Q&A With Carl Richards: Personal Finance on a Napkin

Carl Richards is a certified financial planner and founder of Prasada Capital Management investment firm, but he may be more well known as the napkin-sketch guy.

On his website, Behaviorgap.com, and at the New York Times, he explains financial concepts in a way that can be drawn on a cocktail napkin.

He's also author of a book with his sketches, and what he calls a personal finance book for people who would never buy a personal finance book: "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money."

The release is on the heels of his widely read New York Times piece about his heart-wrenching decision to stop paying his mortgage, which he did in 2010 when he was forced to sell his Las Vegas home for a loss on a short sale.

CreditCards.com chatted with Richards from his office in Utah about cocktail napkins, why we're so bad with money and what it was like to write about his darkest financial hour.

CreditCards.com: Where did the "Behavior Gap" idea come from?

Carl Richards: When I was at working at a big brokerage firm, which I won't name, the whole industry seemed to be focused on finding the best investment. I spent a couple years thinking that was my job: scour the planet for the best investment.

Looking back on it, I noticed that that this well-intentioned search for the best investment was leading into some crazy behavior, like buying things after they go up and bailing on them right after they go down. About that time, I stumbled upon a research study that compared the average mutual fund return to the average return an investor earns.

There was this big gap. It was sizeable. I started drawing that bar graph on the white board in front of clients and say, "Look, if we're like the average person, we're engaged in a bunch of behavior costing us a lot of money. All we have to do is hold the average and behave correctly and we would do better than most people."

I started focusing on this idea that here's this behavior gap, and most of it is due to poor behavior that's the result in our well-intentioned search for the best investment.

Now the Behavior Gap has come to mean anything that we know we shouldn't do but do anyway and it costs us money.

That's why the sketches started -- because it's kind of hard to describe, but when you draw it and see it, that's the behavior.

CreditCards.com: Your book's tagline is "Simple Ways to Stop Doing Dumb Things with Money." What dumb things do people do with credit cards?

Richards: We should always be buying things when we have money to pay for them. I think we all sort of agree on that. Using credit cards as a tool to make those purchases easier, to get rewards, that's what we sort of all think we're doing. We'll build our credit and it will make transactions easier and we'll take advantage of all of these wonderful rewards systems.

Then we end up spending way more than we thought we did. The other crazy thing that I see with credit cards and savings is people that have more than they need in their emergency fund: "Oh yeah, I've got $20,000 in savings and I've got a $5,000 credit card bill."

That's not very smart ... having $20,000 earning 0.5% and $5,000 where you're paying 14% [interest].

You should have an emergency fund. After you have that, you really want to make sure you're keeping your credit card balances low because that's costing you a lot of money.

CreditCards.com: You write about tasks that are important, urgent, and important AND urgent with the example that fixing a car is urgent. To use your example, shopping for a surfboard feels like it is urgent, but is not. Writing a will is important but not urgent. How do we calibrate these things to make the right financial decisions?

Richards: Nobody wants to spend time with an attorney writing a will. Maybe having a label for it would help us figure it out. That's what's so interesting about personal finance. To quote financial planner or author Tim Maurer: "Personal finance is much more personal than it is finance."

And that's one of the reasons some of this stuff is so hard. I can't really decide what's important vs. unimportant and what's urgent vs. non-urgent. If you take the time to be quiet for just a little period of time and be honest with yourself, and if you're married, have a conversation with your spouse or partner or kids, you'll be able to figure out what's important.

A great example is life insurance. As soon as kids enter the mix, we all know there's going to be a huge economic cost if we went away and that we should start thinking about life insurance. But it's the last thing we want to talk about and it's certainly not urgent because it's not urgent until it's too late. It seems like there are some things you can't clearly classify as both.

We get addicted to the urgent and we don't have time to say what's really important.

CreditCards.com: In "Behavior Gap," you write that "many people have a tendency to beat themselves up when they make a financial mistake. But most of us should spend less time worrying about things we could or should have done different." We get this a lot with our readers who have dug themselves into a financial hole. What advice do you have for them?

Richards: After my article [about walking away from my mortgage] ran in the New York Times, I got tons of really depressed, alarmed and, frankly, some worrisome emails.

We can sit around and complain about it. We can blame other people about it. We can whine about it. We can mope about it in our own self pity. Or we can just decide that we can do something about it.

We get so depressed and upset because we're out of control, and that lack of control is a very depressing feeling.

I literally remember days where I was just focused on getting through the next minute. I used old breathing techniques where I would take the time and take some deep breaths and tell myself I'm still in control of at least one thing: my breath. That sense of control lead to let me get a grip on where I really am.

If you're dealing with credit card debt, let's get really clear about that: That's the first step. You can at least get really clear. Write it down. Produce a personal balance sheet. If you don't know, don't worry. Google "personal balance sheet."

Once you have a personal balance sheet and you know your situation, then you can start to make a plan slowly to make improvements. It may mean that things may be worse than you thought. Things may be better than you thought. Either way, you can start to make a plan to move forward.

We've got to stop beating ourselves up over financial mistakes. We've got to take responsibility. No blaming and whining and big, bad banks and credit card companies. We take responsibility and learn our lessons and stop beating ourselves up over it.

And you say, "You know what? That was a really good lesson. I'm glad I learned it. Now let's make a plan to move forward." But we need to separate that from the shame-and-blame game that we all seem to be playing.

CreditCards.com: You wrote in the New York Times and in your book about doing a short sale on your Las Vegas home when it became evident that you owed way more than the house was worth and couldn't afford the payments anymore. Why did you share that story?

Richards: I had encouragement from some really, really, smart people who led me to think about it. When it was first proposed, I said, "There is no way, never."

An editor friend of mine would say, "Look, if you tell me to leave you alone, I'll leave you alone, but it's such an amazing story."

I was finally convinced, and I got enough space emotionally and personally.

I had also told one or two other people my story, and the feedback was, "Oh, man, I wish I would have known that. My brother is going through that. Or my sister, mom." I thought, "there are a lot of people out there going through this. Maybe my story could help." And then I also realized that every time I sit down to write something, I often learn something I didn't know through the process of writing. This would help me get really clear. Part of it was getting clear on what our own lessons were.

That was the most powerful thing for my wife and I, by going back and learning from the decisions we made. We made a commitment to not beating ourselves up anymore

That first week, the response was over 250 phone calls, emails, letters to the house.

Out of the 250 emails, most of them were thank yous, seven of them were just brutally negative. I responded to all seven. Three of them bounced back as fake email addresses. One of them said, "Oh, wow, thanks for the reply. Do you do speaking engagements?" The rest didn't reply.

One of my goals was all of those people out there who are so convinced [that deciding to walk away from a financial obligation] is a black-and-white issue -- could you just understand it's not completely black and white?

CreditCards.com: At the end of the book, you touch on the concept of the American consumer, writing that you're struck by how often you see the phrase and that, "at some point, it seems that we stopped simply being citizens and became consumers, too." What problems do you have with us being labeled this way?

Richards: A consumer-driven economy just seems to me like a bad idea. Let's put it this way: An economic recovery that relies on the level of consumption that we were producing in 2005 and 2006 is a terrible idea. That was a debt-fueled binge. At some point, I hope we can stop saying that "the consumer will return" or "we'll return to the economic climate of 2006." The idea that we're consumers led us to the thinking that that has to do with our identity and has to do with our happiness without us even stopping to question it.

I drew a sketch about this that's a spiral. We keep repeating that process, thinking that's going to make us happy. What can we do? Realize what's really important and then re-tool the way we spend our days and lives and around what's important instead of around this myth of consumerism.