“Financial literacy is so low, simply because we do not teach it” with Joseph Polakovic and Jason Hartman

Financial literacy is so low, simply because we do not teach it. I have long believed there should be a finance 101 course in high school, by the very latest. Even college finance majors talk very little of personal finance basics like a credit card, FICO score, loan underwriting basics, etc. So, the only advice people get along the way is free advice from family and friends. While I’m sure it’s often better than nothing, I don’t believe most people run to ground the advice they are being given. Furthermore, the optimum course of action is often situational dependent and there is a big difference between good advice and great advice. Additionally, the financial objectives we strive for are often skewed. A higher income doesn’t necessarily translate into more wealth. There is an oft repeated quote of, “It’s not what you make, it’s what you keep.” Even this can be narrow sighted. Financial literacy is not something you become fluent in as it’s constantly evolving. Therefore, when most aren’t even taught the basics, it’s much more understandable why so many don’t keep pace.

I had the pleasure of interviewing Joseph Polakovic, the owner and CEO of Castle West Financial in San Diego, CA. Joseph has built his life and career upon his desire to help other protect their dreams and futures. As an undergrad, earning an Accounting degree at the University of Colorado, Joseph had the opportunity to earn a living in his field of study. Under the wing of top financial advisors, he displayed a tremendous amount of natural talent working for a registered investment advisory company, further reinforcing that his chosen career path was ideal for his future. Joseph’s passion to serve and protect runs deeper than financial services, to him it is not a job, it’s a lifestyle. Evident by a four-year sabbatical in the U.S. Marine Corps, including deployments in both Afghanistan and Iraq, Joseph has dedicated his life to protecting the lives of others in the field and in the office.

Thank you for doing this with us! Our readers would like to learn a bit more about you. Can you tell us the “backstory” about what brought you to the finance industry?

My first exposure to finance was as a 12-year-old when my father opened a brokerage investment account for me with $100. I recall him walking me through the various investment options and us deciding that my strategy was to go for one big growth company and hope for an early retirement. While we didn’t end up buying Amazon or anything that became worth much, I do remember wanting to save money so that we could buy and track more investments. This was a waking experience for me and helped shape the direction of my future. From the age of 18 until present, I have been in the finance industry, except for the four-year sabbatical I took in the United States Marine Corps serving as a Combat Engineer Officer. My career started with a job at a boutique Registered Investment Adviser and eventually made rounds through big banking, real estate and specialized client services until I started my own company. The ultimate goal was to combine the knowledge of these fronts to truly offer a client total support with their financial landscape.

Can you share with our readers the most interesting or amusing story that occurred to you in your career so far? Can you share the lesson or take away you took out of that story?

One of my favorite stories is another one from personal experience. This occurred while I was grasping the understanding of “leverage” and deciding that putting every dollar I had saved and leveraging all my income into a house was financially the best thing I could do at the time. I did close on the house and recall spending the first few months in a big empty house with a bed, plastic silverware and stack of paper plates. I was the definition of house poor which had a satisfaction to me that is hard to explain, but is probably similar to what someone feels like after training for a long time and finally finishing their first marathon. It’s hard work, there’s no real prize at the end and you have to live with the aftermath of the sacrifices you made along the way. Yet, for some reason it’s still awesome.

Are you working on any exciting new projects now? How do you think that will help people?

Expansion is my constant goal, so I’m hopefully working on new exciting things all the time, otherwise I’m sure I’d become bored and unhappy. Currently, I am working in several directions of piecing together new offerings for my clients that will truly make a relationship with my company a one-stop shop for financial optimization. To me, all clients operate like a business. They have revenue (income), expenses and net worth. At the end of the day, the better I am at knowing the wide universe of finance, the better I can assist some part of the equation to derive a higher ending result.

Ok. Thanks for all that. Let’s now jump to the main core of our interview. According to this report in Fortune, nearly two-thirds of Americans can’t pass a basic test of financial literacy. In your opinion or experience what is the cause of these unfortunate numbers?

This does sadden me but does not surprise me. Financial literacy is so low, simply because we do not teach it. I have long believed there should be a finance 101 course in high school, by the very latest. Even college finance majors talk very little of personal finance basics like a credit card, FICO score, loan underwriting basics, etc. So, the only advice people get along the way is free advice from family and friends. While I’m sure it’s often better than nothing, I don’t believe most people run to ground the advice they are being given. Furthermore, the optimum course of action is often situational dependent and there is a big difference between good advice and great advice. Additionally, the financial objectives we strive for are often skewed. A higher income doesn’t necessarily translate into more wealth. There is an oft repeated quote of, “It’s not what you make, it’s what you keep.” Even this can be narrow sighted. Financial literacy is not something you become fluent in as it’s constantly evolving. Therefore, when most aren’t even taught the basics, it’s much more understandable why so many don’t keep pace.

If you had the power to make a change, what 3 things would you recommend to improve these numbers?

The first would be to get personal finance into the school system. Everyone needs this education. It needs to cover everything from saving money to paying taxes. Next, I would work with big banks to develop a transparent user experience that shows a person’s actual financial picture. Again, think accounting basics to help everyone understand an income statement and a balance sheet. Banks are starting to develop this idea, but it isn’t close to good enough. People can come to understand, assets minus liabilities equals net equity, but they need a more transparent system that assists with understanding borrowing power, interest rates and investment rates of return. Finally, I would simplify the tax system. Easier said than done, but many people don’t even try with this one and it’s the number one expense we pay in life.

Ok, thank you! Now to the main question of our interview: You are a “finance insider”. If you had to advise your adult child about 5 non intuitive essentials for smart investing what would you say? Can you please give a story or an example for each?

1. One of the best “investments” you’ll ever make is choosing a good credit card (or cards). Everything I pay for in life now is at least 1.5% off because of my credit card (i.e. rewards). I intend to spend money the rest of my life, whether that be in good markets or bad markets, so why not save a little? Again, the banking system is evolving and even categorizing expenses so that you have a better view of where your money is going. I meet clients who refuse to use a credit card because it’s a form of debt. Let’s say they have $30,000 in expenses each year that could have gone on a cash rewards card offering 1.5% cash back and they started using this at age 22. That’d be $450 saved each year. Now let’s invest that in the S&P500 and call it a 9% annualized return on investment. 40 years later, at age 62, they would have over $150,000 in that account and all they did was spend money.

2. Buy a house. Get out of the rental cycle as soon as possible. You need a place to live anyways. This will be the most likely cause of wealth gap for younger generations. I have often wondered whether it would be smarter for me to pay for my children’s college tuition or to buy them each a starter house in the place they want to live and work. Again, it’s not just what you make, it’s what you keep. If all your earnings are going to a rent payment, then you’d be better off delaying school and working a lower-skilled job and letting your home grow in value.

3. Start a business. Doesn’t matter what it is and it doesn’t mean quit your job. Invest in yourself and be an owner of something. Not only can this have wonderful tax benefits, but can also be a wonderful investment in your own happiness. Logic would indicate that it’s best to focus on one thing, but I have empirically found in my own life that is not the case for me. On the contrary, the more interests I have the more I improve at the one thing that was supposed to take my full attention. Somehow all these things seem to tie together and the intangible benefits of thinking like an owner are hard to quantify.

4. Understand cash management. This could be a continuation of the credit card discussion I started at point one, but it’s certainly broader than that. The first cornerstone is to never borrow money in a way that gets you caught with fees, high interest charges, or worse, the inability to make the payment. Those ruin the model. Proper cash management is a skill and takes foresight and attention. However, like the credit card idea, it’s free money. I had a client who was several years from retirement and wanted to run through her financial plan with me. She let me know she was saving several thousand per month and wanted to add another $200,000 to her investments before retiring. I purposed something I thought was quite clever, but left her suspicious and worried. I called it, “The Polakovic Accelerate the Future Method.” Essentially what we’d do is draw from her Home Equity Line of Credit (HELOC), which was charging monthly interest only payments at 5%, and invest it with the goal of achieving 10% returns. So, not only are we taking a spread of 5%, but our investment is compounding while our interest rate is fixed. Additionally, her savings per month were more than the interest payment, so she could use whatever extra she had to put into her HELOC and reduce her future payment and liability. So, that was compounding in our favor too and every dollar that was saved was immediately employed for her benefit, whereas only saving a few thousand per month would require her to spend money on trading costs (buy orders) every month. She did not want to do this, so decided she’d buy into the market once a year. Based on the assumptions of her original plan, she’d be at her mark at just under 6.5 years. Based on the PAFM assumptions, she’d be happily retired in under five. Now, this is not to say that the markets will cooperate with you every time, but the lesson here is to reduce the idleness of cash and take advantage of sound arbitrage opportunities.

5. People are the biggest variable to investment returns. This one has no math associated with it but likely derives the biggest variance. Hopefully by the time my children are adults I can properly teach this one. I have been in 100+ degree weather being surrounded by rocket attacks and would be the first to tell you I’m in an enviable situation. Why? Because I was surrounded by wonderful people. There are a hundred different paths I could take with this topic and how that can translate into actual monetary returns, but if that’s anything but an ancillary benefit then you’re probably doing it wrong. Treat people well and surround yourself by good ones and things tend to work out.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

My thank you speech would have reason to go on for miles, as I have been perpetually propelled by great relationships. However, my hero tribute always comes back to my father. It’s been a sincere pleasure having someone so wonderful to attempt to live up to. My father is the kindest, smartest, most generous person. He was also the last-ditch resource on asking for help growing up. You knew once you’ve reached that stage, options were depleted and you’d be up all night learning every angle to your problem. The answer was never as important as the process. In the end, the product was always the base case scenario, which included the “A” I was after or whatever it was, but also energy and perspective that comes from learning something new and getting there yourself, albeit using a guide. As a kid, that was exhausting. As an adult, I now live for those moments.

Can you please give us your favorite “Life Lesson Quote?” Can you share how that was relevant to you in your life?

Anyone who is waiting in line, on an elevator or simply trying to not make eye contact with people around them should spend some time going down a Mark Twain quote rabbit hole. They’re so good. It’s impossible for me to choose a favorite, but one that stands out for this discussion is, “I never let schooling interfere with my education.” I feel like this is the ultimate quote about thinking for yourself. That doesn’t mean “don’t trust anyone” or “don’t believe everything you’re told” or anything like that. It just simply means come to your own conclusion. Take facts, observations, experiences and roll them forward into your life. Few things are simple. Usually I take a more, “Reach for the stars,” type of quote, but this seems like a time to say, “Be a professional.” If something doesn’t add up, then figure out why not. Be fine with having a stance and having it challenged. But, also be fine with being able to change your mind because of new information. Either way, never surrender your ability to think for yourself.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. :-)

Definitely room for some really saintly answer here, but I’m going to go with my idea about innovating banking technology. What I’d like to see is connected systems that gives a bank a better understanding of a client’s financial situation while simultaneously giving a client a better understanding of what they may qualify for in terms of loans and products. Transparency on both sides being the key. Imagine looking to purchase a house and having your bank already have approved you because of your history and point in time financial position. Also, imagine that your bank analyzes your spending habits and recommends a credit card for you (see this all ties in). Furthermore, imagine this system also facilitating peer-to-peer lending that uncomplicates business and entrepreneurial financing and generally allows for a more liquid and accessible platform to help champion progress and innovation. I believe this is the direction we’re heading, but I would love to spearhead that movement.

Thank you for these great insights!