Don’t Feel Guilty About Your Debt, Take Control

I have a fond memory of my maternal Grandfather sitting me down soon before I graduated from college and telling me, “Steve, whatever you do, don’t borrow money.” While Grandpa John lived far from an easy life as a dairy farmer in Nebraska, he and his mother did inherit the farm when his father died so he didn’t have to incur debt to get started. Circumstances are just different now. Buying a home or even a car is almost impossible without a mortgage or car loan. According to AARP, larger mortgages, higher student loans and a greater overall comfort with debt than displayed by earlier generations has increased the average debt for households approaching retirement by nearly 160% from 1989 to 2010.

Consider Fred and Ethel, both age 45. While they both have good jobs, they have just paid off their student loans and, as a result, are worried they’re a little behind getting started saving for their financial freedom. In addition, when their two children were born they purchased a home and minivan whose payments are stretching their budget. Plus, because their monthly cash flow can be tight, they occasionally build up some expensive credit card debt that takes a few months to pay off. Now, their situation is quite common and really isn’t their fault. Given a choice of incurring student loans or not going to college, they clearly chose the right path for them. So, if Fred and Ethel asked us for advice here is what we would say:

1. Don’t feel guilty, your predicament is not about the past, it’s about the future. Now is the time to plan in order to get where you want.

2. Create a budget that attempts to limit household debt to no more than 36% of gross income – mortgage, car loans, credit card debt. This might not be possible right away but, when the minivan is paid off, keep driving it for a few more years rather than buying a new one.

3. Create an emergency fund by including a regular payment within your budget until you have accumulated the equivalent of about three months of expenses. This will help you avoid incurring ridiculously expensive credit card debt when unexpected expenses pop up.

4. Pay yourself first by making regular contributions, pre-tax if possible, to retirement accounts. Whether it be a workplace retirement plan like a 403(b) or 401(k) or an Individual Retirement Account, include a monthly contribution in your budget. Make the contribution automatic, preferably taken from your paycheck, as you won’t miss what you don’t see in the first place. So, pay for items you want but don’t necessarily need with dollars leftover at the end of the month, rather than leaving retirement contributions for leftover dollars.

5. Not all debt is bad – read here to learn the difference between good and bad debt:  Continue reading “Don’t Feel Guilty About Your Debt, Take Control”

What I Learned In My First Year As A Financial Planner

Although I prepared by studying evenings and weekends for two years to meet the coursework and exam requirements of the Certified Financial Planner process, leaving my friends both at the University of Kentucky and in Frankfort wasn’t easy. After doing the same thing professionally for over 20 years, though, I was ready for a new challenge that would engage my brain in a new and different way. So, after 25 years’ experience as a client of Moneywatch Advisors, I joined the firm. After my first year in the financial planning profession, here is what I have learned – about our clients, about the financial services industry and, most important, about myself:

  • Work-Life balance is the way to live: I’ve always known this intellectually, but I have now learned it emotionally as I now have time to take my son to school every day, drive him to soccer and lacrosse practices and travel with my wife to see my daughter dance ballet in college. I still work hard because I really enjoy what I’m doing but I also prioritize spending time with my loved ones. I am living the life I want and my goal is to help my clients do the same. 
  • Our real value is our clients’ peace of mind: Our niche is serving busy professionals who are consumed with their careers and busy with their families and don’t have time to plan and manage their financial futures. From UK faculty and staff to CPA’s to government relations professionals, we help our clients determine what amount of investment assets they will need to achieve their financial freedom, how much to save to reach their goal, how to save taxes while they save and how to invest their hard-earned savings to help them reach their goals as soon as possible. Our clients are smart but don’t have the time and inclination to tackle these issues on their own.
  • Short-term goals are as important as retirement goals: I probably should have learned this earlier in life, but we all must enjoy life now while also saving for our financial freedom. Whether it be a travel experience or a vacation home, include those desires in your financial plan too.
  • Trust between advisor and client is vital: Let’s face it, other than going to the doctor, opening one’s finances to a professional is about the most personal business transaction there is. Trust is key and we have to work every single day to build it and keep it.
  • Numbers are fine but people are what matter: While the planning and investing advice we provide is the core of what we do, how we relate to people is the key. The more we know about our clients’ hopes and dreams, the better we can help them achieve them. Being a good listener is clearly a core competency of a good financial planner.
  • The financial services industry doesn’t have a very good reputation: Both the New York Times and the Wall Street Journal have written about advisors in some of the huge firms being compensated for pushing clients into products that may not be right for them. As independent fiduciaries for our clients, we are required to provide advice that is in the best interest of our clients, not just advice that is suitable. I don’t know why anyone would choose an advisor that isn’t required to meet that highest standard, but we have to work hard to distinguish ourselves from the rest of the crowd.
  • I really like helping people in a personal way: Since Moneywatch helped guide Lisa and me to our own financial freedom that allowed me to tackle a new challenge, it has been really fun helping others do what we’ve already done.

People sometimes ask me if I wish I made this move years ago, and I always answer, “no.” I really enjoyed my time at UK advocating for the students, faculty and staff that  make it such a special place. And I am more well-rounded as a person because of that experience. But, if you have thoughts of a profession change later in your career, I would wholeheartedly encourage you to explore that opportunity.

Take The Right Financial Road In 2018

I recently read about a 28-year old New Jersey man who typed the wrong address into his rental car’s GPS in Iceland and drove six hours in the wrong direction – SIX! – from the airport to a fishing village in the north of the country….when he was just trying to get to his hotel. Now, his first mistake is quite understandable. I’ve been to Iceland and they are apparently too cheap to buy a vowel because every word is virtually unpronounceable. But, despite the long drive and “poor road conditions” he plowed on because that’s, ahem, what the GPS told him. And he never questioned that Reykjavik’s airport would be 6 hours from, well, Reykjavik. That’s like assuming Lexington’s airport is in Detroit.

This was really quite funny until I realized how many people figuratively make this same mistake in their financial lives. Unfortunately, they assume they’re on the right road until told otherwise. Maybe they assume contributing just enough to their employer’s retirement plan to receive the match will eventually produce enough to support them in retirement. Or maybe they’re contributing as much to debt payments each year as their savings. Or maybe they’re invested completely wrong for their long-term goals.

These people aren’t stupid – they usually just don’t have the time to properly plan for what they will really need in the future. To complete the comparison with our Icelandic mis-adventurer, it is quite common for people to be on the wrong road but not know it until they’ve hit a destination that’s figuratively six hours from their desired destination. Only, the stakes are much higher if you don’t realize your mistake until you hit age 60.

So, here are some suggestions for getting on the right road in 2018:

1. Pay yourself first

Automate your contributions to your employer’s retirement plan and any other investment plans first. Then, develop your budget from what’s left. How many times have you heard that cutting out that daily latte will aid your retirement? No, I like that latte, you say. So, don’t make the choice between your financial freedom and your latte. Pay toward your financial freedom first, then choose between a latte and maybe a beer that evening. That approach is not only better for your long-term financial health but you’ll feel a lot less guilty each day too.

2. Pay down high-interest debt

Not all debt is equal and not all debt is bad. In general, if all of your debt – student loans, mortgage, car loan or lease, credit card debt – is more than 36% of your gross monthly income, that’s too much. Additionally, if a loan has a high interest rate – probably about 6% or higher – that should be taken care of too. (Read more on how to determine if debt is acceptable or a problem here -https://lexingtonfinancialplanner.blog/2017/10/27/should-cal-and-rick-pay-down-debt-or-save-for-retirement/.  If you find yourself in one of those situations, make a plan to retire that debt as soon as you can. Again, automate your payments so you don’t have to choose between making that debt payment and your daily latte.

3. Save for some short-term fun

Around the office I’m kind of known as the saver-police. “No soup for you, save!” (A paraphrased Seinfeld reference, by the way) But that’s not true, Lisa and I are good savers, but we also prioritize our spending for fun too. After we save for our future, we have chosen to use our dollars to travel rather than buy expensive cars or buy a bigger house. We would rather enjoy a nice vacation each year, like two weeks in London last summer, than drive a Mercedes. Now, that’s not a choice for everyone, just us. In any case, choose a short-term saving goal for 2018 and make it part of your monthly budget. Recently, new clients wanted to build saving for regular, nice international trips into their financial plan. We showed them how to do that while still making significant progress toward their financial freedom.

If you would like to talk about your long-term and short-term financial goals, please email me at steve@moneywatchadvisors.com or call me at 859-268-1117.

 

What You Can Learn From Reviewing Your Financial Situation in 2017

Don’t read this blog post now – save it for the week between Christmas and New Year’s and read it then. Let’s face it, you’re running around like your hair is on fire trying to finish work projects, attend parties and finish your gift buying. But that week after Christmas is usually pretty slow. If you’re working, there aren’t a lot of phone calls. If you aren’t working, outside of a movie or maybe ice skating, there’s plenty of free time. Take one hour during that week and 1) Read this blog post; and 2) Review the following items:

Did you meet your short-term goals for the year?

We should always write down our goals for the year, right? Exercise more, read more for pleasure, etc. Because writing down a goal helps make it real and measurable. But, do we? Uhhh, did I save that cocktail napkin somewhere?

Whether we have our 2017 financial goals written down or not we probably still have a pretty good idea of what we intended to do. Did you want to establish a budget? Did you intend to save a certain amount of money for retirement for the year? Did you want to pay down student loans or maybe refinance your student loans? Did you shoot to establish an emergency fund to cover 3-6 months of living expenses should something interrupt your income?

Take just a few minutes and measure whether you accomplished those items you intended to – even if you didn’t write them down as a specific goal. If you hit the mark, raise a glass of eggnog for yourself. If not, choose one goal – the most important financial goal for 2018 – and write it on your computer somewhere where you won’t lose it. Make it measureable and achievable and, if possible, make it systematic where you don’t have to think about it each month.

How did your investments perform?

The stock market has been amazing this year. Not only is the S&P 500 up about 18%, there has been very little volatility – ups and downs of the market. In fact, this year has seen the lowest volatility since 1970. So, how did your investments perform?

Because the stock market has performed so well, this is a good time to look at your asset allocation: what percentage of your investments are in categories like Long Term Income, Growth, Real Estate and International? As stocks increase, including stock mutual funds, it’s easy for your portfolio to get too heavily weighted toward stock mutual funds, exposing you to unnecessary risk when the stock market declines at some point. One of my favorite quotes comes from the former boxer, Mike Tyson, who once said, “Everybody has a plan until they get hit in the mouth.” In our context, when you’re figuratively hit in the mouth when the stock market declines, do you have a plan? In other words, are you properly diversified so your portfolio includes funds that aren’t tied directly to the stock market and they hopefully zig when the market zags? In addition, is your portfolio structured for your personal time horizon and goals?

Did you follow your long-term plan?

Did you save as much for retirement as your long-term plan calls for? Is the total of your investment assets where you planned for them to be at your age? If you are behind, what is the cause?

A well thought-out financial plan should examine your current lifestyle/expenses and inflate them to a point in time when you would like to stop working. Age 55? Age 65? Then, how much in investment assets are required in order to produce annual income sufficient to cover those expenses for the rest of your life? Then, your plan should have concrete steps and measurable goals along the way to eat that elephant one bite at a time.

Merry Christmas, Happy Hanukkah and Happy New Year! Thank you for reading my blog – you can subscribe at the bottom of this post and have it delivered via email each week – and look for it again on Friday, January 5.