In this episode, Jordan discusses the importance of orienting prospects to their financial situation. Specifically, he walks through the three questions he seeks to answer for prospects that help guide the conversation and address the things that prospects most commonly think about as it relates to their finances.

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Transcript

Jordan Haines:

Hello friends and welcome to another episode of elementality. My name is Jordan Haines, financial vital specialist here at elements and your host for today’s show. Now in today’s show, today’s specific episode, you’re going to get a true. Work from home recording my son who is about a year old is teething and that means that he is screaming a lot So if you hear screaming in the background, you know what’s going on.

Also, you might hear a very special song to me It’s called the happy song. It’s by Imogen Heap if you do not know what that is or have not heard it before I want you to go look it up right now, especially for those of you who have very young kids It is a lifesaver to say the least but we’re not here to talk about tactics on raising teething toddlers Today, we are talking about financial orientation.

Now, many of you have heard me talk about orienting clients to their, or prospects to their situation, their financial situation for the first time and how valuable that is to people. Let’s first start by defining what financial orientation is. Financial orientation is the step between getting organized and giving advice.

Or even in depth analysis being oriented to, to my situation or a client situation is a way of helping them actually connect the dots. It’s understanding how everything is connected, how it’s all interrelated. We know that in the world of financial advice or financial planning, there are dozens and dozens of different topics that matter to a client.

Anywhere from insurance to tax planning to retirement planning is state planning. All of those things matter, but understanding how they are all interwoven and how, what those mean to someone is something that I think we take for granted because we know it. Right. Those of you who have been through education programs or have been planning for years, you know, all these areas of finance.

And sometimes we discredit that other people, very smart people. Don’t and so orientation is just a way to help people connect to their financial situation in a way probably they’ve never had happened before. Now, when done right, financial orientation can be one of the most valuable things our clients or our prospects.

Actually want from us. And it’s really interesting because when you get good at this, it doesn’t take a lot of time. It doesn’t take a lot of effort or energy. It’s something that can be done in a short conversation, but it can oftentimes be the difference between a client that leaves you or a prospect that decides not to sign up and one who does.

So I want to give a little bit more detail, and we might over the next few episodes, talk more about financial orientation and how to orient someone to their situation today. I want to, I want to drill into one particular aspect of orientation, something that I find really helpful as a financial advisor, um, guiding these conversations, which is this.

Your objective when orienting someone to their situation is just to answer a few simple. Questions now, way back in the day, if you were to look at dentistsadvisors. com far before we ever went live with elements to advisors, you would have found a section for elements. And in there, you would have seen Reese Harper, our founder, our CEO there with a flipped clear whiteboard, writing some things down.

And there were four videos and the four videos were right next and positioned right next to some questions. And here were the questions. Question number one, am I taking the right amount of risk? Question number two, am I using my income wisely? Question number three, do I have the right mix of assets? And question number four, am I prepared to make work optional?

We had long videos and lots of educational content about those four questions. And in fact, if you go look at the scorecard today, if you go to get elements. com, you will find a version of those questions positioned right next to the scorecard, those questions, my friends. Are how we start to orient someone to their situation.

So this is obviously best done. I really like using the element scorecard in doing this and I’ll reference the element scores that I look at to answer those questions. You can do these on your own though. I find these are just really basic and simple questions that people often just don’t have the answer to.

If you’ll recall the episode I recorded a few weeks ago where I talked about the seminar that the talk I hosted in California, one of the really common themes that I found after that, where many people came up to me having already had a financial advisor who did a financial plan for them and they had no idea.

If they were doing the right things to prepare to make work optional. They had no idea if they were using their income wisely. They had no idea if they had the right mix of assets. So those are the questions we are going to talk about today, as those questions are going to be the thing that really guides your financial orientation with people.

So let’s start with the top one, the one that I answer with every single prospect and every single client that I do a financial assessment with. That question is, am I prepared? To make work optional different versions of this question might be, am I prepared for retirement? Am I prepared for financial independence?

Right? All the things that we use, um, to explain what retirement is. I prefer making work optional because I have a lot of clients that choose to keep working, even though it is optional, but that is how I like to term it. It works really well for the people I work with, but you can change that however you want.

People want to know if they are prepared. To make work optional, or if they’re doing the right things to make work optional in the future. Now within the elements infrastructure, the element specifically that I look at to answer this question is total term. Total term is a really simple calculation. You can go to our website and get more details.

Their total term is calculated by it’s a ratio. So you take someone’s net worth and you divide it by their living expenses or how much they spend in a year. And it roughly tells you how many years a client could live on their net worth. If nothing changed. Now, I know many of you are going to say, well, that’s a simplistic calculation for retirement.

What about inflation and taxes and investment returns and, and, uh, change in lifestyle expenses and things like that. I understand all of that. We’re not looking for a perfect. Measurement here. We’re looking for something that’s just kind of a gut feel, a good enough number that gives us a starting point.

Because if I look at that total term right now, and I look at it in three months or in six months from now, I’m hoping that it’s trending upwards. So more than anything else, it just gives us a starting point. Again, let me repeat that to calculate total term. We take someone’s net worth and we divide it by how much they spend in a year.

The story behind it is that it tells us roughly how many years someone can live on their entire net worth. Now, most often when I go through this, I’ll present that calculation. I’ll explain what it means. Let’s say the client has a million dollar net worth and they spend a hundred thousand dollars a year.

That means their total term score would be 10, meaning they could live for 10 years on their net worth. Again, overly simplistic. Oftentimes I will present that to a client and ask them what they think about it. Now, depending on their age, I get different responses. If I’m working with someone in their early thirties, late twenties, and I say, you have a total term of 10, they’ll say, wow, that was bigger than I thought.

If I work with someone that’s 50 and wanting to retire in the next 10 years, they’ll look at that and say, wow, that’s a lot less than I think. Right? So context matters in this situation, but it does give me an opportunity to help people understand if they’re prepared to make work optional on a simplistic level.

Generally, what I shoot for is 30. So if I’m working with someone that is Mid fifties and they want to know if they’re ready to make work optional. Well, if they’re close to a 30 total term score, my gut is going to tell me that, you know what? You’re getting very close. You’re doing a lot of important things.

If we can make this grow a little bit more, you’ll probably be fine. A quick note about this. If they are a client and I’m working with them. And we are teetering on the edge. Like if it’s not a hundred total term score, then I will probably do more in depth analysis. I might do a forecast or a Monte Carlo, and that will help me understand maybe more deeply if they are actually prepared to make work optional, but helping them orient with a simple number.

Right again, net worth divided by spending with that simple number. They can see something that just tells them roughly how many years they can live on their net worth. That does a lot to help clear people up. I’ve had many people that come to me and they’ll have a Monte Carlo and they’ll have the fancy forecast and it will tell them, Hey, you have a hundred percent chance of success.

And they say, I don’t believe it. And we’ll run this simple calculation and we’ll show it to them. And they’ll say, Oh, this is great. This is exactly what I wanted to see. That’s what we’re trying to do here with this is we’re trying to answer the question am I prepared prepared to make work optional We’re doing it with the total term score.

Let’s talk about the other two Questions here. The second question I often ask is, am I using my income wisely to do that in the elements infrastructure? I look to that middle row of elements, savings rate, burn rate, debt rate, and tax rate. Now the story here is what percentage of your income is going to one of these four areas.

So your income can either be saved, be spent, pay down debt, or pay down taxes. That’s what it can be used for. We want to find what is the balance there? Do you, are you saving enough? Are you spending too much? Is your debt to income ratio too high? Is your tax rate a little too high or too low? Those are the things that I’m looking at now.

Oftentimes when I frame it this way and I say, Hey, look, your, your income can go to one of. Four areas. Here’s where they’re at. And starting with savings rate. I think you need to have an X savings rate that does quite a bit to clients. It simplifies their income in a way that makes it digestible and understandable.

I was talking to a business owner this morning. This business owner probably grosses about 420, a year. Um, both her and her husband work. She owns a dental practice right now. And she mentioned in there. I don’t Really know how much I make. And I said, well, what do you guess? Okay. This is what it is. She says, well, I just want to know if I’m saving enough.

I don’t feel like I’m saving enough. I said, okay, well, how much do you think you’re saving? So I got some quick and dirty numbers. And essentially what we landed on was her savings rate was about 30%. And I said to her, listen, your money. It can go to one of four areas that can be saved. It can be spent. You can pay debt and you can pay taxes with it.

In your situation, based off of what you told me, your savings rate is about 30 to 40%. Now for context, I typically hope to see my clients around 20 to 25%. And you’ve already blown that out of the water. Curious what you think about that. And that was the first time she had in a simple way, been able to understand where her income is going or should be going.

And that helped her kind of just understand and put in perspective. This is what my savings is. This is what it means. This is what this professional is telling to me. All right. So a lot of you are going to have different advice, different criteria that you look at, but that is a very helpful question to ask.

Am I using my income wisely? And you can look at those rates. To do that now, if you choose to do other, I know lots of people will throw like a giving rate in there, like a charitable giving what percentage of your income is going towards charity. And, and you might take this towards like a fixed expenses.

If you want to get more granular, it doesn’t matter. I found that like just keeping it simple, helping them, um, categorize this into maybe two to three different categories. It’s really helpful. Let’s talk about the final question here, which is, do I have the right mix of assets? Now in elements, the elements that I specifically look at is liquid term, qualified term, real estate term and business term.

So again, if you go to our website, get elements. com and you scroll down a little bit, you’ll find an element scorecard. And on the bottom, you’ll see in that order, LTQT RTBT. Liquid term, qualified term, real estate term, and business term. And the way that I think about this is your net worth is categorized or compiled of four underlying categories.

You have liquidity, qualified retirement accounts, real estate equity, and business equity. And what’s the balance there? So if I’m working with someone that’s new, that just bought a business two or three years ago, and they’re just cranking away and they’re reinvesting their business, it’s probably not uncommon for me to have a greater.

Um, tilt towards business and real estate equity versus liquid and qualified retirement accounts. Whereas if I’m working with someone that’s maybe older, that’s about to sell their practice or just sold their practice, they’re probably going to have a lot more in liquid assets and qualified retirement assets rather than real estate or business equity.

This just gives me a starting point to talk about what they have done so far. I very, um, intentionally Uh, frame this and ask this question last. I don’t like to ask this or answer this question before I’ve talked about making work optional or before using their income wisely. Those tend to deal with habits and these tend to deal with outcomes.

And so I like to focus on this to understand, you know, do you have enough liquidity? Um, do you have enough qualified retirement accounts or too much? Um, what’s your conversation about real estate and business? This just almost as a conversation starter more than anything else. And this is really valuable if you know the context of what they want.

Are there big purchases coming up? Is there a goal that they’re working towards? What is going on there? I find this question to be really helpful and to frame it up as, Hey, look, here are the four different categories that you can bucket your net worth in. Most people don’t view it that way. So all in, we have three questions.

Let me review those real quick. Question number one, am I prepared to make work optional? Question number two, am I using my income wisely? And question number three, do I have the right mix of assets we’ve covered? What is that nine elements, total term, savings rate, burn rate, debt rate, tax rate. We’ve covered liquid term, qualified term, real estate term, and business term.

These are all simple ratios to help my client or my prospect make sense of their financial situation. That again, if we go back, what’s the objective of this. It’s to help people connect to their financial situation and actually understand how they’re doing right now. That is an incredibly valuable activity that we can do with them.

So hopefully this helps to, to kind of get a sense for what questions we commonly ask and certain scores or things that we look to to answer those questions. Um, if someone comes to me and they obviously have an acute question, something that they need solved right away, you know, student loan payments are kicking back on, or I have this debt situation or this inheritance that just happened, or this big family event that just happened that I need to take care of.

Obviously you want to answer those. But in many situations where people are just kind of looking for broad financial advice, these are a great place to start. Please let me know if you have any questions. I hope this is helpful for you. Uh, find me at LinkedIn, Jordan Haynes, H A I N E S, or you can email us at podcast at get elements.

com. Happy to talk with you more about this. And with that, everyone, I’ll see you next week.