My Financial Planning Sins
By John Owens, CFP®, EA, ECA
I like to think I value transparency as much as I hate hypocrisy and while that means I should probably run for political office someday, I’d like to talk about those two topics in a very up-close and personal way. I’d like to confess my own financial planning sins and also rationalize them. There are many rules of thumb out there when it comes to planning and while they apply to large subsets of people, they don’t apply to everyone. We talk about this all the time with clients - how their situation is ‘atypical’ and what that requires. So with that in mind here’s my heart-to-heart confession and rationalization of the planning rules I break in my own life. I ask not for your forgiveness, but rather your understanding.
1. The 3-6 Month Emergency Fund
Ahh, the Emergency Fund. The first thing we learn in CFP® prep - and the foundation of any financial plan. Typical recommendations range from 3-6 months of living expenses + other anticipated short-term expenses. For some of our clients, the target is closer to a year. I blatantly flout this recommendation - my emergency fund is typically in the 24-30 months of expenses range. Blasphemy!
You may think that’s ridiculous, and it may be, but to me it makes sense. As a single person, my income is the only household income - which would naturally skew my emergency fund target slightly higher than that of a dual-income household, but I’m still at least 12 months past the target amount on any given day.
So, why do I keep so much cash cushion? I like it. I like the peace of mind it provides. I like knowing that if AJ and Shane get sick of me someday (EDITOR’s Note from AJ: we won’t!) that I’ve got quite a bit of runway. This emergency fund was a significant factor in why I made the leap to BKFI last summer - and leave a firm that was 35 years old. Change is scary AF, but I don’t regret it - I’m glad I had the financial peace of mind to do something that I perceived as a risk but turned out to not be one at all.
And the emergency fund gives me the sense that I can reasonably handle most potential financial surprises that could happen - like needing to care for a loved one and take time off unexpectedly, travel more frequently for family reasons, or deal with an expensive personal illness. I know so cheerful to think about… but the crux of it is that if something bad happens - I won’t have to worry about the financial part as much as I would if my cushion was only 3 months’ expenses.
Finally, I can rationalize this cash cushion one other way - I’m pretty damn frugal. So while I blow most emergency fund targets out of the water, it’s really not a TON of cash to hold onto. And with this in place, I don’t need to add to cash savings each month - I’ve got that base covered.
2. The Health Savings Account (HSA)
Many clients have heard me NERD OUT about HSAs. They’re the most income tax efficient savings vehicle out there - reduces income on the way in, grows without being taxed, and is tax-free for most medical expenses. And barring some huge political realignment in the US in the near future, odds are we’ll all have significant out of pocket medical costs.
With all that said, I don’t use one, I haven’t ever used one, and I’m not sure I ever will - tax efficiencies be damned! This is because an HSA requires a High Deductible Health Plan (HDHP) - which in many cases means that the first several thousand dollars of medical expense is out-of-pocket. That can mean that your annual trip to the doctor or occasional visit to a specialist costs several hundred dollars instead of a $30 co-pay. And I don’t know how often I’m going to go. Luckily, I’ve been pretty healthy most of my life (save for that kidney stone back in 2016, yikes!). But I can imagine a situation where I go the whole year feeling great, get sick in December, and get hit with my deductible in back-to-back months due to timing. An expense that may have cost a few copays for doctors visits and prescriptions becomes $6,000 out of pocket overnight!
I also know that I’m frugal (see sin #1 above). And that knowing that I have this big deductible will make me less likely to go to the doctor when I’m not feeling well - which is a terrible idea. The $30 co-pay is not much of a speedbump at all, thankfully, and I know that if something is wrong, I won’t hesitate to talk to my physician.
So while I’m leaving an incredibly tax efficient account on the table, I’m doing so very consciously and doing it because I know myself all too well. I like as much predictability as possible in my surprise expenses and I like to know that I won’t hesitate to see the Doc if something is wrong - and you can’t really put a price on that.
3. The Roth Conundrum
If you’ve ever seen the film Minority Report, you may be familiar with the concept of future crime - apprehending criminals BEFORE they do something wrong. I’m not a lawyer, but I’m pretty sure that means they didn’t actually commit a crime in that case… Anyway, consider this a future financial planning sin - a rule that I’m planning to break when it comes to Roth savings.
As a general rule, we often plan for Roth IRA funds to be the last dollar you spend in a retirement withdrawal plan. The money is growing tax-free, you want that tax-free growth as long as possible, so spend down your other assets first and save the Roth for later. Conceptually, it makes a ton of sense. But practically speaking, we don’t know which dollar is our last dollar in most cases. And unlike pre-tax or traditional savings, I’ve paid the damn taxes on my Roth IRA and Roth 401(k) funds.
So, my future crime is that I’m not going to spend my Roth savings last or at least I’m going to try not to (again, some of this is in fate’s hands). While my long-term plan is for the check to the funeral director to bounce, that’s easier said than done. So if there’s money left over when I have to go face judgment for these financial sins (and a few others, probably), I’d like it to be pre-tax.
My beneficiaries, whoever they may be at that point, can inherit my leftover pre-tax savings instead. And then THEY can pay the tax on those funds!
They should be happy I left them something. But since I bit the bullet and paid that tax on the Roth savings over the years myself, you can be sure that I wanna spend those tax-free dollars before go to the big financial planning firm in the sky.
I suppose these are all venial in nature, but they do buck conventional wisdom and run counter to the recommendations that we often make. That’s ok. The key to a successful plan is making sure that you’re achieving your long-term goals with a reasonable level of risk. And thankfully, my plan should remain on track despite my transgressions and potential planning inefficiencies. As a lover of transparency and hater of hypocrisy, I hope that you too can understand my planning sins.