Personal Finance Tips from a Professional Financial Planner
Building a financial plan requires you to analyze three building blocks in your financial house: protection, accumulation, and retirement needs. These needs must be in balance and thoroughly evaluated. In our last series, we talked about the protection foundation of your plan. In this blog, we’ll journey into the foundational aspects of successful planning for the accumulation and spending years.
Between the ages of 16 and 55, your financial future is being shaped and defined by the decisions you make and the habits you form around money. Most of us have no real training around money, except to find a way to make it and spend it. America’s credit industry has done a great job of teaching people how to achieve their immediate desires by going into debt. Every generation passes down habits to those who come next, and few of us are lucky enough to be taught healthy, responsible financial behaviors.
True financial success requires you to stop and take an honest inventory of your knowledge and habits with money. What have you learned and how can you do this better than those that taught you?
I tell my young clients to look to someone that they know is successful with their money. That is the person you want to interview. Ask them, “How did you become successful with handling money?” And, “What should I be learning in order to achieve security in my financial house?” Finding a good role model and asking questions is a great beginning to learning what might work for you.
Although I’m now a successful financial planner with a formal education and ample years of experience, I put great stock in the lessons I have learned from observing my family’s personal finance habits. I also recall that I learned many lessons from asking family friends about how they became successful at handling the money they made. These were key life lessons for becoming a savvy saver — keys to success which I now teach my clients, and which I’m now sharing with you.
1. Time is your best friend when it comes to potentially growing wealth
The chart below shows how time and routine savings can clearly make a difference in your results as you enter retirement:
If you compare the investor who invested from age 25 to 67 with the investor who invested from age 40 to 67, you can see the difference that time made. Time equals opportunity when it comes to money. If you don’t already have a long-term savings plan, don’t delay! Whether through your employer or a private account, open an account today and make a plan to contribute.
2. Never spend 100% of what you make
To become what we refer to as a savvy saver, you’ll first need to follow this basic financial strategy: you get paid, save first (pay yourself), pay your bills (cost of living), then go play (fund your lifestyle). This order is a major key to financial success. Most of us get paid, pay bills, and then spend – never saving except perhaps through an employer sponsored retirement program. Although saving through a tax-advantaged retirement fund or employer sponsored retirement plan is a critical part of your overall retirement plan, it does not help you pursue your lifestyle goals between now and retirement.
One of the reasons it is so easy to save through a work retirement program is they take the money out first and then pay you — out of sight, out of mind! You need to do this same thing with your personal saving plan. Direct deposit your paycheck, set up an automatic investment plan to fund your savvy saver goals, pay your bills, and then play.
3. Plan your spending
Make a list of your spending goals in each of the savvy saver buckets and attach a dollar figure to each goal. If buying a home is a 5-year goal and you need a down payment, then start a house down payment fund. Holiday and gift giving happen every year, so you can set aside a little each month to plan ahead for those extra expenses. Looking to help your children with their education expenses? Determine your goal and build a savings plan. You get the picture — plan for everything!
Categorizing your savings in separate accounts is very helpful for most people. Many banks with online banking, such as Capital One 360 savings, allow you to nickname each account you set up for saving. This is helpful as it keeps you focused on your goals and helps you spend from the appropriate bucket of money.
As you plan your spending, the key here is not to spend money you don’t have. If you need to use a credit card or take a loan it should be paid off ASAP. Limiting your debt, aside from a mortgage or car payment, to something you can pay off in one to three months is a good practice.
Speaking of mortgages, remember, when you borrow money from your home equity and get a “home equity loan,” you are now using your home like a credit card. Although your interest rate may be lower, this is still debt!
Many people are stuck in their circumstances because they are cash poor from not budgeting and saving. Managing your debt and your monthly cost of living gives you flexibility in times of turbulence in your financial world or when you want to make a change in your life. Although the idea of planning and sticking to a budget may feel restrictive, it can lead to greater financial freedom and success.
4. Manage your Credit Card Usage
During the last three months of 2021, credit card balances increased by $52 billion to $860 billion—the largest quarterly increase in the 22-year history of the data, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. You can read more about this here.
Credit cards do play a role in helping you establish your ability to pay monthly payment cycles on time. They can help you and hurt you in establishing a credit score. You, the consumer, must be a responsible user and set the boundaries that work best for you. Spend some time reading up on this area. This article from Investopedia on “How to Improve Your Credit Score” is a good place to start.
5. Create your own personal credit card
One of the best ways to avoid debt and become a savvy saver is to create your own credit card. How?
Let’s look at an example of how you can create your own credit card to help you avoid unnecessary, bad debt while funding your lifestyle within your means.
1. Start with a minimum of $1,000 to $5,000 deposit to a designated savings account – this is your starting credit limit on your “personal credit card.”
2. Link a debit card to this savings account – think of this debit card as your “personal credit card.”
3. Set up automatic payments to this savings account each month from your checking account – this should be an amount that works for your budget.
4. Whatever amount of money you have in this designated savings account at any given time becomes your credit limit.
5. Using this strategy, you are spending money you actually have and paying yourself interest!
6. Don’t stop making payments on things you will buy again
Automobiles are the first thing to come to mind when we think about things we will buy repeatedly. Most of us will buy a new or used car every 5 to 10 years. Once you pay off a car, keep “making those payments” but instead of paying a financing company, put the payments into a savings account which will be used toward your next vehicle purchase. When the time comes, you’ll have your trade-in value, plus a nice down payment and room in your budget for the new car payment, if needed. Now that’s savvy!
I hope by now you are beginning to see that your accumulation and spending years are all about carefully planning and monitoring your personal finances and intentionally managing your financial habits of saving and spending. Working with your financial advisory team to define your lifestyle goals and develop appropriate investment programs for each goal is a critical part of helping you live through these years without spending money which should be designated for retirement. If you’re interested in receiving personalized financial guidance and comprehensive, financial planning, contact us today to get started on your journey to financial freedom!
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.