How To Make Financial Decisions When You Aren’t A Billionaire And You Aren’t Living Paycheck To Paycheck

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Personal finance is hard. Investments, mortgages, taxes, insurance- so many things to consider. Once you graduate past opening your first basic checking-savings account, things become infinitely more complicated.

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Personal financial management weighs heavily on many Americans causing them serious stress. The American Psychological Association surveys Americans’ stress levels annually and this year’s results found that money stress registered at the highest level recorded since 2015.

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A majority of financial planning clients — 71% — report experiencing financial anxiety at least half of the time, (Source: MQ Research Consortium and Kansas State University Personal Financial Planning Program,

These stresses are felt at all income levels. I came across this Tweet a while back that frames the problem perfectly:

This is the headspace that the majority of Americans have: you are grateful to have options, but those options can be overwhelming. Furthermore, if you want to be confident that you’ll achieve your financial goals, it’s critical to look at the entire picture.

You may have the basics of budgeting figured out or stumbled your way through getting your first mortgage, but would you say you have a deep understanding of how to manage your money so that you can confidently and effectively meet all your short- and long-term financial goals?

Where to turn for financial advice

For many young families, couples, and those making big financial decisions for the first time, a trusted mentor is the first place to turn for advice. This is generally a parent or close friend.

The problem with asking family and friends about how to handle your finances is that, unless mom and dad are certified financial planners, they probably aren’t qualified to give you advice – even if you consider them successful. In addition, your friends and family most likely don’t have the full picture of your financial situation.

Most Americans do not feel comfortable being completely transparent about finances, therefore any advice will not be offered with the full picture in mind.

Another favorite place to seek financial advice? The internet. As a certified financial planner turned financial blogger, I offer tons of financial advice online. My goal is always to get the conversation started because talking and thinking about our finances is the first step.

That said, unless I’m meeting with you one-on-one, the advice isn’t tailored specifically to you. Personal finance articles have to be broad enough to speak to anyone and everyone.

A third choice is to consult with a financial advisor or financial planner, however, for many this option is too expensive. Many charge more than 1% of assets under management (AUM)- which, due to the nature of compound growth, can end up costing you thousands of dollars over time.

Additionally, financial planners often have a minimum requirement to work with them. This can be as much as a million dollars or more, It logically follows that the best financial planners are the ones who can be choosy and establish high minimum requirements.

For some, particularly those with complicated financial circumstances, a financial planner or a team of financial experts can provide benefits well beyond their costs. “In the ultra-high net worth space, sound financial strategies that are designed to weather financial and market cycles, to grow and preserve wealth for future generations, take a tremendous amount of time to develop and execute – requiring close coordination with tax, legal , accounting, and investment advisors.

In many cases, that team first needs to be assembled, then managed,” says Thomas Callahan, CFP and Director at Boston Family Advisors, LLC. “This process requires patience, prudence, and conviction. There are many potential points of failure which is why it is common for many people to lack a financial strategy or for that strategy to be suboptimal.”

Lastly, many tech companies have recognized the need for personal finance tools. New software, some that are even free, can help you create a financial plan. The challenge is that many will give you a map that you don’t know how to read. A plan is just that, a plan.

If you do not understand the roadmap or you don’t know how to act on it, then your situation will never change.

Getting started: understand the fundamentals.

Before diving into a full-fledged financial plan, I used to work with my clients to ensure they understand these five key principles:

Invest early and often.

Investing can be difficult to get into a habit of doing, especially with consistent news stories about inflation and the cost of living rising just about everywhere. Yet, even small investments early on can have outsized returns due to the power of compounding.

Time in the market beats all.

The earlier you can get your hard-earned money into investment accounts and working for you, the better. Got a raise? Congrats!

Treat yourself to something modest in the short term, then sock away the majority of those extra dollars from each paycheck.

If your employer has a 401(k) match, contribute AT LEAST to the match.

This is free money!

Don’t worry about timing the market.

Trying to time the market is, at best, silly and, at worst, financially damaging. Humans are emotional investors. It is almost impossible for us to buy low and sell high. Instead, aim to buy “young” and sell “old”.

You don’t need to worry about timing the market if you can spend time in the market.

Make sure your funds are invested in the market,

Money that is intended to make money, like your retirement savings, shouldn’t be sitting in savings or money market accounts. If you do that, your money will lose value by not keeping up with inflation.

Unfortunately, it is surprisingly common that a 401(k) will be invested in a money market account rather than being put in the market, so make sure your assets are invested where you want them.

Pay off your high-interest debt.

While definitions of “high-interest debt” vary, treat anything like credit card debt or personal loans as undesirable. If you are sitting on high-interest debt you are throwing money away in interest and fees.

Past the basics: next level financial planning

There are some things everyone should do across the board, and then there are a number of decisions that really depend on personal factors and preferences such as how much you can save and spend, your risk tolerance, and your goals.

To begin mapping your financial plan, with or without support, you need to be familiar with these concepts.

Balance short- and long-term goals against retirement planning.

Retiring is not your only financial goal. College funds, mortgages, and even purchases, like cars, require planning. A good financial strategy balances your short-term goals against the longer-term ones.

For example, if you want to buy a home in the next two years, you should most likely be saving less for retirement in that time. Or, if you want to retire before age 59, then you will need to save beyond just your 401(k), as those funds are not accessible, penalty free, until age 59.5.

Invest in a diversified portfolio.

Gone are the days of studying the markets and handpicking stocks. Exchange-traded funds (ETFs) are an excellent way to get diversification at a lower cost than other investment vehiclesincluding mutual funds.

Save for college in a 529.

529s are just one example of a tax-advantaged account, but they are an important one. College is expensive. You know it, your kid knows it, and the government knows it. You want to take advantage of any tool you have to save money for your children’s education in a smart way. That being said, be careful not to overfund this account, as the funds can only be used for specific expenses.

Develop a tax strategy.

To sum it up, everyone likes to save money, especially on taxes. Tax-advantaged accountsbeyond just 529s, are great resources and totally should be utilized.

Set aside an emergency fund.

Not all your money should be put into investment accounts, You should also have cash savings that are accessible to you when unplanned emergency expenses come up – and they will.

A good financial plan is a holistic one

good financial planning isnt just about retirement, it should consider the amount and timing of all your goals to see how they interact, For example, aggressively paying down your mortgage might put you in a position where you are cash poor.

Then, if the worst happens – let’s say you lose your job and can no longer make your mortgage payments – you have no ability to get that cash back without selling your home. By looking at your entire financial picture, you can mitigate this kind of risk.

Additionally, your plan should look across your entire financial portfolio inclusive of your mortgage, taxes, and insurance. This is where personalization and customization is key.

You may be purchasing a home, saving for retirement, thinking about college for your children – all of these factors come into play when determining how best to save and invest.

Traditionally, understanding how these factors interact has been difficult without the help of a financial planner, but new tools are appearing that make understanding their impact accessible to everyone.

“We make it easy to understand trade-offs from each financial decision,” said Seth Burstein, fortunately co-founder. “We take into account major considerations that impact your finances – like your savings rate, mortgage, tax-advantaged accounts, and brokerage account – and how they all interact to affect your chances of achieving your goals.”

Closing thoughts: so where should I turn for financial advice?

To recap, personal finance is hard, but turning to friends and family, unless they are personal finance experts, is just not a good idea. The internet has a…

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Credit: www.forbes.com /

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