4 Money Hacks Millennials Can Use To Make The Most Of Their Assets

May 14, 2018

If you’re a Millennial, you’re probably familiar with various “life hacks” to make life easier. Why not do the same with your finances? Here are four hacks you can use to easily get more from various financial assets:

1) Use a Roth IRA for emergency savings

When you’re early in your career, you may not have had enough time to build up an emergency fund but may not want to forego the tax benefits of saving for retirement to do so. Enter a Roth IRA. With this account, you can do both at the same time.

Since you can access the sum of your contributions at any time and for any reason without tax or penalty, it can serve as part of your emergency fund. (If you use the “backdoor method” to get around the income limits, you’ll have to wait 5 years before you can withdraw the amount you convert penalty-free.) You may have to pay taxes and a 10% penalty on any earnings you withdraw before 5 years and age 59 ½, but the contributions come out first. Anything you don’t withdraw can grow to be tax-free for retirement. Giving up this tax opportunity and having to file a withdrawal form every time you take money out can also make you think twice before spending the money on an “emergency.”

If it’s part of your emergency fund, the Roth IRA should be invested in something safe like a CD or money market fund. That’s because you don’t want it to be down in value when you need it. Once you have enough emergency savings someplace else, you can invest the Roth IRA more aggressively for retirement.

2) Consider a Traditional IRA for grad school

If you don’t have a retirement plan at work or if you meet the income limits, you can deduct contributions to a traditional IRA. Otherwise, you can contribute pre-tax to a retirement plan at work and then roll the money into a traditional IRA once you leave the job. In either case, the IRA money is penalty-free for qualified education expenses. You’ll have to pay taxes on the withdrawals but you’ll likely be in a lower tax-bracket if you’re not working full-time anymore. Just be sure to keep any money you plan to use in the next 5 years very conservative like a money market fund or a stable value fund.

If you need the money for retirement or end up not needing it for education expenses, you can also convert the traditional IRA to a Roth IRA while you’re in school. You’ll have to pay taxes on the amount you convert, but again, you’re likely to be in a lower tax bracket. The amount you convert to a Roth IRA can be withdrawn penalty-free after five years and the earnings can be withdrawn tax and penalty-free after five years and age 59 ½.

3) Use a health savings account for retirement

HSAs have the most potential tax benefits since the contributions are pre-tax and the withdrawals are tax-free for qualified health care expenses. (These medical expenses don’t have to be in the same year you make a withdrawal so you can pay for health care expenses out-of-pocket to let the HSA continue growing tax-free and then later withdraw the money tax and penalty-free as long as you keep the receipts.) When you turn age 65, you can also use the money for anything without penalty so it’s part of your retirement savings (still tax-free for qualified medical expenses, including some Medicare and long term care insurance premiums). You have to be in an HSA-eligible high deductible plan to contribute, but these plans are most beneficial while you’re young and in relatively good health so your medical expenses are likely to be low.

4) Use a home for income

Known as “house hacking,” you can purchase a home or multi-family unit and have your roommates or tenants pay at least part of your mortgage. Putting extra rooms on sites like Airbnb and Homestay can yield even more income. (Just make sure you’re not violating any building rules or local laws.) Some people even manage to essentially get paid to live in their home if the rental income exceeds their expenses. You also benefit from any appreciation in the property and you can deduct depreciation on an investment property from your taxes.

This is a good strategy to use before you have a family, especially if you would be living with roommates anyway, but there are some downsides to be aware of. First, you need to have enough savings for a down payment and closing costs plus a good credit score and a low debt-to-income ratio to qualify for a low mortgage rate. You then have to play landlord, which means finding and vetting tenants, maintaining the property, and covering the mortgage during vacancies. Finally, you’re tied down in the sense that moving can mean having to sell the property or hire someone else to manage it.

Financial planning is about making your money work as hard for you as you do for it. Don’t just make it work harder though. Use these hacks to make it work smarter too.

 

This post was originally published on Forbes.

Use This Hack to Figure Out How to Invest

June 07, 2017

If I could wave a magic wand and impart knowledge to anyone who thinks they have to be an investing expert in order to make money in the stock market, I would make sure that everyone knows that you don’t have to even be interested in investing in order to do it well. People who want to talk stock tips are often disappointed when they bring that subject up with me – I have relatively zero interest in the market. Yes, I’m a CFP® and no, I don’t like to choose investments.

I understand how to do it quite well, and really enjoy helping others learn what they need to know, but I don’t waste my time worrying about whether the next bear market will happen this year or next. I am quite certain there will be quite a few bear markets between now and retirement, but as a long-term investor, I don’t particularly care when they’ll happen or how long they’ll last, and neither should you. To me, a bear market is like the semi-annual sale at Athleta – a great time to stock up!

An easy investing hack

If you’re like me, and really just want to make sure you’re taking advantage of the overall long-term growth potential that investing in the stock market offers without having to analyze mutual fund ratings, asset allocation models or stock charts (nothing against those who do – more power to you and I wish you much investing success!), then this hack is for you.

Stocks and bonds and asset allocation, oh my

One of the most confusing parts about investing is figuring out what percentage to invest in stocks versus bonds, not to mention dividing the stock portion up among different market segments like large cap, mid cap, international, etc. (JARGON ALERT!)  When I first got into financial planning, I was totally stumped about how to do this. Was there some magic formula that only really smart market gurus could come up with? I knew that there were financial advisors who very confidently presented custom mixes to clients, but where did they get this information? Did I have to work for one of the big investment banks in order to have access to this information for my clients?

Then one day, I discovered the answer. It’s not some secret formula and it isn’t rocket science. You don’t have to know the first thing about what the market is going to do tomorrow or even worry if it’s up or down or going sideways. All you have to do is copy the mix of a Target Date Fund (also sometimes called Target Retirement Funds or Freedom Funds, depending on the investment company that runs them) with the date closest to your retirement year.

How it works

The easiest way to find the mix of a Target Date Fund is to look at the information for the fund, which is often found on the Fund Fact Sheet or you can just look one up on the website of companies like Fidelity, Charles Schwab, Vanguard, etc. You can typically find a pie chart that tells you the percentage of the fund that’s invested in different parts of the market, and then literally copy that percentage using index funds into your own account.

Imitation = flattery = easy investing

The advantage over using the Target Date Fund itself

Why not just buy the Target Date Fund itself, you may be wondering? One of the common criticisms of Target Date Funds is cost – because they require a little more attention than a standard index fund, they typically cost a little more. So, it’s mostly just to save money on fees, although this strategy would also work for someone who has a 401(k) that doesn’t offer Target Date Funds (admittedly, this is becoming less and less common, but check those fees!). It’s kind of like going to a craft show to scope out the cute DIY goods then going home and copying everything you saw that you liked, rather than buying the finished product at the marked-up price.

This hack is also perfect for someone who wants to be a little bit more hands-on, but is still learning the ins and outs of investing. Finding that perfect asset allocation is a bit of the holy grail in the investing world, so save yourself the search and take advantage of the work already done by the experts.

Things to watch out for

  • Rebalancing. If you decide to use this hack, then you also have to be sure you’re rebalancing periodically — at least once a year, you need to check in to make sure your percentages haven’t gotten too far out of whack. If you’re lucky, your account will allow you to automatically rebalance instead of having to do the math, but either way, this is how you take advantage of buying low and selling high.
  • Taxes. If you’re using this hack in a non-retirement account, then any time you do rebalance, you’ll likely be incurring capital gains and/or losses. Not to discourage rebalancing, but just be aware of the potential tax consequences if you’re making big shifts.
  • Adjusting for risk. One of the benefits of just choosing a Target Date Fund is that it automatically shifts the investments toward a more conservative mix as your retirement date draws nearer, so you’ll be on the hook for that with this strategy. Every five years or so, check back with the mix of your original fund to see what changes you need to make when you rebalance.

This Easy Budget Hack Could Save You Hundreds Each Month

May 31, 2017

If you’ve ever taken the time to categorize your monthly spending, chances are you had a similar reaction that I did when I realized how much we spend on food each month – disbelief with a side of regret, anyone? It’s just the hubs and I for now, and we are pretty good about eating in, at least compared to a lot of our DINK (dual income, no kids) friends, so I’m always shocked when our grocery spending sometimes tops what I’d expect a family of four to spend.

Food is expensive…

The fact is, food is expensive and who wants to walk around the grocery store with a calculator? There are ways to counteract that by planning your menu around the grocery store sales, buying in bulk, etc., but sometimes life is just too busy, I know. So here’s an easy hack that I learned from my friends Jill and Andy:

The hack…

One week per month, skip the grocery store and instead eat what’s already on hand. Then take the money you don’t spend on groceries and transfer it to your savings account or use it to boost the payment on a high interest rate credit card. The only number you need to know is what you spend each week, on average.

The long-term effect…

This hack alone could boost your retirement savings by over $250,000 if you stick with it over the years or literally shave years off your debt payments if you use it to get out of credit card debt sooner. Plug your info into the Debt Blaster calculator to see the difference.

Get creative in the kitchen…

That’s it! No coupon clipping needed. It may require a little bit of creativity in the kitchen, but I always find it’s easier than it seems – digging out those jars of interesting sauces I impulse buy at Trader Joe’s or finally using that extra cooked orzo I froze feels so good and budget friendly. You can also use Supercook, a website that let’s you input ingredients you have hand, then suggests different recipes. Plus, it helps to clear your pantry, fridge and freezer of food that may otherwise end up in the trash – a double financial bonus!

Follow This One Simple Rule for a Secure Retirement

May 26, 2017

While I was taking pictures of my middle guy and a whole bunch of his friends right before their senior prom, I was having a conversation with one of the other kids’ fathers. The inevitable conversation about what kind of work we do came up and he was, at one point in his career, working for a large accounting firm that has a wealth management arm. When he found out I was a financial planner, he shared a story about his colleague who ran that part of the business and had built himself a very nice retirement portfolio. My prom-dad-buddy asked him what the secret was that he used to grow his wealth & that of his clients.

The answer was simple: “Always live on your income from 5 years ago.”

When I heard that, I thought it was an interesting concept. If someone is accustomed to pay increases on an annual basis, this allows for a considerable amount of savings each year. This is a concept/theory that I had not heard before playing amateur photographer at prom time. But, it’s consistent with my very incredibly simple rules for personal financial management:

  • Spend less than you make
  • Don’t take on high interest debt
  • Save 10% or more of your salary
  • Always live on your income from 5 years ago

How it works

At a 3% pay increase, someone who earns $50,000 this year would earn $57,963 a mere 5 years later. Living on the original $50k would allow that individual to save almost $8,000 (probably closer to $5,000 after taxes & benefits) that year. If that same person contributed 10% of their income ($5,793) to their 401k – that’s one heckuva combined savings rate (>18%) before we even consider an employer matching contribution or account growth. If that pattern is repeated for a couple decades….retirement starts to look awfully secure. (I tried to do the math, but it got complicated. Suffice it to say, we’re talking about doubling your savings or more with this method)

There are a whole lot of very simple methods for becoming financially secure and these are just two of them. Managing your financial life isn’t as complicated as a lot of people make it sound. I’m a financial planner who hates the term “budgeting” because it sounds so restrictive and so much less than fun.  I prefer to have a couple of quick & easy spending guidelines instead, like these grumpy old man rules.