5 Financial Rules That You May Need To Break

November 30, 2017

There are certain guidelines that we financial planners tell people to help keep them out of trouble. Most of the time, they’re right on. But there’s almost always an exception to the general rule. Here are some of those rules, why they usually make sense, and when they might not.

RULE: Pay your credit card balances off in full

Why it usually makes sense:

Not paying off your credit cards in full each month means that you’ll have to start paying interest to the credit companies at an average rate of 14%. That’s high, but you could be charged a lot more than that, especially if your credit isn’t too great.

Have you seen those calculations that show how the magic of compound interest can grow your savings over time? Well, when you have credit card debt, that same magic of compound interest is actually working against you. Pretty soon, you could find yourself paying more in interest than you spent on the original purchases. Some will even have to file for bankruptcy…and it all started with carrying that first balance.

Exceptions to the rule:

There are two opposite situations that I can think of in which carrying a balance can make sense.

If you have a very low rate and would be better off investing the money than paying down the balance. In this rare instance, your credit card debt actually becomes “good debt” like a mortgage or student loan. In fact, I wrote a whole post about how you can make money off zero rate credit card offers. However, that post actually came with a warning from our CEO because you have to be very disciplined to make sure that you save that money and that you keep track of when the low interest rate offer expires so you can pay it off beforehand.
When you’re in such financial difficulty that you’re having trouble paying your mortgage or your car payment. In that case, make sure those bills are paid first because as much as you don’t want to pay interest or fall behind on credit card payments, you don’t want to lose your home or your car even more.

RULE: Aim to have 80% of your income in retirement

Why it usually makes sense:

First, any target is better than none. In fact, our research shows that most employees aren’t confident they they’re on track to retire comfortably and have never even run a calculator to see how much they need to save. 80% is a good starting place because people tend to need less income when they retire since they won’t be saving for retirement or paying into Social Security and may have their have kids out of the home and their mortgage and other debts paid off.

Exceptions to the rule:

The key word there was “tend.” Your situation may be different depending on the lifestyle you want to have in retirement and how your various expenses may change. For example, you may want to spend a lot more on travel while someone else may prefer to stay close to home and spend more time with the grand kids. Look at what debts will be paid off but don’t forget to add in the costs of retiree medical insurance and possibly long term care insurance. In short, some people will need a lot less than 80% and some will need a lot more.

RULE: Start contributing to your 401(k) as soon as possible

Why it usually makes sense:

The earlier you start saving for retirement, the better off you’ll be. The longer you delay, the more you’ll have to save or the later you’ll have to retire. In other words, your future self won’t be very happy that you had other “priorities” with your money. Plus, if your employer offers you a match, you don’t want to leave that free money on the table.

Exceptions to the rule:

There are three reasons why you might want to delay contributing to your 401(k).

To focus on paying down high-interest debt. This is because high-interest debt can cost you more than you’re likely to earn in your 401(k). Just make sure that you make up those lost contributions once the debt is paid off.
To build up an emergency fund. Your future emergency may not qualify you for a hardship withdrawal and even if you are eligible, you could be subject to a 10% tax penalty, so it’s best to have funds available outside your 401(k) to pay for things that come up. You might be able to borrow from your plan but only up to half of your balance, which may not be enough.
To save for a home purchase. After all, owning a home could be part of your retirement plan too. Once again, just be sure to make up for those lost contributions after you throw that house warming party.

One final note is that you can save for emergencies or a home with a Roth IRA since the contributions can be withdrawn tax and penalty-free at any time for any reason and the earnings can also be withdrawn tax-free for a first-time home purchase as long as the account has been open at least 5 years. The advantage is that anything you don’t use can grow tax-free after age 59 ½ so you’re still saving for retirement too.

RULE: Don’t borrow from your 401(k)

Why it usually makes sense:

Speaking of 401(k) plans, too often people use them like an ATM. Since the interest you pay just goes back into your account, it can seem like a cost-free loan. However, you’re missing all the earnings that your money would have earned if you hadn’t borrowed it. Meanwhile, the loan payments you’re making could have been additional contributions. If you leave your job for any reason, you may also have to pay the outstanding loan balance back within 60 days or it would be considered a taxable distribution and subject to a 10% penalty if you’re under age 59 ½.

Exceptions to the rule:

I’ve seen situations where people have used their 401(k) to pay off high-interest debt and get themselves out of severe financial distress. That’s because there’s no credit check and low interest rates mean that the 401(k) loan payments could be a lot lower than the credit card bills.

The key is that this needs to be part of a long-term strategy to get and stay out of debt. The worst thing you can do is find yourself back in debt but with a much lower retirement account balance. Also, don’t raid your retirement account if you’re thinking of declaring bankruptcy since it’s a protected asset.

RULE: Don’t borrow from your home either

Why it usually makes sense:

In short, you’re putting your home on the line. Lots of people did this during the housing boom, expecting to pay off their loans with rising property values, only to find themselves underwater and struggling to make the payments.

Exception to the rule:

If you have a comfortable amount of home equity and you’re confident that you can afford the payments, a home equity loan can be a tax-deductible and low-interest alternative to more expensive sources of credit. Just be careful of variable rates and balloon payments that can make that loan not so affordable in the future.

As they say, rules were made to broken. But that doesn’t mean they should be broken lightly. If you’re unsure, talk to a qualified financial professional first. After all, you don’t want to learn the hard way why the rule was created in the first place.

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Should You Do A Balance Transfer?

November 16, 2017

A friend of mine recently asked me about doing a balance transfer, which is a common question I receive. After all, you may get offers in the mail for credit cards with rates that look quite enticing compared to what you’re currently paying. There are definitely some pros and cons, and here are a few other things to consider:

How’s your credit? Depending on your credit score, you may not qualify for the best deals or even any new credit at all. To make matters worse, if your application gets turned down, that will hurt your credit score even more. You can get a free credit score at sites like Credit Karma, Credit Sesame, NerdWallet, and Quizzle to see what balance transfer offers you might actually qualify for before applying. (keep in mind that those sites use their own formula and may not be exactly the same as the credit scoring system the credit card company uses)

What are the fees and how long does the balance transfer rate last? You want the interest savings to outweigh any fees you may have to pay to transfer your balance. Be aware that you may end up with a higher fee once the promotional rate ends. You may be able to find a better long term deal from peer-to-peer lending sites like Lending Club and Prosper.

Can you borrow from your 401(k)? If you can’t qualify for a new credit card or if the balance transfer rate is still higher than 4-6%, you may want to pay off your credit card debt with a 401(k) loan instead. There’s no credit check and you pay the interest back to yourself. But you should also be aware that there are potential downsides to this option as well.

Do you have equity in your home? Another option is using a home equity loan or line of credit to pay off your credit card debt. If you have a good credit, you can qualify for a pretty low rate that’s also tax-deductible. If you’re in the 25% tax bracket, a 4% loan would really be a 3%, which is much less than you can expect to earn by keeping your 401(k) money invested. The big downside is that you can lose your home if you default so this is not a good option if you might have trouble making payments.

Is this part of a strategy to pay down your debt? No matter which of the above options you choose, one of the biggest mistakes people make is to do a balance transfer or otherwise refinance their debt and then run the debt right back up on the old credit card. Make sure any balance transfers you do is part of a wider plan to pay down your balance faster rather than get deeper in debt. That starts with getting control over your spending so you’re living within your means. See some relatively painless ways to save money here and here.

Like with most financial questions, the answer to whether you should do a balance transfer is,“it depends.” Know the pros and cons of your different options. Regardless of your decision, make sure it’s an educated one.

Is Trump Going To Take Away Your 401(k)?

November 02, 2017

You’ve probably seen the headlines about the latest tax proposal working its way through Congress and perhaps you’ve heard that there are proposed changes to the way 401(k)s work. How can you tell the fake news from the stuff you should worry about? Here’s how I see it:

What it is: The big thing going on is the discussion about limiting pre-tax contributions to qualified retirement plans (like 401(k) accounts) to $2,400 a year as a way to help pay for tax cuts. If you’re currently contributing more than that pre-tax, you would see your current income taxes increase. However, you will likely be able to make after-tax Roth contributions up to the current limits or an even a higher $20k annual limit. As long as you’ve had the account for at least 5 years, these Roth contributions can then be withdrawn tax-free after age 59 ½.

What it isn’t: Nothing will happen to the money that you already have in the plan — that’s not what this is about. It’s also highly unlikely that total contributions would be capped at $2,400. That would be incredibly politically unpopular, plus preserving the Roth option allows Congress to claim that they’re not raising taxes overall since the higher taxes today would be offset by lower taxes on the future Roth withdrawals. (That loss in revenue to the government wouldn’t be until most of the current politicians are conveniently out of office.)

Should you worry? If this passes, you would no longer have the option of reducing your taxable income by more than $2,400 a year via contributions to your 401(k), so if you currently contribute more than that pre-tax, it would mean higher current tax bills. The silver lining is that those without a current Roth option in their 401(k) would likely get it.

Roth contributions have several advantages over pre-tax contributions:

If you plan to retire before being eligible for Medicare at age 65 and purchase health insurance through the Affordable Care Act, tax-free Roth withdrawals do not count in determining your eligibility for health insurance subsidies, which can make your health insurance premiums a lot more affordable.
Tax-free Roth distributions may mean less of your Social Security income would be taxable.
If you lose a lot of deductions in retirement (like having your mortgage paid off and/or moving to a state with lower state income taxes), taxable withdrawals from your 401(k) could put you in a higher tax bracket — you don’t have that problem with Roth.
Similarly, tax-free Roth distributions can protect you from the risk of higher tax rates in the future.
By rolling your Roth 401(k) into a Roth IRA, you can avoid required minimum distributions and eventually pass on more to your heirs.

What you can do now: If the ability to save pre-tax for retirement is important to you, take advantage of your ability to make pre-tax 401(k) contributions while you can and keep in mind that even if the 401(k) didn’t exist at all, you can always save for retirement in IRAs and regular taxable accounts. The decision of where to put your retirement savings is secondary to how much to save to begin with.

That being said, use this controversy as a spark to learn more about pre-tax and Roth contributions and how you can benefit from whatever opportunities are available to you. Remember, neither Trump nor Congress are ultimately responsible for your retirement. You are.

How To Find The Best Travel Deals During The Holidays

October 19, 2017

Along with a respite from work and the joys of celebration, the holidays can bring stress…and debt. One of the biggest culprits is the cost of travel. Fortunately, there are some things you can do to cut those travel bills down to size:

Flights

When to book: You can pay considerably different prices for the same flight and seat depending on when you buy your ticket and earlier isn’t always better. There are some rules of thumb like purchasing tickets 30 days to 3 months before a domestic flight and 1 ½- 5 ½ months before an international flight and specifically on a Tuesday at 3 pm ET (when airlines release the most sales). If you have an iOS device, another option is to use an app called Hopper^†, which tries to predict the best time to book your flight.

Finding the best fares: When it’s time to book your ticket, check out a site called Yapta, which stands for “Your Amazing Personal Travel Assistant.” It’s powered by Kayak (the sites even look the same) and adds a feature that makes it live up to its name. It can automatically alert you if the price of your flight drops more than the exchange fee and helps you get a credit for the difference. The service works with most of the major US airlines but no foreign-based carriers.

One carrier that doesn’t work on Yapta but that you’ll also want to consider is Southwest. They allow you to change your flight with no fee or cancel for a credit so you can always switch if you see a better deal. Sometimes I even purchase more than one Southwest flight to give me multiple options and then cancel the unused flights for credits I can use in the future.

Choosing your seat: If you’re traveling alone, never choose a middle seat. If your only options are middle seats and premium seats for a fee, consider leaving your seat selection blank. You’ll be assigned a seat at check-in and there’s a good chance you can score a premium seat for free if they’re the only ones left. (This often happens since people will often choose a middle seat to avoid the fee when booking.) There’s no guarantee there will be any available but choosing a middle seat guarantees…a middle seat.

If you’re traveling with someone, you and your travel partner might want to each choose an aisle and window seat in the same row. If someone sits in the middle seat, I’m sure they’d be happy to switch with one of you. But if no one chooses to sit in the middle, you have the whole row to yourself.

Rental cars

Another site called Autoslash does basically the same thing as Yapta for car rentals except they automatically re-book you if the price goes down since you generally don’t pay for car rentals in advance. They also search and apply for coupons you may be eligible for. However, they only include certain car rental companies.

Hotels

Tingo works the same exact way as Autoslash for hotel reservations. They automatically re-book you if the price drops and refund the difference back to your credit card. But unlike Autoslash, Tingo works with virtually every major hotel group and thousands of independent hotels.

There’s one more step you can take after booking the best deal you can find on Tingo. Just before the hotel becomes non-refundable, check an app called Hotel Tonight. It provides great last-minute hotel deals for select cities.

These methods don’t require any sacrifice and little to no extra time. In fact, you don’t really have to change your behavior much at all. Don’t you wish saving money during the holidays was always this easy?

Are You Betting Against Warren Buffett With Your Portfolio?

October 05, 2017

If you could get investment advice from anyone, who would it be? Well, you could do a lot worse than Warren Buffett, the second richest person in the world. For years, Buffett has been advising anyone who will listen, including Lebron James, to avoid high cost actively managed funds and stock to simple, low cost index funds.

With much of his advice ignored, Buffett decided to put his money where his mouth is and bet $1 million to charity that an S&P 500 Index fund would beat a group of any hedge funds over a 10 year period. (Hedge funds are supposed to be the “best of the best” on Wall St. and are generally only available to wealthy individuals and institutions.) After a period of silence, Buffett finally found someone willing to take up his challenge. The 10 year period expires at the end of the year but Buffett’s opponent has already conceded since the S&P is considerably ahead of the hedge funds.

What can the rest of us learn from this?

Keep an eye on costs when choosing mutual funds. The primary reason the hedge funds lost was their high fees. A study by Morningstar similarly found that the “most proven predictor of future fund returns” when comparing similar mutual funds was a low expense ratio, which is the main fee charged by mutual funds. Buffett chose an index fund since they tend to have much lower fees and trading costs than actively managed funds. In a taxable account, they also tend to be more tax-efficient. If you don’t have index funds available to you in your retirement plan, compare funds’ expense ratios and turnover ratios (how often a fund trades and this generates transaction costs).
Have a long term perspective. Despite the odds being in his favor, Buffett knew better than to take a bet on a single year’s performance. He used ten years to reduce the impact of random luck. Don’t get caught up in short term performance. Just because a fund is outperforming for a period of time, doesn’t mean it will continue to do so. In fact, research has found that the longer the time period, the less likely top funds can maintain their outperformance, implying that it was more due to luck than skill.
Be willing to take calculated risks. Buffett knew the odds, but it wouldn’t have meant anything if he wasn’t willing to take a bet on them. Remember, knowing is only half the battle. Don’t let analysis paralysis or procrastination prevent you from acting. If you’re afraid of investing, start with a more conservative fund that also includes bonds and cash as well as stocks.

In retrospect, betting against Buffett may seem like a foolish bet to have made. But keep in mind that when you choose more expensive, actively managed funds, you’re essentially betting against Buffett too with your own money. Is that really a bet you want to take?

The Danger of Keeping Things TOO Simple With Retirement Planning

September 14, 2017

With a lot of personal finance, it makes sense to keep things simple or otherwise choose the method that works best for you. Just as the best exercise is the one you’re actually going to do, the same is true for the best budgeting or money management system. When it comes to investing, simple strategies typically work better than more complex ones.

Finding your retirement number isn’t that simple

But while varying money management and investment systems can get you to the same place (saving enough and being properly diversified, respectively), this isn’t necessarily true when it comes to figuring out how much you need to save for retirement. For example, this article I recently read in USA Today called “Simple to complex: 4 ways to find your retirement number” seems to suggest that there are 4 valid ways of figuring out how much to save:

Save 15%
Save $1 million
Save enough to replace 80% of your income
Save enough to fund your projected retirement expense

This advice can be dangerously simple.

Why saving 15% might not be enough

For example, the 15% number is cited in a Fidelity article that uses this as a guideline for someone starting at age 25 and saving until age 67. Let’s put aside all the built-in assumptions about your income, employer match, investment returns, and income needs in retirement. Instead I’m asking how many people reading this article are actually age 25 or younger? 15% may make sense as a default contribution rate for retirement plans since many people getting their first job out of school tend to stick to the default, but it can be dangerously low for someone starting much later.

Why $1 million might not be enough

What about $1 million? Using a 4% withdrawal rate, that would produce about $40k of inflation-adjusted income each year for 30 years. For someone with higher income needs, that may not be enough. For others, it can be such an unnecessarily high bar that they feel they’ll never be able to retire and are discouraged from saving at all.

Taking it to the next level

If you’re going to take the time to calculate how much you need to save in order to reach $1 million, you might as well take just a few more minutes to use a relatively simple but far more effective retirement calculator like this one. If you don’t want to take the time to project your retirement expenses, you can use the third method in the article and simply target an 80% replacement of your current income.

That’s because people typically spend less in retirement on housing (you may have a paid-off home and/or downsize), other debts that may be paid off, children, etc. You also won’t be saving for retirement when you’re retired so you won’t need that income either. While you may need less, few people will absolutely NEED more. (If you’re planning a more lavish retirement, you can always target a higher income replacement percentage.)

Factoring in all the variables

While it takes just a few minutes to use the calculator, it will take into an account variables such as your projected Social Security, pension, and other retirement income, current age, planned retirement age, and current retirement savings balance and contribution rate for both you and your spouse if married. You can also adjust your assumed life expectancy, inflation rate, and investment returns.

By playing around with the calculator, you can see how much any of these variables can drastically affect how much you need to save to reach your goals. You may need to save a lot more or a less than 15% to have a lot more or a lot less than a $1 million in retirement. When it comes to retirement planning, keep it simple…but not TOO simple.

Why The Traditional 401(k) Is Underrated

August 31, 2017

Do you like paying “hefty tax bills?” According to this article titled, “If you like paying hefty tax bills, stick with your regular 401(k),” you’re likely to be better off contributing to a Roth 401(k) since required minimum distributions from a traditional 401(k) can keep you at the same or a higher tax bracket in retirement. That sounds pretty cut and dry but as with most universal financial recommendations, it’s a bit oversimplified.

Let’s take a look at some reasons why you might want to contribute to a traditional 401(k) even if you don’t like paying “hefty tax bills:”

1. Lowering your taxable income now can make you eligible for other tax breaks. One of the main differences between a traditional and Roth 401(k) is that the former lowers your taxable income now, while the latter can lower your taxable income in retirement. In other words, would you rather pay the tax now or later? One way to answer that is to compare your tax rate now with the one may pay in retirement.

However, there’s another factor to keep in mind. There are a number of tax breaks that phase-out based on your taxable income. Since almost all of them involve working, having children, saving or paying for education expenses, or saving for retirement, you’re much more likely to be eligible for them now than when you’re retired…assuming your taxable income doesn’t disqualify you. Before switching to a Roth 401(k), see if traditional 401(k) contributions can help you qualify for other tax breaks.

2. Your effective tax rate in retirement may be lower than you think. First, don’t forget that not all your income will be taxable in retirement. Even if you have no other tax breaks, you’ll still likely be eligible for at least the personal exemption and standard deduction and your Social Security will at most be partially taxable depending on your “combined income.” Any withdrawals from Roth accounts may be tax-free and only earnings on outside savings and investments are taxable (as opposed to any principal that you sell or withdraw).

More importantly, we need to examine what we mean by “tax rate.” For example, let’s say you currently earn a joint taxable income of $100,000. That would put you in the 25% tax bracket. If you contribute $18,000 pre-tax to your 401(k), all $18,000 would otherwise have been taxed at that 25% rate.

You then retire with the equivalent of $80,000 of taxable income (including RMDs) and are still in the 25% tax bracket. However, only the taxable income above $75,900 (in today’s dollars but the brackets are adjusted for inflation) or about 5% of your taxable income is taxed at that 25% rate. This means your average or effective tax rate is only 14.35%, despite still being in the 25% tax bracket. Would you rather pay a tax rate of 25% now or 14.35% later?

3. You can always convert to a Roth IRA later. If you make pre-tax contributions, you always have the option to later roll them into a traditional IRA and then convert them into a Roth IRA. You’ll have to pay taxes on the amount you convert, but if you plan to take time off from work to go back to school or take care of a child or elderly parent or even start a business that takes time to ramp up, you may be able to convert at that time and pay a lower tax rate. If your taxable income is low enough in retirement, you may even decide to convert then so your Roth account can grow tax-free for your heirs. However, if you make Roth contributions, you don’t have the same option to convert them to traditional.

None of this is to say that the traditional 401(k) is better for everyone either. In fact, there are some very good reasons to make Roth contributions such as if you’re maxing out your 401(k) contributions, you want to have tax-free income in retirement to qualify for higher health insurance subsidies under the Affordable Care Act, or you expect your tax rate to be the same or higher in retirement. If you’re not sure what the best option for you is, consult a qualified and unbiased financial professional.

Don’t just rely on one article’s headline. If it sounds too simple to be true, it probably is.

This post was originally published on Forbes, July 26.

Why Acorns Can’t Replace A Financial Plan

August 24, 2017

It’s always good to hear about different ways of saving money so I was intrigued by this recent Forbes post about how one of my colleagues uses an app called Acorns to save more by making it a game. The app rounds up your linked debit and credit card purchases to the nearest dollar and then invests the difference in a mix of ETFs. Partners can also contribute cash rewards from purchases to your accounts.

The main advantage of Acorns is that it makes saving and investing really easy. Beyond setting up your account and linking your cards, there really isn’t anything else to do. However, there are a few drawbacks to be aware of:

Complacency. My biggest fear is that people would use this as a substitute rather than a supplement to making sure they’re saving enough to hit their goals. The reality is that rounding up your purchases is unlikely to be enough. You’ll still want to calculate how much to save for both long term goals like retirement and shorter term goals like an emergency fund, buying a home, or going on vacation.
Taxes. Once you know how much to save, the next question is where to put it. For goals like retirement, there are significant tax benefits for contributing to your employer’s retirement plan (plus possibly free money in the form of a match), an HSA, and an IRA. Acorns only allows you to contribute to regular taxable accounts.
Risk. Of course, regular taxable accounts are fine for short term goals where you don’t want to be subject to an early withdrawal penalty. The problem here is that any money you might use in the next few years should be someplace safe like a savings account or money market fund. The type of investments that Acorns uses are just too risky for such a short time frame. You could see a good portion of your savings wiped out if you need the money while the market is down.
Fees. While the fees are pretty low for small accounts, their .25% fee on balances over $25k will start adding up as your account balance grows over time. After all, this is how they intend to make money. The problem is that you can purchase essentially those same investments in a brokerage firm without that additional cost.

Fortunately, you can get a lot of the same benefit of using Acorns by simply automating your saving and investing. After calculating how much to save, have that amount deducted from your paycheck or automatically transferred from your bank account to a separate account.

You can then have your savings money automatically invested in a low cost diversified portfolio that matches your time frame and risk tolerance. It may not be as fun as using the app, but it’s definitely more fun to hit your goals than to find out that you haven’t saved enough, paid too much in taxes, or saw your savings decimated by the market in the short run or by fees in the long run.

Does this mean there’s no place for apps like Acorns? Not necessarily. It can be a great way to start a good habit or supplement your other savings, especially if you shop a lot at one of their partners and can collect a lot of “found money.” Just don’t expect it to replace a real financial plan.

What To Do If You’re Worried About North Korean Nukes

August 17, 2017

I recently had someone ask me about what the effect could be on their investment portfolio and what they should do about it should North Korea actually launch a nuclear missile. We’ll get to that, but the reality is that your investments will likely be the last of your worries.

However, there are some things to do to prepare for a nuclear attack that may not only help bring some peace of mind during uncertain geopolitical times, but could also help you should other disasters strike such as a job loss or weather-related event.

1) Know what to do if you’re in the vicinity of a nuclear blast.

The Department of Homeland Security has a quick summary of what to do. Study them and consider taking first aid classes from your local Red Cross. Those skills can come in handy in a variety of emergencies. We change lives at Financial Finesse but this can actually save them.

2) Build an emergency kit.

You don’t have to be a crazy survivalist living in a mountain cabin to see the value of an emergency kit with tools, first aid supplies, and enough food and water to last at least 3 days. In fact, that’s what’s officially recommended by FEMA and the NY Times. A basic kit can be purchased for less than $100 from the American Red Cross or you can put one together for even less, especially if you already own many of the components.

3) Stash some cash.

In an emergency, cash is truly king. No matter how adequate your emergency supplies are, you never know what you may need to purchase from someone else after a disaster. After a nuclear attack, banks may be closed, ATMs may not be working, and money market funds may not be available if the stock market is suspended as it was after 9/11. That’s why you’ll want to keep at least few hundred dollars in physical cash (yes, even if it’s under your actual mattress). Some people hoard gold coins for this reason but will the people you want to buy from know how to value them? I’d stick with cash.

4) Have an emergency food reserve.

If the emergency lasts past 3 days, you’ll still want to be able to eat. Consider having enough food to last at least a couple of weeks. The nice thing about food (as opposed to say, gold) is that it’s something you know you’ll need and can benefit from even if no emergency ever happens.

First of all, you can save a lot of money by buying non-perishable food in bulk. You would then simply replace items as you use them and perhaps add items while they’re on sale. Storing food you eat anyway also ensures that you won’t be making a big change in your diet during an already stressful time.

Second, a food reserve can also be part of your regular emergency fund and reduce the amount of savings you need. After all, you can eat it if you’re unemployed too. Sure, you would miss out on the less than ½ of a percent (minus taxes) you’d otherwise be earning with that money in your savings account. But according to the most recent CPI release, the inflation rate of food over the last 12 months ending at the end of June was about 1.6% so you’d actually be saving more than what you likely would have earned keeping that money in the bank.

5) Make sure your portfolio is diversified.

If we do get attacked, once the initial shock has worn off, you’ll eventually notice that your portfolio will most likely be decimated. This is why it’s important to be diversified in assets like international stocks, government bonds, and possibly alternative investments like gold that may not be as adversely affected or may even benefit from a crisis. You can use this asset allocation guide based on your risk tolerance, follow one of these model portfolios, or simply invest in a “one stop shop” asset allocation fund. Just be sure that this is part of your overall long term investment strategy — don’t change your investments every time North Korea makes a threat or the President tweets one or you’ll likely decimate it on your own.

Hopefully, you’ll never need any of this. In the best case scenario, having a plan will simply provide some peace of mind. In the worst case, better safe than sorry!

Should You Close A Credit Card?

August 10, 2017

One question we often receive is whether or not to close a card after it’s paid off or no longer in use. At first, your instinct might be to close the cards to avoid annual fees and perhaps to never face the risk of running that debt back up again. However, there are a couple of reasons why this can actually hurt your credit score.

Credit utilization

The first reason is that a big part of your credit score is your credit utilization or what percentage of your total credit limit you’re using. (It doesn’t matter if you pay off your credit cards each month because it’s measured at a random point in time.) Let’s say the total credit limit among all your cards is $10k and you have a $3k balance. In that case, your utilization would be 30%, the recommended max you should use to maintain the best credit score. If you close some cards and now have a total credit limit of $5k, that same $3k of debt would result in a 60% utilization.

Credit history

Of course, if you don’t use the cards anymore, your credit utilization will be zero no matter how many cards you have. There’s another reason why closing credit cards isn’t always a good idea though. Closing an old card can shorten your credit history, which is another factor in determining your credit score. So if the card you’re thinking of closing is your oldest card, you may want to keep it open just to keep that history active on your credit report.

This isn’t to say that closing cards is always a bad idea. If you have too many lines of credit, closing a few can actually help your score. To find out, you can use Credit Karma’s free Credit Simulator tool to see what the impact might be.

Alternatives to closing

If closing cards turns out to be a bad idea, there are some alternatives. If you’re worried about using the cards and running the debt back up, you can always physically destroy them or put them someplace hard to access, but keep the credit line open. If you’re trying to avoid fees, contact the card company and see if you can convert the card into one with no fees or one with rewards that outweigh the costs.

Measure the right things

Finally, don’t forget that credit scores are far from the most important number in your financial wellness. In fact, a few points here and there may make no difference at all in your ability to get a loan or the interest rates you qualify for. So despite what may be small impact on your credit score, sometimes the best choice is to just go ahead and close those cards.

Why You Shouldn’t Worry About Investing at the Top

August 03, 2017

Have you been seeing a lot of news articles lately about how the US stock market is overpriced and due for a decline soon? Of course, correctly timing the market is notoriously difficult. Not only do you have to know when to get out, you also need to know when to get back in. But what if the prognosticators are right and you’re unlucky enough to invest at the very peak of the market?

Getting it totally wrong

This article looked at what would have happened if a hypothetical investor had invested at all the wrong times over the last few decades: 1973 before a 48% decline in the S&P 500, September of 1987 just before a 34% crash, and then right before the 2000 and 2007 bubbles burst. Sounds pretty dismal, huh? It turns out that our spectacularly awful investor still would have earned a 9% average annualized return! That’s because they never sold and held the stocks until the eventual recoveries. So what can we learn from this?

You’re in it for the long haul

First, only invest if you can keep the money invested for the long run, ideally at least 5 years. Otherwise, you risk needing the money when your investments are down in value and you’re forced to sell at a loss. Any money you need in the next few years should stay someplace safe like a savings account instead.

Don’t put all your eggs in one basket

Second, be diversified. These results were based on investing in the stock market as a whole. An individual stock can go all the way to zero and never recover. It would take essentially the end of the world for that to happen to the entire stock market. In that case, your investments will be the least of your worries.

Ride out the storms

Finally, don’t sell during downturns. Stock market declines are inevitable and generally happen every few years. The key is to not let them affect your long term investment plan. Try to ignore them or even better, consider re-balancing your portfolio to make the declines actually work in your favor.

Take the plunge

This is another reason why I love investing. You can have the worst luck in the world and still come out doing pretty well. The key is to have patience. As they say, it’s time in the market, not timing the market that matters. So if you’re waiting for a market dip to get in, you could be wasting your time. Just do it!

The Best Financial Decision Isn’t Always the Most Obvious One

July 27, 2017

Let’s suppose you have sufficient emergency savings and are maxing the match in your 401(k). You now have several options of what to do with your extra savings. One is to pay down a student loan with a 3.7% interest rate, the second is to invest more for retirement, and the third is to pay down a mortgage with 3.85% interest rate (2.81% after factoring in the tax deduction). Which would you choose? This is the real life scenario of an employee I recently spoke with, so let’s explore the options.

Option 1: Pay down 3.7% student loan

Her initial instinct was to pay down the student loan because it annoyed her the most and she was worried about having that debt if she were to lose her job. But making payments towards the debt wouldn’t actually make her more financially secure until it was completely paid off. In the meantime, she would actually be safer having more in savings and investments that she could use to make the loan payments in case she found herself in between jobs.

Option 2: Invest more toward retirement

She could reasonably expect to earn more by investing her savings than she would save in interest by paying down the loan early, as long as she invested for longer-term growth and wasn’t too conservative. (My general rule of thumb is to pay off debt first if the interest rate is 6% or more, invest if the interest rate is below 4%, and go either way depending on how aggressive an investor you are if the interest rate is between 4-6%.) Of course, she could still decide to pay the student loans for emotional reasons, but investing would likely give her a better return on her money.

Option 3: Pay down 3.85% mortgage

In the end, we decided that it actually made the most sense for her to pay her mortgage down. At first, that didn’t seem to make sense since the mortgage interest rate is even lower than the student loan after the tax deduction. (Her income is too high to deduct the student loan interest from her taxes.)

However, it turned out that she had to pay PMI (private mortgage insurance) until she had 20% equity in her home. When we calculated how much she would save each year in PMI payments as a percentage of the mortgage balance she’d have to pay down, it was 6%. When you add that to the 2.81% interest rate, she would save a guaranteed 8.81% on the money she put towards getting that 20% in equity!

The moral of the story

When deciding between alternative options, first figure out what the expected return on your money would be, either in savings by paying down debt or earnings from investments, but be sure to factor in ALL the possible savings and earnings. (A qualified financial planner can help you do this so long as they aren’t biased towards one choice or another.) Finally, don’t forget the “happiness factor.” If, after looking at the numbers, she decided that paying off the student loan would make her happier overall, that’s fine too…as long as it’s an informed decision.

Are You Embarrassed To Talk About Money?

July 20, 2017

When I first heard about Financial Finesse’s workplace financial wellness programs, which are offered free to employees of client companies, I assumed that almost all of the employees would want to take advantage of it. After all, how often do you have the opportunity to speak with a CERTIFIED FINANCIAL PLANNER™ professional with at least 10 years of experience who won’t charge you or try to sell you anything? At best, it could change your life, but even if you decide not to do anything, what’s the harm in talking?

But what I’ve learned over my years here is that people find all kinds of reasons not to take advantage. Don’t get me wrong, we are busier than we’ve ever been working with employees to improve their financial lives, but I often wonder what keeps everyone from making the most of this amazing benefit. I find one of the obstacles is people feeling embarrassed to talk about their financial situation. Which I hate, because there really isn’t anything to be embarrassed about — we’ve heard it all and we are a judgement-free zone.

Here are 3 of the most common things I hear people say and why they shouldn’t feel that way:

I feel stupid about money. People tell me this ALL the time. The funny thing is that these people are far from stupid. Many of them are lawyers, doctors, scientists, etc. However, we have an education system that doesn’t really teach personal finance, a financial system packed with unnecessarily (and some would even say purposefully) complicated jargon, and busy lives that leave us without much time to learn this on your own.

Far from being “stupid,” acknowledging what you don’t know is a crucial first step in improving your financial wellness. No one knows it all and even if you did, we all have emotional biases that can prevent us from making the right decisions. It never hurts to get a second opinion (at least when it’s free and unbiased).

I feel guilty about what I spend on X. This is another one I hear constantly. Remember, there is no one right amount to spend in any given area. It all depends on your personal situation, goals, and values.

For example, many New Yorkers complain about how much they spend in rent, but they often forget how much they aren’t spending on car payments, car insurance, gas, and car maintenance. A person who is debt-free and saving enough to hit their goals can afford to spend more than someone trying to pay off credit card debt. You may decide to spend more on travel and less on shopping, while your friend does just the opposite. Neither of you are wrong, as long as that spending doesn’t lead to additional debt.

I know I should be doing X, but I’m not. Welcome to the club. Even financial planners will admit to this. Personal finance reminds me a lot of dieting and exercise. Most of the time we know what we need to do, but the hard part is actually doing it.

Just like working with a personal trainer, a good financial wellness coach can not only help you decide what to do but help motivate you to actually do it. One way is to hold you accountable. In that case, your fear of embarrassment can be your best asset.

You’re not alone.

If you’ve ever said any of the above, know that you’re definitely not alone. These feelings are also nothing to be embarrassed by. (I’m much more concerned about the person who is in denial and doesn’t think they need any help.) The only thing to be embarrassed by is not doing anything about them….especially when the help is free!

The Real Reason Your Stock Picks Are Wrong

July 13, 2017

It’s common knowledge that in the long run, stocks outperform treasury bills, which are short term loans to the federal government that can be considered a relatively risk-free form of cash. But according to a new study by Hendrik Bessembinder of Arizona State University, a majority of stocks in the CSRP database underperform treasury bills over both one-month and lifetime returns from 1926-2015. In fact, almost all the returns of the stock market come from just the top 4% of stocks! So what does this mean for you?

Picking individual stocks is basically gambling. The odds are simply heavily stacked against you. If you want to “invest” a small amount of money in individual stocks in the hope of outsized returns, go for it. (I actually do this myself.) Just make sure it’s money you can afford to lose and not your retirement nest egg or college fund.
Put your eggs in lots of baskets. It’s not just to avoid the big losers. It’s also to make sure you get the big winners too. For most people, this means investing in mutual funds or ETFs since it’s generally more difficult and expensive to buy enough individual stocks to be adequately diversified.
Be careful of active management. Considering how slim the odds are of picking that 4% of stocks, it’s no wonder that the vast majority of active money managers underperform. They either have to take the risk of missing that 4% and drastically underperforming the market (hence putting their careers in jeopardy) or more likely, they create “closet index funds” that mostly buy the entire market but still end up underperforming (albeit less drastically) due to fees and transaction costs. You can avoid these problems by simply investing in a diversified portfolio of low cost index funds. This way, you know you’ll have that 4%.

None of this means you should abandon stocks for treasury bills. Let’s not lose sight of the big picture here. A dollar invested in US stocks in 1926 was worth $448 in real inflation-adjusted dollars at the end of last year while a dollar in treasury bills was only worth $1.53, barely staying ahead of inflation. If you want your money to grow (and you probably need some growth to hit your long term investing goals), stocks are still where the action is. We just don’t know which ones yet.

The Best Financial Advice I’ve Ever Heard

July 06, 2017

That’s how the advice was characterized in the title of an article I read recently and it actually lived up to its name. After a five year study, the author found that there are two main ways to wealth for self-made millionaires (not including inheritance, marriage, or winning the lottery):

Pursue a dream.
OR
Live below your means and invest your savings over a long period of time.

Option 1: Pursuing a Dream

I’m often irked when I hear successful entrepreneurs and celebrities advocating the first path. The problem is that it requires both a lot of sacrifice and a lot of risk to achieve a dream. We see the outcomes, but we don’t often see the sacrifice or the risk. Hearing about countless hours of hard work isn’t as exciting, and no one listens to all the people who took the risk of dropping out of college and giving up on a safe career only to fail at acting or whatever else their passion was.

It’s not that this is necessarily a bad choice. Some people who pursue their dream do succeed. Just be aware of the sacrifices and risks you’ll have to take.

But it’s not always an either/or. One option might be to first try to achieve some level of financial security and independence first. For example, Arnold Schwarzenegger first made millions of dollars by selling fitness equipment and investing in real estate before he embarked on his acting career. He didn’t want to be like other aspiring actors he saw that struggled financially and were forced to take sub-par roles to pay the bills.

Option 2: Living Below Your Means

Since most people don’t have the desire to make the sacrifices and take the risks required to pursue a dream, the article’s author found that 83% of the self-made millionaires he studied became rich simply by living a very frugal lifestyle. (boring, I know) This is a path that doesn’t require immense talent, effort, or luck. The main obstacle is “lifestyle creep” or the tendency of people to automatically increase their standard of living as their income rises. As a result, many of them never get much beyond living paycheck to paycheck.

So what’s the secret? The article says the key is to maintain the “same house, same spouse, and same car” as long as possible. After all, houses and cars are two of the biggest expenses Americans have and anyone who has gone through a divorce can tell you it can be quite costly as well.

One advantage I’ve found of minimizing high fixed costs like homes and cars is that it leaves me more money not just for savings, but also for discretionary expenses like dining out, shopping, travel and entertainment. This gives you a certain level of financial freedom in your everyday life that makes you feel less constrained. Research has shown that spending money on experiences can particularly lead to happiness.

In contrast, buying a new home or car can typically only give you a temporary boost in happiness before you get used to it and need to upgrade again to get the same high. In the meantime, having less money to spend day-to-day can make you feel depressed and constrained. It’s kind of like going on a diet vs finding a way to eliminate a bunch of calories everyday so you can eat more of what you want.

So if you want to stop living paycheck to paycheck and become financially independent, you have two choices. You can either make the sacrifices and take the risks necessary to pursue a dream or you can stick to the same house, spouse, and car as long as possible. The second may not sound as exciting but as they say, slow and steady wins the race.

Deciding Whether To Save Or Pay Down Debt Isn’t Just About Math

June 29, 2017

I recently saw this article titled, “A financial expert says deciding whether to save or pay off debt comes down to a basic math question” that quotes financial writer Jean Chatzky asking, “What am I getting on that money?” For example, if you can save in your 401(k) and get a 100% or 50% match from your employer, that’s probably the highest return you can get. That would be followed by paying off high-interest debt like credit cards that often have double-digit interest rates.

However, you may be better off investing extra money rather than paying off low interest rate debts like many student loans, car loans, and mortgages if you can expect to earn more on your investments than the debts are costing you. In other words, earning a 6% average annualized return on your investments is better than paying down a 4% mortgage (especially if the 6% return is in a tax-sheltered account and the mortgage interest is tax-deductible).

More than basic math

This is generally good advice. There are a couple of problems though. First, it doesn’t take into account emergency savings, which should be kept in a low-risk, low-return account like a bank account or money market fund. With bank interest rates typically below 1%, you would NEVER save for emergencies using that logic because you could always find someplace else to put your money with a higher expected return.

You know how there’s generally an inverse relationship between risk and return? Well, emergency savings and insurance policies have low or negative expected returns. (If returns on insurance policies were expected to be positive, insurance companies would go bankrupt). That’s because they provide the value of reduced or negative risk.

Where does the emergency fund fit in?

So how should you prioritize emergency savings? Like having adequate insurance, I would actually put them first. Yes, your expected return is low but the goal here is to reduce the risk of losing your home and/or car if you lose your job and can’t make the payments.

However, because the return is so low, you don’t want to have TOO much in savings. A good rule of thumb is to have enough to cover at least 3-6 months of necessary expenses and perhaps even 8-12 months, depending on how risky your income is, what other resources you have available, and who else you’re providing for. A tenured teacher with a retirement plan they can borrow against and no dependents needs a lot less than an entrepreneur with little retirement savings and a family to take care of.

Figuring in your personal feelings about debt

Second, don’t forget the emotional component. Some people are more bothered by debt than others. Even if they know they can earn more by investing extra savings, they would derive more happiness (or at least stress relief) from being debt-free than from having those extra investment earnings.

In the end, isn’t happiness the goal? (This isn’t to be confused with making emotional decisions that we’ll later regret. The key is to make decisions that will maximize our long term happiness.)

So remember, when you’re deciding whether to save or pay off debt, it’s not just a basic math question. It’s a personal question too. That’s why we call it “personal” finance.

How To Find A Financial Planner That’s On Your Side

June 22, 2017

A friend of mine recently asked me what I thought of the new Department of Labor’s rule last week that requires financial advisors for IRAs and qualified retirement accounts to act as fiduciaries in their clients’ best interest. I personally felt a little conflicted.

The issue

On one hand, it can reduce a lot of the conflicts of interest that plague the financial advisory world. Before the requirement, advisors essentially had a choice over whether to be regulated as investment advisors subject to the fiduciary rule or as brokers subject to the much looser “suitability standard.” Many of the latter recommend high-fee funds that pay them large commissions, despite the fact that low fees have been found to be most consistent predictor of superior performance.

On the other hand, it will likely have some unintended and harmful consequences. Since advisors subject to a fiduciary standard tend to charge asset management fees, they often require you to have a minimum account balance to work with them. These fees can also cost more than the commissions in the long run.

At Financial Finesse, none of this has ever been an issue. We don’t charge fees or sell anything at all and make absolutely no money based on what we tell people. Because our services are paid for by employers, they are free to the people we work with and open to anyone, regardless of income or net worth. This opportunity to help people who really need it rather than sell things they may not need is why many of us chose to work here. Many even took a significant pay cut.

How to find a planner outside of the workplace

What if you don’t have access to an unbiased workplace financial wellness provider like Financial Finesse through your employer? Looking for a financial planner who will act in your best interest goes beyond just what’s required by the new rule. Here’s a process to follow that’s similar to the one we use to hire our planners:

First, find out how they’re compensated. Do they accept commissions based on their recommendations? If they charge an asset-based fee, do you meet their minimum account size? Consider advisors that charge an annual, monthly, or hourly fee as this presents the least conflicts and typically costs less when you do the math.

Second, good intentions aren’t everything. Make sure they have the skills to act in your best interest too. Look for planners with at least 10 years of experience and who have widely respected professional designations like the CFP®, ChFC, and CPA/PFS. Many other “credentials” are really just marketing gimmicks that can be purchased online.

Once you’ve narrowed your search a bit, do your homework. Review their disciplinary history here. Interview at least three to see who you personally feel comfortable with. Otherwise, you may find yourself not consulting them or taking their advice. Finally, ask for references of clients similar to you.

Of course, this process doesn’t guarantee that your planner will always act in your best interest. Stay vigilant and don’t be afraid to fire your planner if necessary. Remember that the person who cares most about your financial well-being and is ultimately responsible for it, is you.

Here at Financial Finesse, we believe strongly in the importance of workplace culture and the power of doing well by doing good. This article is the fourth in our week-long series of posts where we highlight a specific part of our company culture that helps to make Financial Finesse one of America’s best places to work. This is just one part of our celebration of recent recognition by Inc., who listed us as one of the Best Workplaces in 2017 and Entrepreneur, who named us to the Small-Sized Companies: The Best Company Cultures in 2017 list.

7 Places For Young People To Put Savings

June 15, 2017

In my last two posts, I wrote about why saving is such an important part of “adulting” and shared saving hacks for new grads. But where should those savings go? Here is how I would prioritize putting my savings if I were just starting out:

Build up an emergency fund. You may still feel invincible, but you’re actually more likely to need emergency savings than anyone since you’re more likely to change jobs frequently and less likely to have retirement assets or home equity to fall back on in an emergency. Shoot for at least $2,000 in savings, which is what the Federal Reserve Bank estimates the average American needs to resolve a financial crisis. Ideally, you want to be able to cover 3-6 months’ worth of necessary expenses in case you’re in between jobs. After all, you can’t always rely on the Bank of Mom and Dad.
Max a Roth IRA. Since Roth IRA contributions can be withdrawn tax and penalty-free at any time, a Roth IRA can be used to help build your emergency fund while also saving for the future. Just make sure you keep it invested relatively risk-free like in a savings account or money market fund until you’ve accumulated enough emergency savings outside your Roth. At that point, you can invest the Roth IRA more aggressively to grow tax-free for retirement. The younger you are and the longer the money will be invested, the more you can benefit from that tax-free compounding. You can also use the earnings penalty-free for qualified education expenses or up to $10k for a first-time home purchase.
Max the match on your employer’s retirement plan. Once you’ve accumulated some emergency savings, make sure you’re contributing at least enough to your employer’s retirement plan to get the full match. Otherwise, you’re leaving free money on the table. If you can’t afford to do that right away, you can slowly increase your contributions over time. Some plans even have a contribution rate escalator feature that lets you automate that.
Pay off high-interest debt. Once you’ve done the above, pay down any debt with interest rates higher than 4-6% since the debt may be costing you more than what you could earn by investing your savings. Start with the highest interest rate balance and then put the payments towards the debt with the next highest rate as each balance is paid off. You can see how quickly you can pay off the debt and how much interest you can save with this Debt Blaster calculator. Paying down the debt will also improve your credit score and improve your debt/income ratio, which can help you…
Buy a home. Once you’ve settled down enough that you think you’ll keep it for 3-5 years, owning a home can provide tax benefits and allow you to build equity. However, you’ll need savings for a down payment, closing costs, and any furniture/appliances you want to purchase. Ideally, you want to put down 20% to qualify for the best mortgage rates and avoid having to pay private mortgage insurance.
Max out a health savings account. If you’re in a high-deductible health insurance plan, you can contribute to an HSA pre-tax and use the money tax-free for qualified health care expenses. Unlike flex spending accounts, you can keep any unused money in the account and even possibly invest it. When you turn 65, you can then use it for any purpose without penalty so it can do double-duty as a retirement account too.
Save enough to hit your retirement goals. If you’ve done all of the above, run a retirement calculation to see if you’re on track. If not, you may want to save more, starting with your employer’s retirement plan.

If you need help, consider consulting with an unbiased financial planner. Your employer may even offer access to some at no cost to you. Aren’t you starting to feel more like an adult already?

The 7 Top Saving Hacks for New Grads

June 08, 2017

Do you know a new or upcoming grad? Last week, I wrote about why saving is such an important part of “adulting.” Of course, the hard part is actually finding the money to save. This week, I’ll share some key saving tips to pass on to any new grads wanting to start out on the right financial foot.

1. Don’t forget the cost of state income taxes when evaluating job opportunities. Taking a job in a state without a state income tax like Texas, Florida, Washington, or Nevada can save you thousands of dollars in taxes each year. Make sure you factor that in when comparing compensation and cost of living.

2. Keep your housing costs as low as possible. It may be tempting to get the best home you can afford, but this is where you can save the most bucks. Housing is a fixed cost that’s hard to adjust if money gets tight.

The key is to live below your means. Consider starting out living with parents or roommates for a while. In addition to saving on rent, you can also split utilities and share the cost of furniture and appliances. When your income goes up, upgrade to a studio before getting a one bedroom. By improving your living situation gradually, you can get a new “shot of happiness” with each improvement while being able to save more at each step.

In my case, I lived with roommates all the way up until last year. I actually preferred having the companionship of living with people that’s harder to find after college, especially if you move to a new area like I did. Even now, I live in a small studio that I was able to purchase in cash from saving money on rent all of those years.

3. Don’t buy a new car. A new car is a lot more expensive but will turn into a used one as soon as you drive it off the lot. If you’re worried about maintenance costs, consider a certified pre-owned car. I made the mistake of leasing a new car right after college but then purchased a used car in cash after law school.

4. Limit your eating out and entertainment budget. Give yourself a fixed amount to spend each month. You don’t have to track where every penny goes but when the money is gone, no more spending until the next month. On the other hand, if you have money left over, you can carry it over to be splurged in the future. This method forces me to prioritize and look for deals when going out.

5. Be smart with your smart phone plan. Consider staying on your family plan or using a prepaid cell phone plan. My prepaid plan with Verizon costs me about half as much as the regular Verizon plan without any noticeable reduction in quality or services. I also like to buy last year’s newest and greatest phone at a discount. It’s still an upgrade for me and I don’t have to worry about any quirks with the latest phones that haven’t been worked out yet.

6. Don’t pay down your student loans early. This one may sound puzzling but the fact is that student loan interest rates tend to be lower than credit cards and less than what you can likely earn by investing your savings instead. See if you can lower your payments with an income-based, graduated, or extended repayment plan. This way, you can put your savings towards paying off higher interest debt or higher earning investments.

7. Automate your savings. Once you’ve figured out how much you can save with the above strategies, have those savings set automatically set aside before you have a chance to spend them on something else. First, make sure you’re contributing at least enough to your employer’s retirement account to max the match. Then set up automatic contributions to an HSA (if you qualify), a Roth IRA, and savings accounts for short term goals like a vacation or home purchase.

Any other ideas? What have you done to save money? Feel free to supplement this with any tips of your own.

The Top 7 Reasons Saving is the Most Important Part of Adulting

June 01, 2017

I recently celebrated my 38th birthday, which I guess officially puts me in my late 30’s. As I reflect on the past couple decades, I find myself thinking about how the effect of saving money early on really made an impact on my life and helped me to “adult” better. For all those lucky kids just getting started with adulting, here are my top 7 ways that saving money from day one will help make it easier:

Saving money = more life choices

“Finding yourself.” You may still not know what you want to do when you “grow up” and that’s okay. In fact, I didn’t either — my first job interview after college was to sell newspaper advertising. Your early career years are a time to explore different career options. That means you’ll make a lot of mistakes. Having savings gives you the freedom to say “no” to a job or boss you hate in order to pursue something you’ll love.
Security. You may land a great job but find that sometimes things don’t work out on the employer’s end. As the last one hired, young people are often among the first to be let go. Think of your savings as the lifeline keeping you from mom and dad’s basement. Having what our CEO calls “FU money” also means the freedom to walk from a job when you need to.
Travel. One of my closest friends from college took a year off to travel the world shortly after graduation. If you’d like to do something similar, now is the time to do it before you’re tied down with obligations. Having money in the bank will make that a whole lot easier.
Marriage. Unless you plan to elope, weddings are expensive. And even if you do plan to elope or not marry at all, the cost of attending other people’s weddings can really add up too. Having money set aside allows you to make the most of these happy occasions.
Buying a home. An Australian billionaire recently stirred up controversy by blaming millennials’ inability to buy a home on their fondness for expensive avocados and coffee. He has a point. An increasing number of young people are putting off buying a home because they don’t have enough money for the down payment and closing costs. That means continuing to pay rent and helping someone else build equity instead of yourself.
Starting a business. Even the most brilliant business ideas aren’t typically profitable right away. In the meantime, you’ll still have bills to pay. That pressure for a quick buck could lead you to short-term thinking at the expense of the long term growth of your business.
Financial independence. Don’t think of it as “retirement” but as getting to the point where you work (or don’t work) as you want to. The sooner and the more you start saving, the sooner that day will come. Some people have even taken this to the extreme and retired before 40!

Don’t think of saving as deprivation. Think of the money in your bank as representing freedom. The more you have in there, the more options and freedom you have to live your life the way YOU want to.