In case you didn’t already know, October is Financial Planning Month. It is the perfect time of the year to reflect on your spending, investments and savings from the past year and set new goals for the future. Find out what worked, what didn’t work, the things you did well and the things you could improve on. Continue reading as I share some insights about financial planning I have gathered over years of helping clients in this industry.
If someone was starting their financial planning from scratch, where should they begin?
The first step is to list out some major life and financial goals. Provide goals for the short term (less than 5 years), the mid-term (5–15 years), and the long term (longer than 15 years). A handful per time frame is sufficient. Once you have the goals identified and categorized by life/financial and timeframe, you can then assign a dollar value to those goals that require some sort of financial funding.
The next is taking a look at your budget. Take a look at what you are currently doing now. List all your income and all of your expenses. Make sure to account for ALL of the expenses and be realistic. If you water down some numbers, you are only hurting yourself in this exercise.
Then, the third step is to create a “target” budget based on your listed goals. This target budget should allow for savings to be set aside for the various goals with more funds weighted towards the short-term goals. But, don’t ignore the long-term goals either. You want to save for all your goals, just in different proportions based on timeframe.
Why is it not always productive to take your financial advice from your uncle or best friend?
In a nutshell, you have your own views of what is important, both in life events and around money. Your uncle and your best friend will share what worked for them to accomplish their goal based on their preferences. But, what worked for their goal may not work, or even be appropriate, for your goal given your unique desires and beliefs. Also, do they share with you what did not work? Or, are you only getting their winning stories?
When it comes to financial planning and saving for retirement, what is a realistic goal in terms of the percentage of savings? Does it depend on age or other factors?
This absolutely depends on age and where you are in terms of the savings process. Ideally, for younger savers (under 30), setting aside between 8 to 10 percent of your income towards retirement will get them on the right track for a healthy retirement account. The rest can be used for normal daily expenses and other short/mid-term goals.
As one gets older the amount needed for savings to reach the same end goal roughly doubles every 10 years. So, if someone waits ten years to start saving, instead of 30, they are now 40, instead of 8–10 percent, they are now looking at 16–20 percent saved to reach the same end number.
You generally hear people saying 15 percent should be set aside for retirement and this would be a good rule of thumb for those in their mid-30s. At any rate, save at least enough for retirement to take full advantage of any company match. Also, how you save is just as important as how much you save. And how you save depends on the retirement accounts you open — do you pay tax now or in retirement? Are you diversifying your tax liability in retirement by utilizing Roth accounts?
What kind of debt should consumers worry about the most? What kind of debt isn’t so bad?
Good debt versus bad debt. In a nutshell, it comes down to interest rates. Given the current interest rate environment and market conditions, 5 to 6 percent interest is about the breakpoint. Anything below 5 percent would be considered good debt and anything above 6 percent would be considered bad debt. Debt above 6 percent right now would generally be personal lines of credit, private student loans, and credit cards. Debt below 5 percent right now would generally be federal student loans, mortgages and car loans.
For young adults with student loans, how would you recommend they tackle repayments? Does it depend on their situation?
This also depends on their situation, but, generally speaking, tackling any private student loans would have priority over government student loans. This also goes back to the good debt versus bad debt conversation. In addition to the interest rates of good versus bad debt, government student loans also offer a number of forbearance and forgiveness programs. For example, if you pass away, your government student loans are forgiven, assuming it is in your name only. Private student loans are not. Also, student loans should be viewed as an investment in your future, something that will empower you for your career.
What keeps you up at night as a financial advisor?
What keeps me up at night is the fear that investors will make life-changing decisions based on a small amount of information, and that the information is based on short-term events. Fear will overtake rational thought. Particularly during this pandemic, it’s imperative to think in the long term as much as we possibly can and not make unnecessary, life-changing decisions in the moment.
If you could wave a magic wand and help every American in some way for Financial Planning Month, what would you do and why?
Stop reading generic investment resources. Stop listening to the talking heads. Stop looking for a get rich quick scheme. Stop taking advice from non-investment professionals. Too often, what is pushed out in the media is for ratings and for companies to sell their product. Good ideas and good investments do not need to be sold.
Investment companies pay a lot of money to push their products, and if you are seeing them advertised, then they probably aren’t right for you. Not to mention they probably have high fees to cover the costs of that ad. When you see any talking head discussing the market and how to invest, take a second and ask yourself: What are their credentials? Do they have a background in finance or the area of conversation, or do they simply look and sound good on screen? Building wealth takes time and hard work. Focus on what you can control and let your savings rate do the work, not the rate of return.
Although Financial Planning Month is coming to an end, that doesn’t mean you’re too late to prepare for a successful financial future. The more you practice money-saving habits, the more money you have to invest in your future. If you have any questions or need some assistance getting started with financial planning, reach out to us at email@example.com and one of our knowledgeable financial advisors would be happy to help.
Tolen Teigen is Chief Investment Officer of Financial Decisions, Inc. Financial Decisions, Inc., is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.