than 40,000 hours of personal, one-on-one conversations with people about an almost infinite number of topics. But all topics really boil down to one thing—money: how to make it, how to use it, how to save it, how to control it, and how to spend it.

In the next 25 years, more than $68 trillion of all that money will shift from one generation to the next—the largest wealth transfer ever in human history. With vast differences between the various generations in how they think, what they value, and the life ahead of them, now is the time to think about your personal financial plans and future decisions that may involve your loved ones. Take the time to have a conversation and share your thoughts with the next generation. While you can’t take your money with you when you die, you probably don’t want to see it squandered or fought over!

That is the primary purpose of this book: to help not just you but, more importantly, your children and grandchildren understand the fundamentals of money and personal finance. In other words, this book is intentionally designed to help the next generation make sense of all of life’s decisions involving their dollars—hence the book’s title Next Gen Dollars and Sense!

Despite the wide range of information sources available today (much more than when I taught 25 years ago!), individuals and investors are less savvy and more confused than ever.

This leads to the second purpose of this book: to help provide a practical perspective in a world flooded with social media, multitasking, and information overload that has spawned 10-second attention spans. Achieving financial results over time won’t happen without more diligence, awareness, and focus. And let’s face it—positive, significant results are rarely instantaneous; instead, they are achieved over time. After all, you don’t reach that million-dollar target (or whatever your goal is) without starting with the very first dollar.

Third, as I watch my three sons grow into adulthood, their generation seems somewhat ill-equipped for the rocky road ahead. Entering a changing job market on the heels of a recession and historic pandemic, they now face soaring housing and healthcare costs, rising inflation and interest rates, and, for some, astronomical student loan debt. The days of pension plans are long over, and I would not want to guess what Social Security might look like when they retire. It is clear that any successful future retirement will become increasingly dependent on individuals personally accumulating savings over time. Yet this generation needs extensive education about and exposure to personal finance principles and economics. I hope that this book will provide the tools, knowledge, and perspective necessary for people of all ages to succeed on their financial journey.

Continue the Conversation

The concepts discussed throughout the book are not new. They have existed for decades and have been thoroughly discussed for more than 35 years on our long-running radio show (and now podcast) Dollars & Sense. The show still airs live every Sunday morning on various radio stations in Central Florida and was recently named one of the Top 25 Financial Planning Podcasts.

To subscribe or connect with our program, visit our website at www.NelsonFinancialPlanning.com or scan the QR codes in the About the Author section at the end of this book to access the show’s various channels.

Acknowledgments

Many people deserve recognition, and thanks for helping create this book. First, thanks go to the good Lord above for putting the plan in place for this to be my career—one that I continue to enjoy immensely.

Second, I sincerely appreciate the thousands of friends and clients who have shared their personal stories with me, many of which helped shape the views and recommendations described throughout this book.

Third, I am grateful to the great team at Nelson Financial Planning for their help with this book. Jaimie Walter, Zach Keister, and Chet Cowart were the real workhorses for researching, writing, and assembling this book. Our team of Certified Financial Fiduciaries, Christina Lamb, Rob Field, and Kristin Kalley, along with Carolyn Grzan, Patty Theis, and Pilar Kalley, provided invaluable editing services.

Fourth, I want to thank my wife, Stephanie, a rock star in her own right and a source of great strength and encouragement to me and our three sons, who just make life more fun.

Introduction

Money is one of the most influential forces in our lives, bringing security, freedom, and happiness but also triggering stress, anxiety, and fear. Money is intricately woven into all aspects of our lives, from paying for necessities like housing and food to impacting significant decisions that affect relationships with family and friends. Managing your finances can be daunting and highly emotional, so learning about and making SENSE of life’s decisions involving your DOLLARS is essential.

The first and most fundamental step toward establishing a solid foundation and achieving long-term financial goals is planning. Without a plan, it’s too easy to get sidetracked, overspend, and fall into debt. But with this book as a guide, you will:

•Learn how and why to set financial goals, create a budget, manage debt, and build wealth.

•Discover strategies for navigating life’s changes, maintaining financial success, and developing habits and mindset for long-term economic prosperity.

•Explore the essentials of investing and navigating life’s big purchases, along with retirement, estate, and tax planning.

•Access valuable tools and strategies to achieve financial success.

Whether you’re just starting your financial journey or ready to retire, this book will help you develop a solid plan for achieving your financial goals.

Chapter 1

Human Behavior

As humans, we are constantly bombarded with news and information. Unfortunately, most of it is negative. Why?

Well, as my good friend and longtime radio and television personality John Bud Hedinger once said to me years ago, Well, you know Joel, negative news sells better than positive news.

He was right. A commercial news source or media company is not actually in the business of sharing information but in selling advertising opportunities. Focusing on the negative side of things helps retain and enlarge an audience. Increasing viewership allows a media company to charge advertisers more and thereby increase their profits. This reality sheds a very different light on the fundamental nature of the information around us.

The Role of Negativity

Negative news can have a profound impact on a person’s financial decision-making. This is because people tend to react emotionally to any news, especially if it’s negative, which can cloud their judgment when making financial decisions.

One study conducted by the University of Michigan found that people exposed to negative news about the economy were more likely to make conservative financial decisions, such as saving more money and investing less. This happens because negative news can create a sense of fear and uncertainty, which leads people to be more cautious with their money.

Another study conducted by the University of California, Berkeley, found that people exposed to negative news about the stock market were more likely to sell their stocks, even if it meant taking a loss. This is because negative news can create a sense of panic, leading people to make impulsive decisions without fully considering the long-term consequences.

Furthermore, negative news can also impact people’s perception of risk. A study conducted by the University of Chicago found that people exposed to negative news about the economy perceived the risk of investing to be higher than those who were not exposed to negative news. This perception of increased risk can lead people to avoid investing altogether, which can negatively impact long-term financial goals.

Additionally, research shows that humans experience triple the amount of pain from a loss than they do the pleasure from a gain. In other words, if we lose $1,000, we feel an emotional response that is three times greater than our feelings about gaining $1,000. This psychological reaction can dictate our financial decision-making.

These and countless other studies have uncovered many cognitive biases that cause our minds to work against us and prevent our financial success. Cognitive bias occurs when someone interprets a situation based on their subjective opinion and personal experiences, which may not be impartial or correct. The rest of this chapter explores these behaviors and biases and how to prevent them from negatively impacting our finances.

Familiarity

According to the American College of Financial Services, our minds often use what we already know, or familiarity, against us when making financial decisions. This is because our brains are wired to prefer something familiar over something unfamiliar, even if the unfamiliar option is the better choice.

This cognitive bias can lead to poor financial decisions, such as sticking with a familiar investment even if it is underperforming or holding onto a losing stock because we are familiar with the company.

For example, far too many people held onto Sears Roebuck stock way too long just because they grew up with their Christmas catalog. Familiarity can cause us to overlook new opportunities or investments that could potentially benefit us in the long run.

To combat this bias, be aware of our tendency to favor the familiar and actively seek out new information and perspectives by researching new investment opportunities, seeking advice from financial professionals, and challenging your own assumptions and biases.

Anchoring

Anchoring is a cognitive bias that occurs when we rely too heavily on the first piece of information we receive about a topic. In the context of investing, this can cause us to fixate on a particular stock or investment, even if it is no longer the best option, leading to missed opportunities and poor investment decisions. To avoid the anchoring bias, remain open to new information and perspectives, and regularly reassess investment decisions.

In the late 90s, many people invested heavily in technology companies fixing anticipated Y2K concerns—potential catastrophic computing errors in switching from the year 1999 to 2000 (which wasn’t accounted for when software programs were initially developed). When the calendar turned to the year 2000, and the world continued to spin, many of these same companies experienced dramatic declines as their products were no longer needed to prevent a catastrophe that never happened!

Oversimplification

Oversimplification is another cognitive bias that occurs when we try to simplify complex financial information or situations into easy-to-understand concepts or rules of thumb. While this may be helpful in certain circumstances, oversimplification can hinder your comprehension of financial concepts, resulting in poor investment decisions or missed opportunities for growth.

The reality is that every person is unique, with their own set of needs, wants, and desires. To avoid oversimplification, always seek out multiple information sources and perspectives and take time to fully understand the complexities of financial decisions before making them. We often see this oversimplification bias when it comes to retirement planning, as people forget to include their total healthcare costs or the impact of income taxes. At Nelson Financial Planning, we often spend several hours over multiple years mapping out a retirement income plan for clients approaching retirement.

Hindsight

Hindsight bias is the tendency for people to believe they could have predicted an event’s outcome after it has occurred. This bias can lead people to overestimate their ability to anticipate events and underestimate the role of chance or other factors in contributing to the outcome. Hindsight bias is also known as the I knew it all along phenomenon. It can negatively affect decision-making when people make overconfident decisions based on their belief in a past event.

This is one bias that I recognize most often when talking to people at the office. They ask, Why didn’t you see this (name the event over the last 25 years) coming? Sadly, there are no crystal balls or other ways to predict the future accurately and consistently. This behavioral bias can also manifest itself when people get out of the market during bad times and then try to get back in during good times. This results in selling low and buying high, which undermines investment results.

Endowment Effect

The endowment effect is when people tend to overvalue objects or investments they own because of a personal attachment. In the context of investing, this can cause people to hold onto underperforming investments or assets simply because they feel an emotional connection.

The best example of this is when people continue to own stock because their parents or grandparents once owned it, like General Electric. But the company is not the same as it was thirty years ago! After being part of the Dow Jones Industrial Average for more than a hundred years, General Electric was removed from the index in 2018 due to poor performance. To avoid the endowment effect, remain objective, take a fresh look at all available information, and keep personal feelings about a company out of your financial decision-making.

Status Quo

The status quo effect is the propensity for people to prefer things to stay the same or maintain the current situation. This bias can manifest in a variety of ways, such as resisting change or choosing familiar routines. Status quo bias can be a powerful force, as people often feel more comfortable with what is expected and may avoid taking risks or trying new things. However, this bias can also prevent people from making necessary changes or taking advantage of new opportunities.

To avoid the status quo effect, set specific goals and create a plan for making changes, which provides a sense of direction and purpose. If you are using a financial planner or advisor, make sure to meet face-to-face at least annually to review your account and make adjustments regularly. Many people struggle with change, but life changes every day, so why not use it to your investing advantage?

Bandwagon Effect

The bandwagon effect is when people favor a particular behavior or belief simply because others are doing the same thing. This bias is often observed when people are influenced by the actions or opinions of a large group of people, such as in politics, fashion, or marketing. The bandwagon effect can be a powerful force, as people often desire a sense of belonging and feeling part of a larger group.

However, these biases can also lead to irrational decision-making and prevent people from thinking critically about their choices. To avoid falling prey to the bandwagon effect, take time to consider the facts and make decisions based on objective information rather than