I recently had the good fortune of being featured in this article which appeared on the front page of the Seattle Times Business section, and I want to share it with you.
A.J. and Amy are a young couple burdened by debt who did not have the resources to pay for a financial planner. The Seattle Times reached out to me through my affiliation with the Puget Sound Financial Planning Association and asked if I would build them a plan. After several meetings we were able to identify and build a plan around their short and long term goals. I am thrilled to report that they feel like they are finally in control of their debt and retirement savings. Most importantly, they have developed peace of mind around their finances.
Please keep in mind no two investors are alike, this article referenced above is a specific recommendation based on A.J. and Amy’s personal finances. If you would like to give the gift of financial peace of mind, I am always more than happy to help your friends and family develop their own personal plan.
Every day, financial news sites and channels provide a steady stream of conflicting opinions and predictions that often leave investors feeling confused, frustrated, and paralyzed. Don’t believe me? Please allow me to elaborate.
In addition to reading a wide range of investing and personal finance pieces each day, in the evening I often browse a site called RealClearMarkets.com to make sure I take a look at some of the interesting and/or important articles I might have missed during the day. RealClearMarkets.com is basically a consolidator of articles from a number of other sources. You might want to take a look at it just so you can see what I mean.
When I review the list of approximately 50 headlines, I always find it interesting to see how many compelling yet contradictory articles and videos are in one spot, one right after another. It’s common to see one claiming one view, with another of the exact opposite view right below it. China is imploding/China is still a sleeping giant, Gold is headed much lower/Gold will touch new highs by the end of the year, The stock market is about to re-visit the lows of 2008/The stock market is pausing before reaching new highs by year end, Stick with large cap U.S. stocks/America’s best days are behind us and one should look abroad for better investing opportunities, A bond catastrophe is upon us/Don’t believe the bond bust hype, Inflation is about to run rampant/Deflation is the new worry, Emerging market stocks and bonds are to be avoided at all costs/The long term secular growth story of the emerging markets is still very much intact. Good grief! What’s an investor to do?
We’ll continue to see these contradictions, but one does not need to feel paralyzed by them or compelled to decide which one is the better path to follow. The truth is that they all have elements of truth and quite often are written by some very bright people. This month marks my 27th year in this business, and I have seen investors get caught up wrestling with these contradictions in each and every one of those years. Please let me offer an alternative.
Rather than struggling to decide if this is the right or wrong time to hold stocks or bonds in your portfolio, or which types of each to hold, how about always holding a portion in stocks and a portion in bonds, along with an adequate cash reserve for emergencies or opportunities that may arise? Of the portion devoted to stocks, hold U.S. and foreign (including emerging markets), small and large cap, growth and value, and also some REITs (both foreign and domestic). Of the portion destined for bonds, hold those of the highest credit quality (which tend to hold up relatively well when the stock market severely declines), and those with short- to intermediate-term maturities (which have lower interest rate risk in a rising rate environment).
With regard to cash reserves, the rule of thumb in the financial planning community is to maintain enough to cover 6 to 12 months of living expenses, depending on your situation, but often these targets tend to be on the low side. My experience has been that during periods of severe market or personal financial stress, nothing provides peace of mind like cash. Nobody ever complains about having too much cash on hand during these times. And when opportunity knocks, it’s nice to have plenty of cash on hand to take full advantage. Even when yields are as low as they are now, cash is king. The purpose of your investment portfolio is to deliver returns in excess of inflation over time. Cash is for liquidity, flexibility, and peace of mind.
The appropriate mix of these various asset classes, of course, depends on your individual circumstances and objectives. A big part of my job as an investment advisor is to help clients establish and maintain this mix in the face of unrelenting alarmist news headlines.
If all this advice sounds like nothing more than common sense and things we’ve all heard before, you’re right. But interestingly enough, many people tend to get caught up in all the predictions and hype out there, and they tend to ignore or forget these time-tested principles. As Paul Merriman once said, “There is a Grand Canyon of difference between what people know they should do and what they do.”
If you are tired of feeling confused, paralyzed, and frustrated and would like to jump off the financial news treadmill, I invite you to contact us. If you are not quite there yet, I wish you luck and a quiet mind as you continue down your path. We’ll be here when you need us.
I recently had the pleasure of sitting down with a client’s daughter. She’s in her twenties, just finished up her nursing degree six months ago and is working the night shift at a local hospital. She is living with a couple of roommates and is finally in a position to save some money after being a very broke college student. She now faces the question posed by many young people who are starting their first “real” jobs.
Michelle (as we will call her) wanted to know what to do with the money she’s now able to save. She had no idea where to start getting her finances in order. To get her started on the right track, I suggested she focus on a few key areas.
Live within your means
She’s already years ahead of many twenty-somethings in that she is living on less money than she earns. She wasn’t sure how much money she would be able to save on a monthly basis so I suggested she set up a rough budget. I didn’t encourage her to be terribly rigid with the budget but to use it to get a sense of where she is spending her money so she’s aware of her spending habits. This will help her decide what she wants to spend money on and what is less important to her.
Create an emergency fund
While she enjoys her job and has no plans to quit anytime soon, you never know what life will throw your way. So I recommended she save three to six months of income and have it very liquid (money market, for example), which will enable her to have a safety net in place.
Understand your insurance policies
Michelle wasn’t sure exactly what her benefits were at work. She knew she had medical but wasn’t sure of the deductible. She also didn’t know if she had dental or vision coverage. As a young woman in her twenties, the likelihood of an expensive surgery or illness is very low, but injuries can still happen.
She also had no idea whether her employer provided disability insurance. I recommended she read through her employee materials again as things are typically a blur when starting a new job. I also encouraged her to ask the HR department about any questions she may still have after reading the policy information.
I checked to make sure she has car and renter’s insurance and that the policies are up to date. When you’re just getting started financially, you don’t want to find out after an accident that your $10,000 car is only covered up to $5,000, or regret not having renter’s insurance after your upstairs neighbors leaves a faucet on, flooding your apartment and ruining your new laptop, couch and clothing.
Pay off your debt
This is typically the ball and chain around many people’s ankles when they first start their careers. I recommended that Michelle pay off the money she owes by attacking the debt with the highest interest rates first. She has about $10,000 in student loans and another $1,500 in credit card debt. The credit card debt has a much higher interest rate than the student loans, so she’ll pay the minimum on the student loans until she pays off the credit cards. Then she’ll pay down the student loans. A good way for her to keep debt in check moving forward is to use primarily cash for all purchases or to use a credit card and pay it off monthly.
I also recommended she compare her local credit union fees and programs to that of her bank. She’ll likely save money on ATM transactions, credit card interest and loans in the future by using a credit union.
Identify short-term and long-term goals
Michelle’s short-term goals include a trip with college friends to Hawaii later in the year. Her longer-term goals include retirement and buying a house. It was important to identify these goals so she can budget for the trip and start down the road to home ownership and retirement. While retirement is probably 40 to 50 years off for Michelle, she will not have to save nearly as much towards her future as friends who start saving in their thirties. She’s fortunate to have a 401k plan and the hospital provides her with some matching as well. The matching is basically free money to her so she would be wise to take advantage of it. By contributing to her 401k plan, she’ll pay less in taxes and benefit from the employer match, which is a win-win. She may not be able to add as much as she’d like to her retirement plan right now, but she can always increase that after building up her emergency fund and paying off debt.
Michelle is well on her way to a successful future just by addressing her finances at such a young age. She’ll have a good handle on her spending habits, her debt level and goals.
My final piece of advice, which Michelle has already followed, is to talk to your parents’ financial advisor. The advisor may not be in a position to take you on as a client, but they should be happy to meet with you and get you headed in the right direction.
After cleaning the garage, packing away your winter clothes and cleaning the windows, turn your spring cleaning efforts to your finances. Here are ten ideas to freshen up your financial situation:
1. Reduce paper: Most banks, brokerages, credit cards, and utilities offer online delivery and storage of statements and bills. Sit down with your paper statements and see how many you can move to online. You will save the time spent opening mail, remove clutter and help the environment.
2. Pay your bills online: Sign up for an online bill payment service if you don’t already. Set up automatic payments for recurring bills.
3. Purge: Get a good shredder and use it aggressively. You really don’t need the water bill from two years ago. Purge! This can also help reduce your risk of identity theft.
4. Eliminate redundancies: Eliminating clutter is not only about getting rid of paper; Identify what accounts are redundant and can be combined and/or closed.
5. Organize: Get a label maker and create a small, efficient filing system.
6. Reduce costs: Review bills you get from cable and phone companies, because when contracts expire they may revert to higher charges. Give them a call and you’ll be surprised how easy it is to have your rates reduced.
7. Check your coverage: Review your insurance coverage to make sure that it is appropriate for you.
8. Compare interest rates: Make sure your banks and credit cards are competitive for their fees and interest rates.
9. Track your goals: Create easy-to-use systems for tracking your big picture goals, including a simple budget, college savings, and retirement.
10. Think about getting help: Identify what areas you may need professional help, and create a plan to interview candidates.
For many Merriman clients, getting investments right is only part of achieving their financial goals. I am often asked what else people can do to help improve their financial outlook, and I always answer that being financially disciplined is just as important as investing wisely.
Here are five things I think everyone should do to simplify their financial situation and become more disciplined with their finances:
- Consolidate your accounts. If you have an inactive 401(k) with an old employer, transfer it into an IRA. Often, 401(k)s have limited investment options, and you can take advantage of diversification and management benefits by moving your old 401(k) into an IRA account held elsewhere. Likewise, if you have several IRAs in your name, consider consolidating them into one. There is no real benefit to maintaining multiple accounts, and it can be a headache to manage them all.
- Get a handle on what you are spending. There are dozens of apps and websites that can simplify the process of tracking expenses. Mint.com is a great example – it is free and anyone can use it. If you own an Apple device, go the App Store and search for “budget.” Find the app with the highest ratings and download it. Knowing how much money you spend and what you are spending it on is important, both before and after retirement. You cannot, for instance, know how much you are going to need in retirement unless you know how much you typically spend.
- Put your savings on auto-pilot. If your employer matches contributions to your 401(k), you should contribute at least enough to max out that matching and take advantage of that “free money.” If you can afford more, all the better. Don’t forget that saving is not limited to company-sponsored retirement accounts. Saving toward your emergency fund in a bank account or your child’s education in a 529 college savings plan is just as important. As with your 401(k), you can set these types of accounts up for automatic contributions. Ideally, you would work with a Certified Financial Planner™ to figure out the exact percentage you need to contribute based upon your specific set of circumstances.
- Limit the number of credit cards you own. The more cards you own, the more complicated it becomes to manage them. If you have several cards with outstanding balances, consider transferring balances to consolidate your credit card debt at a lower interest rate and save yourself a substantial amount in interest payments.
- Use an auto-pay service to manage and pay your bills. I have a Schwab checking account that allows me to pay thousands of vendors directly from my account. It also alerts me when I have a bill due. If you do not bank with Schwab, don’t worry – most banks now offer a similar service. Ask your local branch for help in getting this set up.
Some of these steps may sound daunting, but are actually quite easy to complete. I know you’ll be glad you did it. Ultimately, these steps will allow you more time to focus on the things that matter most to you.