Practical analysis for investment professionals
25 March 2015

The Most Important Money Question, According to Carl Richards

Ever wondered: What’s the most important money question?

Carl Richards has the answer: It’s “Why is money important to you?”

That’s right. Not “Should I draw down savings or investments to prepay my mortgage?” or “Should we wait to take Social Security?” or “If my retirement accounts are fully funded, how should I invest the rest of my cash?” But “Why is money important to you?”

Richards is a long-time financial adviser who is well-known for his simple napkin sketches explaining complex financial ideas. He is also the author of the best-selling book, The Behavior Gap. (My colleague Charlie Henneman, CFA, included it in his post, “Eight Books That Changed the Way I Think About the World.”)

Richards firmly believes the foundation of any financial plan lies in addressing the “Why?” question, even if it makes you (or your clients) squirm — as it no doubt will — or think you mistakenly stepped into a therapy session.

“Before you plan,” he writes in his new book, The One-Page Financial Plan, “you have to know why you’re planning.”

(The book will be published on 31 March. It has received high praise from the likes of Morgan Housel, of The Wall Street Journal and the Motley Fool, and Joshua Brown, of Ritholtz Wealth Management and The Reformed Broker.)

Richards compares the discovery process that follows asking “Why?” to a doctor’s visit. Which would make you feel more comfortable: a doctor who began writing a prescription after barely hearing your symptoms? Or the doctor who took the time to really understand what was going on before making a diagnosis and handing over a prescription?

“Obviously you’d feel better with the doctor who took the time to walk through the diagnosis process,” he writes. “You shouldn’t expect anything different from your financial life.”

Richards says asking why money is important is a bit like “applying the rigor or a doctor’s examination to your financial health. It’s no crazier than going to the doctor’s office for a check-up before you get a prescription . . . Logically, we know that doing the last thing first — asking a financial adviser for a solution before identifying the problem — makes no sense, yet that’s where the traditional financial services industry would have us start: at the end.”

Start at the beginning and then use what you’ve learned about your values to come up with a financial plan that is right for you, he says.

Why

Here’s a simple process Richards recommends for getting to the bottom of the “Why?” question.

Ask yourself:

  • Why do I invest so much of my money and time on X?
  • Why do I spend so little on Y when I claim it’s important?
  • Why do I save as much (or as little) as I do? What am I hoping to achieve?

If you hit a “dead end” when trying to figure out what’s important to you, he says there are two areas where you might find the clues:

  • How do you spend your time?
  • How do you spend your money?

Richards tells readers that getting to the bottom of “Why?” is “potentially scary territory” and that it’s helpful “to set up a few guard rails” to make the process productive.

So, before you ask “Why?” do the following:

  1. Set aside time. Avoid late nights or the end of a long week. Rather, pick a time when you’ll have more energy.
  2. Get out of the house. “Having a specific place can serve as a reminder that these conversations can be emotional, and can help you prepare for that,” he writes. “For the same reason, I suggest keeping conversations about money out of the bedroom, the park where you go to relax, or the place where you had your first date.”
  3. Let go of the past. “If we approach the process with the right frame of mind, reflecting on our mistakes may help us avoid repeating the same mistake in the future. But, at a certain point, you need to make peace with what’s happened in the past and move on,” Richards says.
  4. Adopt a “no shame, no blame” attitude. “We all have made financial mistakes in the past,” he writes. “By adopting a ‘no shame, no blame’ attitude, we can reframe mistakes as valuable lessons. Over time, they’ll lose the emotional charge.”
  5. Skip over goals — for now. This is the clincher: “The purpose of asking ‘Why?’ isn’t to come up with specific goals or plans of action,” Richards says. “It’s meant to reveal the REASON why you have certain goals. Expect the first answers to come fairly easily. But give yourself time to pause and really think; by doing so, you can go even deeper, getting much closer to what’s important.”

In the opening pages of the book, Richards reminds readers that the best financial plan has nothing to do with what the markets are doing and everything to do with what’s important to you.

And he emphasizes that no two plans are the same (that is, it’s not one-size-fits-all) and that coming up with the right plan is a process.

“Creating a financial plan is one of the best ways of giving yourself something that everyone wants more of: time,” he says. “It’s about being really honest about where you want to go, getting really clear about where you are now, and then making your best guesses about how to narrow the gap between the two.”

Why is it so important to have a financial plan?

Richards cites a scary data point in a June 2013 report from the National Institute on Retirement Security (NIRS): “the average working household has virtually no retirement savings. When all households are included — not just households with retirement accounts — the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.”

Step one in creating a financial plan is to “get clear about where you are and where you want to be.” Start by asking yourself: Why is money important to me? Or, if you are a financial adviser, by sitting down with your clients and helping them get to the bottom of why money is important to them.

Carl Richards will be participating in a Twitter chat about his new book, The One-Page Financial Plan, on 16 April 2015, from 12–1 pm EDT. To participate, sign in to Twitter and direct your questions and comments to @CFAWealth. Follow the discussion using the hashtag #CFAChat.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Lauren Foster

Lauren Foster is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Previously, she worked as a freelance writer for Barron’s and the Financial Times. Prior to her freelance work, Foster spent nearly a decade on staff at the FT as a reporter and editor based in the New York bureau. Foster holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

2 thoughts on “The Most Important Money Question, According to Carl Richards”

  1. Jill Sing says:

    I look forward to reading Carl’s book. Perhaps Asking Why and taking time to reflect on the deeper messages and underlying values will create meaningful financial plans but also help all of us to make other changes that align with what is truly meaningful.

Leave a Reply

Your email address will not be published. Required fields are marked *



By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close