Mind Over Money | BTalk Australia

(13min 03) On today’s BTalk Australia Phil Dobbie talks to Adrian McMaster, author, psychologist and financial adviser. Adrian’s book “Mind Over Money” (Wilkinson Publishing) explains how the way you live can determine how wealthy you are. He explains the three simple rules and how to implement them, together with the two powerful emotions that drive our finance decisions.

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• Today’s Transcript

Phil Dobbie: Hello I’m Phil Dobbie and welcome to BTalk Australia. Today getting your mind around your money. We’ve said before that when it comes to money people can behave irrationally, yet financial advisors tend to be pretty straight up and down people. Wouldn’t it be great to find a financial advisor who understands people? Well Adrian McMasters does. He’s a finance guy who’s also a psychologist and he’s an author. He’s written Mind Over Money, which is a how-to guide to managing your finances. Now, Adrian, you’ve got three simple rules — I think everyone has these. Maximise income, minimise expenses and optimise your investments; nothing terribly new there but do we all do all of those things?

Adrian McMaster: No. Most people start with the third thing, Phil. Most people when they decide that they’d like to become wealthy go and buy a book about investing, go and see a financial advisor and say, “Show me the investments that are going to make me wealthy.” Really, as I say in the book, investment is the last thing that you should be thinking about. That’s not to say you shouldn’t be thinking about it; but if you want to become wealthy you need first to address your income, and from there you need to look at your expenses before you then turn your attention to investments.

Dobbie: Now it’s interesting you say about the investment thing and I can understand that. A lot of people are going to be feeling very sorry for themselves because of that. But I’d assume a lot of people are also saying, “Hey look I just want the best paying job; I want to maximise the amount of money I’ve got coming in through the door.”

McMaster: That’s right and as we all know, we know plenty of people on high incomes with no wealth. So, optimised income, or maximised income, if the expenses aren’t minimised as well some people’s wallets are a bit like a vacuum; anything in it will be cleaned out and so we need to look at the way people have been spending their money. But there are some tried and true formulas for maximising your income. They’re quite basic things but they’re things that bear repetition and bear reminding for people. Basically the employment market or the business world is governed by laws of supply and demand; so if you’re going to be an employee and some people psychologically are destined never to be employees, they’re not going to be masters at their own ship, if you’re destined never to be an employee then you’d be looking at a trade or an occupation or profession where demand is likely to stay high. Right now this is not a bad time to be a psychologist I must say. And things like medicine are also quite robust against economic cycles; history shows that it’s people in those professions whose income is much more robust as I say when things turn down; because it’s the sort of thing that people are always going to want to buy.

Dobbie: There’s a trade-off of course as well, isn’t it, the whole work life balance thing so you could go all out to maximise your income even if you don’t spend it all. You can have a pretty miserable existence if that’s your be-all and end-all.

McMaster: You can have a miserable existence and it’s very important that you maintain your health basically and maintain your personal integrity. Those two things are key and one of the things I often remind people, and we talk about in the book, is your career is actually a marathon, not a sprint. A lot of people look to sprint. In most cases, people’s income rises with experience and so you’re looking to keep yourself in good working order for longer and that’s a matter of not burning out. I often see people who are maybe going at it a bit hard — often when people take on a personal mortgage and that sort of thing and they sort of get into their mind, well we want to be short of these things in seven or eight years. Sometimes it’s better to say well let’s just go with the 25 years and enjoy the journey along the way, and be somewhat confident about the way the future will unfold.

Dobbie: And make sure I’m still around in that 25 years.

McMaster: Exactly yeah. You can’t take it with you; there are no pockets in a shroud as they say.

Dobbie: So you mentioned that there’s a lot of people who may be on high incomes, but they’re not that wealthy because their expenditures have gone up as well. Do you think that’s the pitfall a lot of people fall into, as they get more money they just spend it?

McMaster: Can do yes, can do. In the absence of a plan they can do. One of the interesting things though about expenses is that there are some particular expenses and this harks back a little bit to your previous question — there are some particular expenses that we can actually influence. Some things we can’t influence. We need to eat, we need to live somewhere, we need to have a holiday, etc, etc. But there are things that are much more within our influence and probably the single biggest predictor of a person losing wealth is a marital breakdown. If a person is working so hard that they’re not attending to their personal relationship they may find as we talk about in the book, that they may have maximised their income but they’ve also more than doubled their expenses because they lose that family unit.

Dobbie: That’s right. You halve your net worth. I’ve been there. The other thing I guess is controlling your tax. I mean that’s an obvious place to start although when you’re trying to control your expenditures, there’s not a lot you can do with that really, is there? You can spend a long time trying to minimise your tax but is it ever really that effective?

McMaster: It can be, it can be. There’s more tax breaks available to a self-employed person, it must be said. But they say, particularly in Australia with this phenomenon that we know of as middle class welfare, by taxes going out but also things coming back in, in the form of family tax benefits and that sort of thing, there’s usually more available to people than they know. And my advice to people if they’re looking for a financial advisor would be don’t worry so much about an investment advisor, particularly in the early days, but get yourself a really good tax agent. Because I think it’s that person who will allow you to keep more of what you’ve earned and thus make more available for investment. Investments really is the easiest part, and there’s some very simple things that we capture in the book, tried and true things: index funds, residential property and that sort of thing that can be accessed usually without an advisor. But tax is one area where it’s very difficult for the average person to remain or become conversant with every tax break that they might have available to them; so my advice is usually to people “well why don’t you start with a good tax agent if you’re looking for advice”.

Dobbie: Now tax advisors are one thing. Taking advisors in any field, particularly investments I guess of late, how can you be sure you’re not going to get an advisor who leads you down a garden path? A lot of these advisors are really sales people aren’t they with a fancy job title? How can you sort out a good one from a bad one?

McMaster: You’re looking for a confluence of interest basically so you’re looking for someone who will only get paid and whose business model depends upon you being a happy and successful client. So what you’re really looking for is at what point does the advisor get paid? Avoid commissions. Basically a rule of thumb for me is that if you avoid all investments that have a commission attached to them, you’ll miss out on some good ones, but you will also miss out on all the bad ones. You will also miss out on the bad advisors because I’ve never met a bad advisor who takes fee for service. I’ve met some good advisors who are on commission, but all the bad ones are basically on commission as well. My advice would be that you avoid that, stay in control; pay a person by the hour or by the job. As I say, stay in control. If you’re not happy with their work, you end the relationship and they no longer get paid. So the confluence of interest — it’s in their interest to keep you as a happy client. They’ll keep working with you and for your best interest.

Dobbie: Now I’ve seen a lot of people landing themselves in trouble because they borrowed too far to invest; they’ve been too highly leveraged. Why is it that people have taken such high risk? Is it pure greed and how can you tell you’re not one of those people?

McMaster: Unfortunately often you can only tell with experience. These are the things we often only see in hindsight. There are two dominant emotions that drive people’s attitude to money — one’s fear and one’s greed. Up until around about this time last year, greed was really dominating. Here in Australia, we’ve had 16, 17 years of really out and out growth and people forgot about risk. People forgot that things can go wrong. So people did get greedy if they did. There are some rules of thumb around how much to borrow. In the environment of low interest rates that we’ve had up until a few years ago, people were doing their thumbs, as if those low interest rates would always pertain. So I always say to people when you’re doing your thumbs, add two or three percent to each point in interest rate and is it still affordable? Because as we’ve seen over these last few years, it’s certainly not unexpected that interest rates can rise by that much and that’s when people find themselves in hot water.

Dobbie: Interestingly, I asked the bank on this podcast what they allowed for and they said half a percent.

McMaster: Yes, but remember the bank wants you to buy debt. They sort of know in most cases people will pay it back. They’re not very interested in how and they don’t care about the effects on your relationships if you’re having to work extra hours and that sort of thing to repay them.

Dobbie: Is there a danger now that a lot of people have been burned in various ways that that other emotion fear is going to hold us back from making sensible decisions. Might we be losing out on opportunity because of that fear?

McMaster: Very much so, very much so and that’s happening, we’re seeing that. The Australian market, the share market for example in the last two months had fallen by more than European and American markets even though our economy is actually much more healthy than those economies in general. So we’re seeing a preponderance of fear at the moment. One of the best ways I think to manage by fear and greed is to become a very regular investor. I really like an idea called dollar cost averaging, and I talk about this at length in the book, where a person decides I’m going to invest X number of dollars each month, for example, into a particular field, and I’m going to make that investment regardless of the current state of the market. You can get some really nice surprises; I do it myself in October. Sometimes I forget because I’ve got it all set up by electronic banking; sometimes I forget that I’m about to do some buying and I don’t remember until I get the receipt from the index fund manager when they send it to me, and I realise that I’ve bought at the very low point of the market for that month. You won’t do that every month. Some months you’ll buy just before the market falls and so you’ll be buying at a higher point in the month, but what you take out is the ability to be your own worst enemy; to say look, “Things have gone really bad so I’m going to stop investing”, which is what a lot of people are doing now and they miss out on the really cheap prices.

Dobbie: So it’s really a long-term view you’re talking about, isn’t it?

McMaster: Absolutely.

Dobbie: You’re taking out all those short-term snap decisions.

McMaster: Yeah that’s right. If you’re investing into a volatile market like the share market, you shouldn’t be investing into it money that you’ll need in the next four years. That’s a rule of thumb for me. So you need to be able to wait four years to get it back. Our market’s been down for about 12 months; I’ll be very surprised if it’s still where it is now in three years time; so people who invested this time last year have got another three years to really make up, make back at least some of what they’ve lost. And it’s a great way of managing timing risk.

Dobbie: So it seems that the key is really a softly, softly approach and a long-term view and not being phased by the shifts in the market, just looking into the distance.

McMaster: You really know you’re there when you don’t even watch the news each night to see what the All Ords did today. And when you get the receipt in the mail, “Oh, I bought something last week and I forgot about that”. That’s when you’re really being a smart investor from my point of view.

Dobbie: That’s because you’re too busy having a good time, enjoying a fine wine and all the good food that you’ve been able to afford.

McMaster: Well, from a wealth creation point of view I’d rather you were off doing some high earning occupation, but yes you’re getting the point.

Dobbie: Listen it sounds like a very good read for Christmas so you can have a really good 2009. Mind over Money is the book. It’s published by Wilkinson Publishing. It’s got your smiling face on the cover with someone’s family on the beach. I hope that’s your family in the background.

McMaster: That’s my family, yes — my wife and children are very, very happy with that cover.

Dobbie: And they’ve stuck with you, which is good. All right thanks so much for your time today.

McMaster: It’s a pleasure Phil.

Dobbie: Next time on BTalk Australia we talk to the MD of Tourism Australia.

Jeff Buckley: This opportunity was somewhat unique in that we had a movie called Australia, about Australia, and it was going to get enormous exposure so the opportunity was to see what we could do to leverage.

Dobbie: That’s Jeff Buckley. He talks to us about the latest Baz Luhrmann movie and the Australia TV commercial that goes with it. That’s next time on BTalk Australia.