But my big thing was okay, I know I’m supposed to save money. And like, I know I’m supposed to save in my 401k. And so I’m gonna try to max it out. And I know I’m supposed to put money away from emergencies. And I feel like that was the most important thing I did. And I did it at such a young age, even when at a young age maxing out my 401k was kind of a stretch, I didn’t come out of school with a big salary. It was a big stretch. And so I remember getting on, I don’t even know if this website exists anymore.

But CNN had like a money tab and a personal finance tab. And I remember reading that all of the time, every single day. And then there were some blogs like Get Rich Slowly and Five Cent Nickel and during the Great Recession, you know, I was all over those and learning like different ways to save money in a creative fashion. But ultimately, by learning the profession and working with clients, I think it’s how I got most of my background and obviously, you know, some of the designations I have in the curriculum there that drove that.

But if you’re a millennial who is just starting out, the most important thing you can do is if your company has a retirement account, I feel like that’s always the place to start. And there’ll be lots of people trying to sell you stuff, whether it’s, you know, investment advice, and it’s well-intended or it’s insurance or whatever…

Until you’re putting away as much as you can in those retirement accounts, you don’t really need anybody to sell you stuff or give you advice. And now there’s all these apps out there that help so like I’ve been Chief Investment Officer of a platform called BrightPlan, which really focuses on corporate financial wellness, but it looks a lot like a Mint or a *inaudible or personal capital or something like that. And my goodness, there’s so many good options now to help you make good financial decisions right out of the gate.

Robert Leonard 5:58
Is there anywhere specific with a retirement account that somebody should start with?

Peter Lazaroff 6:46
Well, I think if you have a 401k account, that’s usually the place to start. And that’s largely because usually your employer is going to match your contribution. So if you’re making $100,000, and they have a 30% match, well, you put 3% of your salary and they’re going to give you $3,000 of free money. And it’s like the only place in the world where you’re going to double your money instantly at no cost. And so that’s a super important contribution.

I’m just such a big believer, even though there are some plans that are bad, which is a little bit subjective and a little bit objective. Bad usually means like high cost or poor investment options. Your employer’s retirement plan is usually the best place to start. The secondary place after that I tend to think is opening an online bank account and starting an emergency fund. So my online bank account, I think I’ve had it since 2008. And my checking account and my primary bank I mean, it’s more just like a train station where a paycheck comes in and all the money leaves you know, some it goes to the emergency fund, some it goes to my automatic bill pay, some goes to my credit cards. Very little of it actually lives in my bank account.

And part of the reason these online banking accounts are so useful is they pay so much more interest because they are a brick and mortar bank and they don’t have to do all the things other banks do. I think those two steps, retirement fund and emergency fund… You know, you can make a lot of financial mistakes in your life. If you got those two things in place, like those two things can really cover up a lot of bad choices throughout the rest of your life. And so if you can nail those, you’re on a real great track.

Robert Leonard 8:19
Yeah, it doesn’t really get much better than that hundred percent automatic, instant ROI that you get. Now, for an emergency fund, how much should someone be targeting to save in that account?

Peter Lazaroff 8:30
That’s a good question. So it kind of ranges anywhere between I’d say three and 12 months of living expenses. And living expenses, just to be really clear, are like the type of living expenses you would have if you couldn’t work. So if you just took all the expenses you have on average every month and multiply that by six, that’s six months living expenses in many ways, but, you know, if you’re some reason you’re out of work for six months, a lot of those expenses wouldn’t exist. So you’re looking at more like rent and utilities, food, insurance, andd gas, you know that type of things.

I would say that the more job security you have, the less of emergency funds you need. So I think I’ve certainly was shaped a lot by the fact that I came out of school during the Great Recession. I was very fortunate to have a job all throughout, particularly in finance, where a lot of people were losing their jobs. But I do think that it did sway that I aim for having 12 months expenses in my personal emergency fund, despite the fact that I feel like I have a high amount of job security.

If you’re doing freelance work, you need more of a cushion. If you’re a tenured professor or a doctor whose income is relatively recession proof, you probably don’t need as much. I feel like there’s also some amount of psychology involved with what helps you sleep at night. But I do think as I’m talking about these big numbers, these six months, 12 months living expenses, and I’m freaking out your listeners, it’s important to realize that these things aren’t built overnight. You know, emergency fund is something that happens incrementally, and I know my emergency funds started out with me putting $25 a paycheck into an online bank, which really is not that much.

And once I realized every six months or so I was bumping it up by another $25, then maybe by another 50, bumping it up by amounts I wouldn’t really notice and making sure those contributions were automatic. And what happens over time is compound interest takes over and a saving habit amounts to something that doesn’t seem like a lot in the beginning, but ultimately it grows to something pretty reasonable over time.

And if you are trying to reach that certain threshold of a certain size emergency fund, you can use windfalls like a tax return or an inheritance which you know, usually means somebody has passed, which is not great, but it is a windfall or a bonus. That’s the way that perhaps you can accelerate your path towards building a healthy-sized emergency fund beyond just the recurring savings.

Robert Leonard 10:53
Yeah, that’s exactly what I was gonna say about that it is seemingly daunting. You know, when you talk about six to 12 months, that might be lot of money depending on how much you have in expenses, so that could definitely seem daunting to a lot of people. So, as you said, keep in mind that it can be built over time. It’s not like you have to do it all overnight. And the other thing is to even get started on this, you need to know what you’re spending. Some sort of budget, you need to know what’s coming in and what’s going out every month. So like you mentioned, I personally use Mint for my own. So in order to know and develop an emergency fund, you need to know what you’re spending. So I would start there, and then build your emergency fund from there.

Peter Lazaroff 11:32
Yeah, even if you don’t want to budget and you download Mint, and you get like one year’s worth of data… It will take your one year spend, divide it by 12, and there you go. That’s what you spend every month. You’d be like, “Well, I had this like one time thing and this month and you know, these gifts this month.” Well, there’s always these one time things.

So what you spend is what you spend. The clients who come in here, I feel like they always underestimate their spending and they’re always a little surprised at how high it is and a little embarrassed. It’s like there’s nothing to be embarrassed about. But when you’re saving for something like an emergency fund, you know, these savings rates.

And, you know, I had mentioned… I guess I mentioned in our conversation before the show, I have two small kids. And they, you know, a lot of people, particularly millennials are starting to ask, “Well, how do I like financially prepare for children?” And the answer is you don’t, but a good savings rate helps because if you’re saving a lot of money, and you have children, well, then you just decrease your savings rate, and you don’t lose your lifestyle in the process. And so I think, these habits, the sooner you get into them, the easier these other big expenses that are coming down the pike will be to absorb.

Robert Leonard 12:37
So what stops someone from getting started? What do you see as the most common thing that holds people back?

Peter Lazaroff 12:44
I feel like all of the choice that’s out there. So there are so many choices of where to start to begin with. And then once you’ve even chosen where to begin, there’s even more choices and it seems complex and I think there’s some research that shows that more choices tend to lead to worse decisions or no decisions. And they see this in 401k plans, you know, company retirement plans where there’s 20 different mutual fund options. People struggle more than if there’s only six.

And there’s stuff like in the grocery store, they’ve done those, you know, when you go to a grocery store on a Saturday morning, and they have samples of all the different foods out, they’ve done studies where they put samples of different jams. And there was one Saturday where if you try a jam, you got $1 off coupon, and they’re 20 different varieties of jam. And then the next weekend, they did it and there was only I think there was only six. And the people who saw the fewer jams on the table bought more jam than the people who saw 20.

We just don’t like all this choice. And so people get a little bit paralyzed not knowing where to start. It’s actually part of reason I had created something called smartmoneyquiz.com. It’s just nine questions to be like, well, where should I start and that sort of allows people to at least get a starting point because none of this stuff is hard. It just takes a little bit of guidance. And the more things you can automate, the less discipline that’s required on your part.

Robert Leonard 14:09
Yeah, I completely agree with that. I think somebody should just take action, get started. And then even if you don’t know it all, just know a little bit and then get started. Even if you’re a little overwhelmed, and then you can figure out the rest along the way. You’re likely not going to make a decision that’s going to really hurt you in the beginning. So just start after you’ve learned a little bit and continue on.

Peter Lazaroff 14:30
Nobody’s an expert, and especially if you’re doing things like focusing on your company’s retirement plan and emergency fund, you almost can’t make a mistake. I mean, you definitely can but if you’re putting money in there, you’re gonna be fine. And you know, I mentioned smartmoneyquiz.com you know, if you’re really confused and you’re listening to this, well just pop it up on your cell phone or when you get to your desk at work or at home, you know, take nine question quiz and I’ll point you where to go first.

Robert Leonard 14:56
And even if you do mess it up, don’t stop learning yet. You’re young, you have time to fix it. And don’t stop learning just because you get started, keep learning. And then hopefully, you’ll realize what you did pretty quickly and you can fix it. Now, let’s assume somebody has gotten started. What is that biggest mistake you see them make? We’re talking about some issues or things that people could do. What is the biggest mistake you see people make and how could they avoid it?

Peter Lazaroff 15:20
So I’m not sure that I can choose one. Two things came to mind real quickly. I do think, and I’m seeing less of this in the past few years than I saw several years ago. But people buying a starter home I think is a pretty hard financial decision. Usually, especially because a lot of our parents have built up a lot of their net worth through their homes.

It’s tempting to forget the fact that inflation did a lot of that net worth growing for them in their homes. And when you buy a starter home, you’re only going to live there for like three or four or five years, you’re probably going to end up losing money on that transaction, even if the home appreciates in price because when you take out a mortgage, most of your payments, the first seven years are just interests. You’re not really building up any equity.

And you ultimately put money, you dump money into the house to make improvements and buy furniture. And you I see a lot of people buy homes when they’re single, and then they get engaged. And I’ve never seen a spouse like the person’s house. You know, I’ve never seen someone get engaged in the person who didn’t own the house is like, “Yeah, I love the house.” Never. It never happens, they always move.

And so I think if you can’t envision living in a house for 10 years, it’s usually not a good move, and a lot of people buy because they just want to own a home or they’re tired of paying rent. Like I get that paying rent feels like throwing money away. But in reality, if you aren’t going to live there beyond seven years, you’re just going to be paying money and interest anyways. And when you buy and sell a house that’s 6% to a broker each time and so you know, there’s ultimately a ton of cost that goes into it.

The other big thing I think is that young people often buy some form of permanent life insurance too early in life and that can be expensive and hard to get out of and there’s a really compelling sales pitch behind it. But generally speaking, particularly if you don’t have any kids, you don’t have a house, you don’t even really need insurance. But, you know, to get into something like a whole life insurance or permanent life insurance definitely limits your options as you get older. And if you decide that you want to back out, it’s not particularly cheap to do so on the tax front.

Robert Leonard 17:21
Let’s talk about lifestyle creep. What is it? And how can somebody avoid that mistake?

Peter Lazaroff 17:27
Well, I don’t know that anybody can completely avoid lifestyle creep, to be honest, because if you think about it, we get a lot of raises in our early years, you know, the biggest raises tend to come in your 30s, late 20s and 30s. And your salary tends to peak in your 40s or 50s. But as we get raises, we tend to spend a little bit more and in an ideal world, if you’re getting like a definitive raise, you’re on a salary and you’re earning 20% more next year. You know that in advance. Well, you should really make a plan to save a portion at raise. I’m a believer.

Yeah, you can expand your lifestyle if you’ve earned it. But what tends to happen over time with something like lifestyle creep is it starts with perhaps adding premium channels like maybe at HBO and Showtime, or you get nicer seats at like sporting events or concerts. Or you pay for upgrades in hotels or airlines, you buy a nicer bottle of wine or you go out to dinner more frequently. All of these things aren’t harmful individually. But when you put them all together, what ends up happening is that spending amount that you have, you know, we talked earlier, what you spend in a year and then divide by 12.

That’s what you spend every month… Lifestyle creep kind of creeps up on you and your spending is much higher than you would have thought. And if it’s so high that when you get to a place where you realize you have to cut back, it’s not going to feel very good. It’s really hard and I think we as humans, we don’t notice gradual change much.

So I put my hand in a pot of water and it started heating up slowly, I wouldn’t notice the temperature rising for a while. You would not notice the incremental increase in temperature and eventually it would be boiling. You’d be like, “Oh my gosh, my hands boiling.” But if you take your hand out of that warm water and dunk it into ice water, that’s going to hurt.

And that’s a lot of what is happening with lifestyle creep. The slow gradual increase in spending that typically is aligned with the raises we get throughout life, or just some lifestyle expansion. So I mentioned like, getting married, having kids, buying a home, those are all things that somewhat permanently increase your outlay. That’s not really the lifestyle creep I’m thinking of. The lifestyle creep is usually truly lifestyle. Things that are fun things, that aren’t needs. Needs and wants can be a blurry line, but all those little luxuries adding up over time, you have to have a plan to save and erase, otherwise those things will overtake your finances and make it really hard to retire someday.

Robert Leonard 19:48
It’s okay to increase your expenses a little bit if you’ve earned a raise. I mean, you’ve earned it. You’ve worked hard for it. It’s okay to increase your expenses a little bit. It’s just… I think the key thing is to not increase your expenses more than your raise.

Peter Lazaroff 20:03
Yes, unless you had a kid and then you sometimes can’t help it. But hopefully you had a good savings rate to begin with. And you know, most people, if you’re on commissions or if you’re doing freelance work, it’s a little different. But if you have a job that salary or salary plus bonus, like you should have a good idea at the end of the year if you’re getting a raise and what it looks like.

And the first thing you should do is set up whatever your automatic savings are, is to save some portion of that. And maybe even commit to saving all of it for just a few months and see how long you can go before you dip into it. If you’re a competitive person, that’ll work well for you. Some people just can’t help themselves, or sometimes they’ll do one big splurge, and then save it for all of time. There’s no right answer for everybody. Key is just figuring out what is right for you.

Robert Leonard 20:48
In the past, you’ve written about these three crucial techniques for building a strong financial house. Can you talk to us a bit about what those techniques are?

Peter Lazaroff 20:57
Sure. So I think the first technique is really focused on intentionality. And so I have some worksheets on my website, some goal planning worksheets that are also in my book, “Making Money Simple,” that really force you to be very intentional with both your savings and your spendings. And so I think a lot of times, personal finance content, financial advisors like myself focus on the saving and investing side, but also trying to align your spending with your values. So there’s an abundance of research that shows that experiences generate more happiness than stuff.

So if in your goal sheets, you have something like a huge vacation with friends, or five year anniversary trip or something like that, and then you have a flat screen TV, I’m going to be encouraging you to take the trip. And the research shows that even an elaborate date night can have more lasting happiness than a brand new iPhone. And so I think that experiences over stuff is an important piece of it on the spending side.

And there’s stuff like purchases that great time or you know, finding ways to make things a *treat. So within that intentionality within the savings plan, it’s really writing out goals. Being very clear what they are and what they’re going to take, so that you know what you’re doing. So that’s the first piece. A lot of times I say like financial success isn’t magic. It’s just simply engineering. And so with that intentionality piece, you are really laying out the plans for what you’re doing.

The second crucial step I would say is automation. And automation was hard when I came out of college in 2007. There were ways to automate your finances a little bit, but not nearly the way that you can today. And the most obvious form of automation is when you contribute to your retirement plan right out of your paycheck.

You can move money automatically to banks, to HSA accounts, to IRAs, to college savings accounts to auto payments, mortgages, built-in everything, everything can be automated. I mean, if you have rent, a lot of people will have allow… landlords will happily take an automated rent payment. So I think that automation is the second crucial piece and then the third is investing. And boy, I mean, we could talk for like five hours and then take a little break and then talk for another 25 hours.

But the real key to invest is your first year, you’re trying to save enough money for something and everybody wants to retire at some point. And retirement may mean a lot of different things. It may be one long 20 year vacation, it may be just having the financial freedom to do whatever it is you want. I mean, I think a lot of people in our generation envision working later and just doing work they really love. But how do you get to a financial place where you can do exactly what it is that you love? Investing kind of equips you to do that.

So really, you’re just trying to outpace inflation, because you can’t just save in cash, it won’t work. The problem with investing is that we are hardwired to make poor investment decisions. Everything in in our DNA goes against what good investing would be. The patience and discipline and removing emotion from decisions when they’re highly emotional events happening. You know, it’s really difficult and so I do spend a lot of time in the book talking about that. I do try to write a lot of content about stay the course, you know, know that market downturns are going to happen. I mean, heck, I got out of college and the market dropped 60%. That’s a lot of money.

Now fortunately, I didn’t really have any money at that time. So maybe it’s scarier when you have a lot of money to lose 60% of it. But in reality, 10% drops, 20% drops, they happen all the time. And that’s what makes investing give you higher returns or these losses. And there’s a lot of components to that third crucial step, that investing step, that makes for successful investing. But I do think some of those basics, you can learn from a lot of good resources. Hopefully I’ve added to that list of good resources out there.

Robert Leonard 24:42
Let’s fast forward a few years and assume somebody has sort of gotten their financial picture in order or they’re at least along the right track. And they maybe want to take it a step further. At what point does somebody need to consider hiring a financial advisor and does everyone even need one?

Peter Lazaroff 25:00
So I think that if you use a professional, whether it’s in finance or law or medicine, actually definitely in medicine, you’re going to have a better outcome. The challenge with financial advice is how do you afford somebody who’s going to give you good, unbiased, objective advice. I think that the proliferation in robo advisors has helped, particularly from the investment side. And because it used to be that you would have to work with somebody who is paid based on what they sold you. And that’s how you get your advice.

That’s how everybody got their advice until they’re independent advisors. But a lot of independent advisors have account minimums that make it prohibitive to work with them. So I do think as soon as you can meet an account minimum of a robo advisor, that’s when you should use one. I think the sooner you can outsource that investment advice, the better.

So I used to mow my lawn. We bought our house in 2010 and we got a house with a big yard. I used to think I want a big yard. After having a house with the big yard, I now know that’s not something I want. But we had it for eight years, actually, I guess maybe nine years. And it used to take me like 90 minutes to mow the lawn. And I tried to do it on a Friday, Saturday or Sunday. It need to be mowed every six days or so. But sometimes it’d be Saturday. And look, I just didn’t want to do it either as being lazy or I want to go do something with friends. Or maybe the weather didn’t look great or something came up where I wouldn’t mow the lawn, and I wouldn’t have checked the weather and, “Oh, well it rained and I can’t do it Sunday and I’m like, I go to work Monday.” And suddenly my grass is out of control and it’s long and then I gotta cut it.

If you ever mow your lawn with really long grass, it takes forever and it looks awful. Like for the five years that I was mowing my lawn on my own like, I didn’t kill the grass. It was fine. It looked like it wasn’t overgrown most of the time. But the year that I hired someone to mow our lawn, it looked so much nicer. The guy cutting it was doing all this stuff I would have never thought to do. He is cutting it in multiple directions. He was doing different heights of grass based on like the sun exposure. He was seeding strategically. He was going around the the flower beds and ultimately, I got a not just a nicer looking lawn but a healthier lawn. And I think that finances and investing are a lot like that. Anybody can do it on their own. But it’s really hard to avoid mistakes and a lot of investment success comes down to minimizing mistakes, and just getting the heck out of the way of compound interest.

So your question, this was the super long response to when’s the right time to hire advisor. If you have investment dollars beyond your company retirement plan, go ahead and find a robo advisor. In fact, you know, I mean, even though BrightPlan is really focused on corporate financial wellness, I guess you can go to brightplan.com/Peter. And you know, you can use that platform and it’s my firm and Certified Fiduciary by the Center of Fiduciary Excellence, but you can also go to one of the other dozens of robos out there and get low cost investment advice. As long as you kind of set it and forget it, you can be on a good path. When you start having more complex needs like you need an estate plan or taxes, we’re trying to evaluate insurance, it is really important to find an advisor who’s a fiduciary.

Robert Leonard 28:07
If someone listening to the show was, after hearing that, decides they want to hire a financial professional to assist them with their money, what are some of the most important things they need to look out for? And what question should they be asking them?

Peter Lazaroff 28:21
The most important thing is that you work with someone who’s a fiduciary, which means that by law, they have to put the client’s interests above everyone else’s including their own. And the important thing about working with a fiduciary is that you want to get their fiduciary commitment in writing, because some people will say, “Well, of course I act in my clients best interest.” Okay, will you put it in writing? “Well, I can’t put it in writing because compliance, you know.” If they won’t put it in writing, they’re not going to act as a fiduciary for you.

And then similarly, there are some people who can act as a fiduciary while developing your plan, but can remove their hat as fiduciary and act under a different standard to sell you products. So unless you’re getting someone who’s acting as a fiduciary at all times, you can’t ever be certain what… you know, if you’re getting unbiased objective advice. So I think that’s one really, really important piece.

I personally think it’s nice to work with someone when you know they have a deep bench of talent, or if they have a wide range of knowledge, you know, because one *inaudible… I work at a firm of 65 people where my sole focus is largely just managing the money that we have here. There’s, you know, I used to be a solo advisor where you’d have to be responsible for knowing everything about investments and doing all the due diligence in taxes and estate planning. Just a lot of work for one person to do and if that one person gets hit by a bus then like, what do you do then? So I’m generally pretty biased to finding someone who has at least a succession plan or a backup plan or a deep bench to cover you but that fiduciary piece is definitely the most important to me.

Robert Leonard 29:52
Is there a way to check a resource or a website or anything to confirm that somebody is actually a fiduciary and is there a governing body?

Peter Lazaroff 30:02
The SEC is who governs registered investment advisors, what people call RIAs. And they have this thing called a Form ADV Part 2. So all this like jargony stuff, you’re like what in the world, I think you know, a decent place to go is you can go to brokercheck.com, and you can type in a person’s name. And you can get background checks if there’s any complaints about them. It will let you know if they are registered with the SEC or not. And if they’re not registered with the SEC, they’ll have a little link saying we’re going to take you to the SEC site. That’s a good sign.

But generally speaking, you should be able to ask outright and ask for them to put it in writing. And if they won’t do it in writing, then I think that’s your best bet there. Because there are ways to claim your fiduciary and then still kind of remove that fiduciary hat at times and honestly, I think it’s unfair to the consumers that it’s that difficult to figure out whether or not someone’s acting in your best interest because if you go to the doctor, and he or she prescribes you medicine, you mean you just assume that they’re doing it because it’s in the best interest of your health, not because they’re getting a trip to Hawaii for it. So why shouldn’t financial professionals be held to the same standard as a CPA or an attorney or a doctor? But it is unfortunate. You go to brokercheck, as I can’t remember which brokercheck.org or brokercheck.com. You can put in someone’s name. That can be a first step to help you out.

Robert Leonard 31:29
Yeah, it seems like one of those things that should just be a given. You shouldn’t really have to even think twice about this. But, you know, like you said, I mean, it definitely is something that you need to take into consideration.

Peter Lazaroff 31:40
Well you know, the CFP marks. So when people have those designations behind their names, the Certified Financial Planner, they updated their ethics section this year to say that you must be acting in a fiduciary capacity to use those letters. And that’s put some really big firms in a weird position because they don’t act in a fiduciary capacity and so those people can’t use those letters. So if they’re actively using the CFP, again, it’s not a guarantee, but it’s a pretty good chance that they are acting in a fiduciary capacity. At least they’re supposed to be, that’s what the otherwise they get e*thic things.

Robert Leonard 32:13
Which common piece of advice do you hear given by other financial professionals that you don’t necessarily agree with? And what would be the truth?

Peter Lazaroff 32:22
Oh, well, I mentioned insurance earlier. I kind of wrote something for the Wall Street Journal that got me a lot of hate mail about permanent life insurance. So I think generally speaking, I think everybody needs insurance. But I think people end up with the wrong policy and way too much beyond that. I hear a lot of other people talk about beating the market or timing the market or getting in at the right time. And honestly, it’s just not possible.

At the beginning of our conversation, you’d mentioned Warren Buffett, even Warren Buffett. You know he had speeches today where he says, “Oh, yeah, what I did over my career couldn’t be done like it’s too competitive of a marketplace now.” It used to be that there was a lot of dumb money in the market. And now 95% of trading is done by giant institutions with huge research departments, and all sorts of PhDs and you don’t stand a chance. And so I think, you know, is you have money, you’re never going to know what the right time is.

And really, time in the market is way more important than timing the market. And so I think that’s probably the most important thing that people… It takes a while to understand it. And to believe that buying individual stocks that’s eventually going to put you in a bad place. You may get lucky during a bull market like we’ve had now. But over time, you know, the odds of you winning with a strategy like that are really low.

Robert Leonard 33:44
You recently wrote a piece about how the new free trades that a lot of brokerages are doing aren’t truly free. Talk to us about this idea a little more.

Peter Lazaroff 33:54
Robinhood 2015 came out and they said, “Hey, we’re not going to charge on stock trades, free stock trades for everybody.” And I I remember going and talking on college campuses and saying, “You guys, you know, that’s not free right?” And they were like, “What? No, I don’t pay anything.” And recently, Charles Schwab and TD Ameritrade and E*Trade, all got rid of their Trade Commissions for stocks and ETFs. And in reality, the cost that I was highlighting in that piece, those have always been there, but like, it’s never free.

And my feeling is, if you’re not paying something, then you have just become the product, you know, they are now selling something of yours. It’s kind of like the internet, you know, you go and use Facebook. Facebook isn’t the product. You the user are the product, they’re selling your data, they’re marketing to you. With trading, there are a number of explicit costs, so commissions would have been one of them.

But the implicit costs that are there are quite large. So there’s something called a bid ask spread, where if you go to Google Ginance or Yahoo Finance, you’ll find the stock, the current price and you’ll see two prices divided by like a slash sign. And that’s the bid ask price and basically, you know, if you are going to buy a share of a stock for $100, the ask might be $100 and five cents. And so that means it costs you .05% to make that trade. Now you might say, “Oh, it’s just five cents.” But if you’re trading $1,000 worth, well, suddenly it’s not and for a lot of mutual funds, you can buy the entire US stock market and the expense of the fund is point .03%. So this is nearly double what it costs to just own a fund.

So these bid ask spreads, when you trade, it’s really the cost of the market maker executing the trade on your behalf. The other thing is that these custodians, the Schwabss the TD Ameritrade, the Robinhoods, they sell your orders to high frequency traders. So if anyone has read about high frequency traders, they just trade and make fractions of a penny on each share that they trade, but they need orders to be able to do it and so they pay the brokerages for your trade. And you know, that’s how they make money.

Other pieces… Sometimes it used to be like, they’ll have platforms where you see it’s kind of like at a grocery store. Mutual fund companies and ETFs, they pay for shelf space and custodians so that you see their funds first, if you’re going to trades, that’s a piece of it. But I think one of the biggest ways that these places are making money is on your cash. So Charles Schwab, for example, nearly 60% of the entire company’s revenue came from cash. So like they charge you, they pay you basically nothing, then they go and lend the money for, say, 2%.

And so they just pocket 2%. Plus they charge you money. And ultimately, I could probably go down another half dozen, but they start becoming more opaque. Really, in reality, free trades should not be the reason that you choose a provider at this point. I mean, it used to be that when Charles Schwab launched, I think a discount brokerage trade was like $80. So yeah, it’s obviously a lot better than that. But free trades also might encourage you to trade a lot. And if you trade a lot, you’re going to make mistakes. I mean, there’s a lot of research.

The more you trade, the worse off your returns are. And men tend to do that more than women. I mean, the research is pretty clear that men are overconfident, they trade more, they have worse returns. So I would say that don’t let the free tempt you into making some of these bad investment choices, or sway sort of where you keep your money to invest.

Robert Leonard 37:16
I know you aren’t generally picking individual stocks anymore, Peter, and I completely agree with everything you said about the free trades. But one of the hidden benefits that I think maybe not a lot of people are considering is something that I plan on doing a lot and that I’ve already started doing is I had a huge watch list of stocks that I really wanted to start researching more, but because I had no skin in the game, I didn’t make time to actually go in and research those companies.

So now with no commissions, I’m able to just buy one or maybe two shares to get those stocks in my portfolio. And now I have some skin in the game and now I have a reason to go in and learn more about those companies and actually put forth the time and effort to research, whether I should make those positions bigger in my portfolio. And I know that the commission was only $5 before, which isn’t huge by itself. But when you’re only buying one or two stocks, if that’s maybe a $30, $40, $50 stock, you’re looking at 10% or more of your position that you’re starting. So it can be large. So for me, personally, I like to be able to add these few stocks to my portfolio with just one or two shares, get them on my radar, and then dive into them a little bit more and see if I want to enlarge that position in my portfolio.

Peter Lazaroff 38:32
Yeah, I think it’s a good point. And you mentioned this yourself. It’s not your whole portfolio stocks, individual stocks, and the people who we work with who insist on having individual stocks… It’s usually because they’re passionate about investing. And, you know, I look at that board as a form of entertainment. And so I would agree because back when I was buying individual stocks, I was a stock analyst. I remember thinking, well if I don’t buy 50 shares like it’s not worth the commission, and to be held up by one or two, and scratch that itch and kind of have the, you know, expressing of your passion be a little bit cheaper. That’s a you know, honestly, I’d never thought about that. But that’s a pretty good point.

Robert Leonard 39:08
Yeah. And even to your point, maybe now, instead of buying 50 shares, just like you said, to scratch the itch, now you can just buy a couple shares. You’re like, “Oh, I picked individual stocks.” And then if it goes to zero or doesn’t do as good as the market, it’s not that big of a deal, because you didn’t buy that many shares. So I definitely agree there. It’s not necessarily as great as the news makes it seem, but I think there are some hidden benefits as well as there is hidden cons.

Peter Lazaroff 39:31
Yeah, I think for the most part, as long as people recognize that nothing in life is ever free. You know, they’re always making money off you. And I think some of these costs I mentioned, if they go up, then you’re just paying them in a different way. And there is some suspicion that they might go up, but there’s no proof of that. So we’ll see. I mean, I think the trades was such a small piece of revenue for these big people. Anyways, I assume it’ll be business as usual, but maybe it’ll encourage people who are using mutual funds before to switch to ETFs because mutual funds still cost money. ETFs are more tax efficient. So maybe it’s a boon to them. But it’s always hard to tell these things and they evolve over time. And I’m sure there’ll be more news coming from somebody about something that could shift it even a little bit more.

Robert Leonard 40:11
That’s the big caveat there, right? Nothing in life is free. So time will tell, time will tell. Now, using Mint as an example, what other tools or resources can someone use to help them manage their money more effectively?

Peter Lazaroff 40:25
You know, honestly, those *of Mint and BrightPlan are all I really use, but I have credit cards with Chase and American Express and Chase’s new app is actually, I don’t know if you useCchase or anyone’s noticed it, but they have a lot of new features within their app that I think are really cool and are insightful about your spending more so than what you’ll get in Mint. Because in Mint, you can categorize but Chase seems to pick up on trends. So that’s interesting. Beyond that, I mean, there’s so much technology, the key is finding something. I don’t think you should have to pay to download technology, you might have to subscribe to get something of value.

But ultimately, I’m in a tough position because I feel like I open Mint and I open BrightPlan every single day. And it’s never to like check the values of my investments. It’s usually to check my spending. BrightPlan runs these little financial models on all your different goals. And so if the market is down *inaudible is down nearly 20% near the end of last year. And I remember logging at one point, I’m thinking, I wonder if the percentage of success went down on these goals and you know, maybe it moved 2%.

But back to us saying earlier, the market drops 10% or 20% all the time. So it’s not that uncommon. But yeah, those are the tools I think of most. Beyond that it’s books. So I’m a really big fan of The Little Book of Common Sense Investing by John C. Bogle. I like the Elements of Investing, which is Burton Malkiel and Charles D. Ellis, both of whom wrote kind of staple books. Charlie Ellis wrote Winning the Loser’s Game and Burton Malkiel wrote A Random Walk Down Wall Street. Yeah, so like, rather than give people two huge books, I gave them the Elements of Investing because it’s condensed. And there’s some personal finance stuff in there that I think is really good.

Robert Leonard 42:09
As we turn the corner to the end of the show here, if you were to summarize everything you’ve learned over the years from investing your own money, from being a finance professional, what is the number one piece of advice that you would give somebody?

Peter Lazaroff 42:23
Keep it simple. So if you don’t understand what you’re doing with your money, you should not do it. So when it comes to investing, if you’re investing in something you don’t understand, you need to seek to understand it. This stuff, I find some of the complex stuff really fascinating, but only because it makes the simple stuff ring so much truer and I think the more and more you learn, you realize that the simplest solution is often the best one. And when you’re investing, seeking simplicity can mean not making different buys and sells so if you feel like well, I feel like the markets gonna go down and so I should probably sell. Well, that’s too complicated, you know, the markets always go up and down.

And the simpler solution would be keep saving, keep buying, don’t sell, don’t sell until you’re retiring because there’s plenty of time to write it out. When it comes to using mutual funds or ETFs, I only own a single fund, it’s 100% stocks, it’s globally diversified. It’s, you know, not the sexiest thing, but it’s ultimately going to help me achieve my goals. And my goals are going to be driven by how much I save and the fact that I’m earning on at least market returns. And so finding ways to simplify your life makes it easier to track, makes it less stressful, but also just the products that are available today allow you to simplify in a way that just better leverages compound interest and just makes your life easier. So I think the more and more I learn, the more and more I start embracing simplicity.

Robert Leonard 43:51
As a listener of the show, you can probably tell that Peter and I are both very passionate about personal finance and investing. But when you really look at our portfolios, I know Peter just mentioned he keeps it simple, I keep it relatively simple as well. So you can still like to learn about these things and not go super complex on your portfolios. You can keep it simple and then if you don’t like this stuff at all, keep it simple anyway and you don’t have to spend a lot of time worrying about it. Peter, thanks so much for your time tonight. I really appreciate it Where can the audience go to connect with you?

Peter Lazaroff 44:22
https://peterlazaroff.com/ is where everything I do eventually ends up and if you can’t spell Lazaroff you can take your best crack. Google’s pretty smart. You can also go to smartmoneyquiz.com which will ultimately get you back to my site to find me. but I’m on Twitter a@PeterLazaroff and LinkedIn at Peter Lazaroff. Instagram, Facebook, all that. You can figure out how to spell my last name, you know where I am so.

Robert Leonard 44:45
I’ll be sure to put the correct spelling of Peter’s last name in the show notes with the link so you guys can all go check it out and connect with him. If you have any questions or if you enjoyed the show, feel free to reach out to him. Tell him what you liked about the show or what you want to learn a little bit more about. Peter, thanks so much. I really appreciate it.

Peter Lazaroff 45:02
Yeah. Thanks, Robert. This is fun.

Robert Leonard 45:04
That’s all for today’s interview. But before we end the episode, I’m excited to tell you guys about an offer we have going on right now with the show. For the next few weeks, anyone who leaves an honest rating and review for this show in Apple Podcasts will be entered into a drawing for a free book, or a one on one coaching session with me. In order to enter, all you have to do is take a screenshot of your review, post the photo on Instagram, and tag me in the post. I’ll then pick three winners at random and contact you directly if you’ve been chosen. Not only will you be entered for this giveaway, but it’ll also help the show grow and allow me to continue to bring on the best guests. I really appreciate all of your support. And I look forward to seeing you all again next week.

Outro 45:51
Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.