Mind Over Money: Interview with Eric Tyson

Sunday March 5, 2006

I recently spoke with personal finance guru Eric Tyson about his latest book, Mind Over Money: Your Path to Wealth and Happiness. The book is about different personality types when it comes to personal finance, such as overspending, hoarding, or avoiding finances altogether. The main point of the book: people should adopted a balanced approach to money: save some, spend some, invest some, and spend time with family. It occurred to me that Mr. Tyson's well-rounded and holistic approach to finances would make an excellent tax strategy too.

William Perez: First, I'd like to thank you and your co-authors for writing Taxes for Dummies. It must have taken courage to write yet another tax book.

Eric Tyson: It's not easy to provide a concise guide to common tax issues!

William: You worked as a financial advisor. What role does taxes play in an overall financial plan?

Eric: Taxes have a major impact on personal financial decisions. A good financial advisor must have a deep knowledge of tax breaks and strategies to best help his clients.

William: I often tell my clients that they need to keep their taxes in perspective, that it's part of their overall goals for their lives, for their finances. But it's hard to get this message across, because a lot of people are fixated on lowering their taxes.

Eric: That is a problem with some folks...they allow the tax tail to wag the financial dog so to speak. They invest in [tax-free] muni bonds, for example, because they hate paying taxes, but not be in a high enough tax bracket to justify being in munis. Or, some people blindly buy real estate just for tax breaks.

William: And that's mostly what your new book, Mind over Money, is about -- how to gain a bigger picture of your financial life.

Eric: Mind Over Money takes a very holistic look at money and how people relate to money. It identifies the ways we fail to optimize the money that passes through our hands and provides concrete suggestions for how to develop the best financial habits.

William: In the book, you identified patterns of financial behavior -- how people become obsessed with their money, either by hoarding it all, or by spending more than they earn. Do you see similar patterns when it comes to taxes?

Eric: Yes - excellent observations. I have seen [these patterns in tax behavior] as well.

William: I can think of two profiles that related directly to the tax arena: the Obsessive Personalty (finding all the ways to save on taxes) and the Avoider Personality (not wanting to deal with taxes at all).

Eric: As you know "avoiders" can get into real big trouble - penalties, interest...jail time!

William: I often tell people they need to plan ahead for taxes, instead of always playing catch-up after the fact. Are there some smart tax strategies that fit in with your holistic approach to financial planning?

Eric: A lot of it revolves around thinking through your life and financial priorities and maintaining balance. Saving for retirement is fine, for example, but don't do that to the exclusion of living today or working towards shorter-term goals. Investments should be chosen on the overall merits of the investment factoring in expected after-tax returns.

William: It's hard to factor in expected after-tax returns... dont you think?

Eric: Yes and I really should detail more what I mean by that. Specifically, be knowledgeable about the tax breaks on stock dividends, long-term cap gains and tax-free bond income. Obviously, no one can predict returns but you should have a ballpark idea what a given investment should produce over the long-term. No one except for all of the self-anointed sages who believe in their crystal balls!

William: Ah, but tax rates on long-term capital gains are at an all-time low of 5% or 15% depending on your tax bracket. Do you think capital gains tax rates are going to rise? (I do.) Should that impact how people structure their investments?

Eric: Well, if you have somone for example who is holding a long-term asset and is otherwise considering selling, now is certainly a good time to consider from a tax standpoint. However, the feelings that those rates are quite low should not in and of itself lead someone to sell an asset, especially if it still looks good for the future.

William: I'm thinking of someone who is ready to invest a chunk of savings and who is considering whether it should be in a taxable account or a tax-deferred account. Of course, we cannot predict future tax rates, but it might seem that paying the tax now while capital gains rates are low would be preferrable to deferring that to some future date when tax rates might be higher?

Eric: It may or may not make sense to pay tax now. Retirement accounts are a good deal but you've got to run some scenarios to see if investing outside [of a retirement plan] may be better.

William: I encourage people to save for retirement, start a business, or take a college class as tax strategies. All three strategies have a common denominator: planning ahead, using your hard-earned dollars to pursue something you love, and of course to take advantage of tax breaks. But really it comes down to lifestyle choices: choosing to do something you love, and then seeing if there's a tax angle to it.

Eric: That's right about planning ahead. Unfortunately, to take advantage of major tax breaks, you've got to have money! If you live paycheck to paycheck, you can't fund retirement accounts, buy a home, etc.

William: Really planning ahead is about taking control. This is something you talk about in your new book. There's a different mindset involved. Taking control of your tax and financial situation means you are in charge, whereas a lot of people are just instinctively reacting.

Eric: Agreed. That's why money causes many people stress. They don't have a plan and they are just reacting. And, they are being sabotaged by bad habits or distorted thinking (e.g. "I have to watch my stocks every day because I may need to bail").

William: This sounds like the John Bogle approach to investing: buy and forget about it. In other words, invest the time upfront to understand the investment, and then check in every year or so, but not follow the stock movement day by day.

Eric: It's hard for some people to step back from their investments with the 24/7 info sources all around us. And, they are anxious because they haven't done enough homework, or they'd like to believe they can quickly react and take advantage of a situation or cut their losses. Checking your investments quarterly or annually is just fine.

William: You don't talk much about socially responsible investing in your new book. Is this something you are starting to see your clients asking about? How do people integrate their personal values into their financial descisions?

Eric: I covered that in Investing and Mutual Funds for Dummies.... Some "socially responsible" funds will shun tobacco companies but then invest in paper companies or other suppliers to tobacco companies.

William: Is there such a thing as social responsible financial planning?

Eric: Mind Over Money talks about teaching kids about taking money, saving and spending some and earmarking portion for good causes. I think moral angles should have a far greater influence over how people lead their whole lives. That's why Mind Over Money highlights the downside to materialism, workaholism, neglecting ones family and friends, etc. It also includes coverage of the damaging effects of addiction. When it comes to choosing investments, I think your values should play a part. That's why some people shun real estate because they don't like all the developing going on.

William: I would like to thank you for your time and for all the sensible advice you have written in your books.

Eric: Thanks.

Eric Tyson is the author of several books on financial planning, investing, and taxes. His latest book is Mind over Money: Your Path to Wealth and Happiness (CDS Books, 224 pages, $21.95). Other books by Eric Tyson include: