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Finally – A Practical Class!

November 8, 2013

Monday marked the start of the last 6 weeks of my MBA program, and I have to say I’m super excited. First, I’m really excited because I’m almost done (obviously) and I can almost taste the sweetness that comes with being home for dinner, giving the kiddo a bath, and enjoying evenings snuggling with the hubby. I’m also excited because I might have the most interesting courses of my MBA career. This mod, I’m taking Negotiations (he professor is an FBI hostage negotiator), Impact Investing (an amazing cross between business and international development), and Personal Wealth Management (which basically comes down to applying MBA concepts to personal finance).

I have to say, I was a bit skeptical about the value add from Personal Wealth Management prior to my first class yesterday. I am by no means an expert in the subject, but I’ve done a ton of research and am pretty in tune with our financial position, goals, etc. However, I was most interested in this class to get more insights into the investing end of things, especially for medium term financial goals. After just one class, I am pretty confident in saying that this course might be on the best ones I’ve taken ever! The professor has a background i n finance and uses actual data and independent scholarly research to tackle the challenges in personal finance, and I learned so much in just one class. Talking with my classmates on the way home from class also gave me some great ideas, but I’ll get into that in a second.

Before class, I emailed the professor about some tools I use to manage our finances and I’m excited to meet with him next week to review them and get some feedback. The first class, however, gave me some insights into the ways that I could improve these tools as well as some ideas on how to use them in new ways. With graduation around the corner, I am entertaining the thought of changing jobs. Though I have a financial forecasting tool that I developed many years back to help us figure out our expected after tax monthly income (and changes to this that would arise from raises, promotions, other jobs), the class opened my eyes to ways to make it more accurate. Mainly, I added some columns to account for FICA and Medicare – small changes that resulted in a pretty accurate estimate of our after-tax income. Discussing after-tax income also made me realize that I needed to amend my tools when evaluating out of state offers. Using my existing tool with the tax updates I made will certainly give me an estimate of my after-tax income regardless of where the offer comes from, but it if is an out of state offer, updating the state tax rates could have a big impact on our bottom line. It’s a pretty simple concept, but something I hadn’t even thought about.  Doing this, in addition to forecasting expected expenditures adjusted for changes in cost of living, is a much better to evaluate competing job offers and compare apples to apples when it comes to cross-border opportunities.

While I was very familiar with the evidenced-based recommendations for saving and spending that came up during class, I am intrigued to see what research/empirical  says about investing. This is one area I haven’t looked into too much and need to understand better. My general understanding of the data is that low cost index funds tend to perform best over the long haul, but that’s about the extent of my knowledge. The professor hinted that some of the most conventional advice and practices, such as target-date retirement funds, may not stand up to the data. Again, very intrigued.

One thing that I found interesting was realizing that I actually don’t consider my 401(k) an investment. To me, it’s a no brainer, automatic thing that comes out of my paycheck before I even see anything. It is heavily invested in equities, and because I have such a long investment horizon, I don’t actually pay that much attention to the movements in its value. I don’t consider it income or savings… I guess I view this as more of an “emergency fund” for when I can’t work anymore and not really an asset. Sooo, given how I view this investment, I’m very intrigued to see how what I learn in the class can be applied to better managing this. Another area I’m interested in learning more about is how to utilize investment vehicles to save better for longer medium term goals, like funding college educations for the kid(s).

Speaking of college education for the kids, I had an epiphany talking to a classmate. We were both lamenting the cost of childcare, and she mentioned that the cost of childcare for 5 years is basically the same as a college education. Then it hit me like a ton of bricks – as the kiddo’s daycare costs go down as he gets older, we should just invest the difference between that and his current daycare rate into the college fund. If we keep doing that, we would have his account more than fully funded by the time he’s ready for college! 

Other important concepts I took from the class: understand that projecting your future earnings and consumption is an art. Just because you can use fancy models and things like the CAPM to estimate the present value of these things, doesn’t mean your estimates are accurate. I’m so guilty of wanting to get details as precise and as far forward as I can, so this was a good reminder. At the same time, I do think that it makes sense to try and make at least a conservative attempt at forecasting for a 5 year period. I agree that trying to forecast your income and spending out 20, 30, etc. years into the future with any degree of accuracy is not really possible. However, I think that it is important to have a baseline plan for achieving financial goals, and an understanding of your likely income and consumption. I compare this to forecasting cash flows for a company – it’s really hard to forecast this stuff with any certainty or accuracy too far into the future, and I would go so far as to say that for many companies it is extremely hard to do this for even 10 years down the road. But, just because it isn’t accurate, doesn’t mean there isn’t value in doing it and using it as a starting point. Take for example, the forecasting I did to determine how we could pay off all of our debt in the next 3.5 years. I made a lot of assumptions, many of which will undoubtedly need to be modified. However, making these assumptions gives us a starting point to understanding roughly what our consumption and income need to be to meet the goals we set out for ourselves. Then, if something changes on either the income or consumption side, we have a starting point from which to make adjustments to the plan.

I think the main takeaway I have from this is to remain flexible and understand that just because a spreadsheet tells you that you should spend x and make y, doesn’t mean you actually will. There has to be a balance between micro-managing and pure avoidance – having tons of spreadsheets to analyze a variety of scenarios will not guarantee that you’ll be prepared for everything that life throws at you. By the same token, you can’t avoid planning all together just because you know that it won’t work exactly as you thought.  

In summary, lots of good things to think about from yesterday’s class, and I’m looking forward to sharing more of my thoughts on the key topics we cover over the next 5 weeks. In the meantime, I’d love to hear your thoughts on these topics – where do you stand on the micromanager/avoider spectrum? What areas on personal finance do you need to beef up your knowledge and understanding? 


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