Use These 5 Financial Seat Belts To Avoid Costly Mistakes

We know that some financial mistakes will occur, but the big ones are what can set us back from reaching our financial goals like retirement. There are some preparations you can take, though, to avoid those big financial mistakes or to at least lessen the blow. 

It’s like wearing a seat belt. We always wear seat belts (or I hope you do) so a minor fender bender doesn’t turn into a hospital visit. We best protect ourselves from accidents worse than fender-benders with our seat belts as well. These simple straps give us the best chance to avoid harm.

That’s why we have gone through and put together five “seat belts” for your financial situation.

1.Don't Carry A Credit Card Balance

One of the biggest mistakes that we see preventing people from retiring early or even reaching a goal like buying a home is having too much credit card debt. Credit can be a great thing if used correctly. However, it can be a huge financial setback if used the wrong way. So, how do we avoid the big pitfall? Don't think of your credit card limit as the amount of credit you're approved to spend on the card. Instead, spend only the amount that you will be able to pay off at the end of the month. This financial seat belt is to not carry a credit card balance. To avoid falling into a huge debt pitfall is to pay off your credit card every month. 

 

2. Make Saving Automatic

Many people talk about not earning enough to be able to save… and thus the reason why they can’t retire. We're currently working on a new eBook following a couple who recently retired with $1 million in their retirement account, but they didn’t even know it until he recently opened his 401k statement. This was a family making under $40K a year. The reason they were able to save such an amazing amount is because they made savings automatic. They automatically contributed to their 401k and didn’t account for that money in their budget. So, automatic savings is the seat belt to avoiding getting to 65-years-old and not having enough savings to retire.

3. Dollar Cost Averaging

This is the key to keeping you from trying to time the market. A mistake many people make is trying to outsmart the markets. Let’s be honest… nobody can outsmart the markets. A steady strategy of diversification and long-term investing gets you to your goal of retirement. Dollar cost averaging - investing a small amount of money every month, quarter, or year - at a specified time, keeps you from trying to analyze whether it’s a good or bad time to invest. That’s your seat belt from freezing up when things are bad and allows for you to instead buy when things are on sale.

4. Keep Your Mortgage Payments Low

Avoid the pitfall of being house rich and cash poor. Basically meaning that you buy too much house and aren’t able to cover the unknowns that pop up in life. We suggest that your monthly mortgage payment does not exceed 28% of your monthly income, before taxes. But that’s at the high end. Our recommendation is to have your mortgage payment be closer to 20% of your gross income. This is your seat belt to becoming house rich and cash poor.

5. Have An Emergency Reserve

This is actually the biggest way to avoid falling into a financial pitfall. Have 3-6 months worth of expenses in cash at all times. Why? So a medical emergency or a housing issue doesn’t lead you to incur debt or interrupting your financial plan… both of which will set your retirement goals back. This is your seat belt to avoiding financial unease.

Maybe you are already wearing your financial seat belt, but you still just want reassurance that you are on the right path to retirement… well, that’s why we built yourwela.com. You can sign up for free and fill out a game plan. This game plan is a set of questions which will then be reviewed by one of our advisors. They will analyze your situation and get back to you with action steps and a review of your situation. This is how we are leveraging technology to deliver financial advice. You are able to take action while at home and even while watching your favorite show. 

When You Should Adjust Your Financial Plan

Financial planning

Mike Tyson said, “Everybody has a plan until they get punched in the face.” I love that quote for a couple reasons:

  1. It’s Mike Tyson and when he speaks, it’s usually quite entertaining.
  2. It’s extremely accurate – with the caveat that not everyone has a plan.

We all have times in our lives when we get figuratively punched in the face. Life throws plenty of curve balls, and some require changes or adjustments to your financial plan. Let’s look at a few instances where it makes sense to adjust:

  1. Pay raise – Don't think of your new raise as a license to spend freely. While you certainly should enjoy your hard‐earned pay bump, you need to do so within the confines of your plan. We recommend people use the budget TSL (Taxes, Savings, Life). If you're using this budget you'll automatically raises both your spending and savings amounts. A raise may mean you need to contribute more to your 401(k), but it could also mean that you will hit your annual 401(k) max, in which case, you’d need to find other avenues to save like in a brokerage account or Roth IRA.
  2. Kids – It’s a given that life gets more expensive and your financial plan will change when you have kids. You most likely can't anticipate all the new additional costs you'll take on with kids, but you can at least anticipate a few and know where in your budget you can be flexible. Perhaps you'll want to add a college savings account, or maybe your cash flow will tighten so you can't save as much? Having some idea of what to expect will help you better handle those curveballs.
  3. Financial Setbacks – This is the most painful "punch in the face" to your finances. Whether it's a pay cut, job loss, broken down car or hospital bill, the reality is that many of us will face financial setbacks of some type in our lifetime. This is why we preach that everyone should have an emergency fund with three to six months' cash reserve.
  4. Retirement – This financial adjustment will most likely happen as you get closer to retirement. You might have planned and saved for an early retirement only to realize you can't image giving up your job, or you might be forced into early retirement for medical or other reasons. In either of these financial situations, you'll most likely need to make adjustments to either to your allocation, budget or both.

Then there are other times where you feel the need to make major overhauls to your plan when in reality, staying the course is the right call.

  1. Big Returns – Recently we’ve had a few nice years in the market with double digit returns, and we’ve had a few flat years. When markets rise, though, you can’t start acting like that will be the norm. At Wela, we often tell people to expect 6% ‐ 7% returns because it’s an average. Rarely will returns be exactly 6‐7%. This is where people can get into trouble with trying to time the market. Timing the market doesn’t get you 6‐7%, it gets you 2‐3% typically, and that's if you’re lucky.
  2. Major Purchase – When you have the urge to buy something expensive (home/car/boat/nice watch), it’s best to take a step back and be sure it fits within your financial plan. You might want to wait for a raise so you can incorporate the expense in your TSL budget (like we talked about earlier.)
  3. Emotional Career Change – Remember your job is arguably the most central piece to your financial plan. It’s the source of cash flow and often retirement benefits (401(k), 403(b), pension, etc.). Be sure you know the impact that a job or career change will have on your plan. It’s certainly okay to change, but be sure it’s well thought out and a part of your plan. In other words, be sure it doesn’t create an unanticipated change.

If you're going through any of the above changes, or maybe it's something that we didn't include, and you'd like a professional opinion on if it's time for you to adjust your financial plan, create a free Wela account to talk with our team. We love to help clients and users alike get their financial house in order.

3 Options For Newlywed Money Management

marriage financial planning

A common question we receive at Wela is how newlyweds should deal with finances.

Perhaps one part of the pair doesn’t know how to have a conversation about financial matters with their soon-to-be spouse. She may love to buy shoes and he may love to save, or he wants his “boys weekend money” while she wants everything shared. What should they do?

In the early years of marriage, most couples have to learn to compromise and think, act and plan for "we" instead of "me," and that includes financial matters. Considering a large percentage of divorces happen because of money issues, clearly this piece is crucial to get right but something many couples have trouble agreeing upon.

There is not a right or wrong way to go about this, and it very much depends on the investment/savings personalities of the couple. However, the most crucial step that too many people miss is talking about their finances in the first place. It's important to be upfront about both of your saving, spending and investing styles so that you can then both agree upon a plan for how you want to merge your financial lives. You might agree on all financial topics which would make it easier when making financial decisions. You might not agree on any financial topics, in which case you might agree to keep your financial lives separate, at least for a time, while you both work on finding your financial middle-ground.

Related: Will Getting Married Hurt Or Help My Taxes

There are two key issues that are typically on the forefront of newlyweds’ minds:

What do I do with my/their old bank accounts?What do we do with “OUR” money?

How you answer the second question will help you answer the first. There are three possible outcomes for the second question:

  1. Completely Shared - You both share a single account with both your names on it where all cash flow goes into and all expenses are paid. Typically for this to work so that both spouses are happy, you must both have trust and faith that your partner will act responsibly and not hold the other liable for spending more than themselves.
  2. Individual Accounts & A Joint Account- You each have separate accounts where your paychecks are deposited, plus one joint account for some amount of fixed expenses. The shared fixed expense account would handle all joint bills while the separate accounts would be used at the discretion of the holder. Typically the amount each spouse contributes to the joint account is either based on the percentage of income each is responsible for in the family, or based on the percentage of expenses each is responsible for (this is much trickier to navigate).
  3. Completely Separate - You each have your own separate accounts and identify which expenses each spouse will be responsible for, thereby, keeping a black curtain over accounts completely and maintaining maximum financial independence.

We have seen all three options work. Most often, couples start with the second or third option and slowly migrate with more comfort to the first. Once you've decided how you want to handle your finances moving forward, it'll be easier to decide how you want to handle your old accounts.

Marriage is a learning process. When most people get married, they’ve barely figured out their own finances, much less built trust in how their new spouse handles their finances. To speak with an advisor about which options makes the most sense for you, create your free Wela account today.

Budget for taxes, savings and life

Last week I shared the sobering news that when you add up the taxes you pay to the feds, payroll tax, Georgia state, etc., you’re probably paying more than 30 percent of your income to some form of government. And this doesn't even include property, sales, gas, and ad valorem taxes. I don’t advocate moving to Canada or Europe -- unless you want to pay even more taxes. What you can do is educate yourself and adopt what I call a TSL-driven budget. That's a budget containing the three buckets where most of our dollars go: Taxes, Savings and Life.

Retirement planning will be a whole lot easier with my TSL guidelines:

Taxes: 40 to 50 percent

Pro golfer Phil Mickelson recently got in hot water when he complained 62 percent of what he earns goes toward taxes. Few of us feel sorry for a guy who makes close to $50 million a year. But his complaints weren’t that far off the mark, even though CNBC reported his estimate was a little high.

Consider the new federal tax bracket that’s nearly 40 percent on families with annual income north of $450,000, add California’s 13 percent  income tax, and you almost start to feel sorry for Lefty.Almost.

Taxes take a huge bite out of all our paychecks. So budget 40 percent of your income for taxes (closer to 50 percent for really high income households), and you’ll have a good sense of what’s left for your Savings and Life buckets.

Savings: 20 percent

For many years Vanguard recommended saving between 8 and 12 percent of your gross income to guarantee a happy retirement. Recently, they upped that guideline to 12 to15 percent, thanks to lower return expectations in the future. I advise clients to try to save 20 percent of their gross income.

Twenty percent is a significant number, but take into consideration the many tax-advantaged ways to save -- such as a 401(k), 403(b) or a SEP IRA -- and you can get there a lot faster than you might think. And you may be able to retire a lot sooner than you think.

If 20 percent seems unrealistic right now, just start somewhere and work up to it.

Life: 30 to 40 percent

Now, we’re at the truly discretionary spending. The remaining 30 percent (40 percent if your tax bite is lower) of your income goes here. Spending just 30 to 40 percent of your income during your working years on living (food, shelter, transportation, insurance, kid-related costs, entertainment and the like) will allow you to maintain your lifestyle once you retire.

For Mickelson, that’s means limiting his Life spending to about $15 million a year.

My TSL formula may seem harsh at first, but who ever said getting to Easy Street (and a happy retirement) was going to be easy?

5 Steps To Building A Solid Financial Foundation

When your personal financial foundation is solid you can more easily reach your financial goals and handle any financial stress from the markets, job loss, etc. with a clear mind. There are five steps everyone can take to start building their solid financial future.

Tracking your finances

Tracking your finances

1. Set Your Goals

Alright, first and foremost you need to understand why you want to have control of your money. This is the time to focus on yourself. If you are saving or wanting to start budgeting for someone else… well, I hate to break it to you, but you aren’t going to stay committed to the plan for very long. You must get to the root of why you want to control your finances. You need to buy into it and have it be for you, or you’ll have a difficult time with the next four steps and completing your financial foundation.

2. Know Where You’re Spending

The second key to creating a solid financial foundation is to make sure you are spending within your means. This is a simple concept, spend less money than you make. We sometimes harp on this, but it’s something that seems to get overlooked every day. If you spend more than you make then you have to stop. Understand how much of your paycheck you can spend every week, and even what you can spend on a daily basis to be within that. If you are spending more than you make you can’t reach any financial goals like saving for retirement, paying off debt or buying a new house. This is an important piece of your financial situation because it allows you to later build on top of your foundation.

3. Prioritize Your Spending

We then want to make sure we know where our money is going. Tons of people get into trouble because they simply don’t know where their money is going. You might have recurring charges for iTunes, Netflix, magazine subscriptions, etc. Suddenly you’re at the end of the month, and you don’t know where all your money went. You need to know where every dime goes.

This was an issue my wife and I were having and the impetus behind us going on the Economic Shutdown. We took one month earlier this year to make sure we understood where every penny we spent went. By watching where we spent our money and cutting out as much superfluous spending as possible, we found a way to save 35% of our paychecks that were deposited into our checking accounts! You can read the full account of our adventure here, and we will soon have an eBook coming out. Sign up as a user and we’ll let you know when it’s available.

4. Prioritize Your Saving

Make sure you keep focused on the long term. It’s easy to crave and achieve short term positive outcomes, but understand the decisions that you make today and how they will impact your future. Rewarding yourself by spending your new savings on a night on the town instead of saving that money in your 401k might sound reasonable today, but how is that going to impact you in your 40’s, 50’s and 60’s? If you build good financial habits early, like saving for retirement, it will actually cost you less in the long run.

5. Don’t Mix Money & Emotions

Finally, the last key is to control your emotions around money. Maybe you’re an emotional shopper, and after a bad day you think buying that new purse will turn your day around. Perhaps after a fight with a friend you feel the need to order a large Domino’s pizza. Whatever your spending crux, if you act on the desire to spend money when you’re emotional then it’s more likely to be a purchase that’s ultimately equivalent to flushing cash down the drain.

The biggest reason for having a solid financial foundation is it allows us to safely build on top of it. On top of this foundation is where we start saving for our emergency reserve, paying off debt, saving into our 401k or a Roth account and begin to boost our wealth for the longer term. Without our solid foundation, everything we build above it will crumble in an emergency.

Wela means wealth, and the only way to build wealth is to first create a solid foundation. We spend a lot of time with our users and helping to create a financial game plan. This can help you to create a solid financial foundation which will then allow you to build your wealth on top of that. Just sign up and let’s get starting on building your solid financial foundation.

I Want To Grow My Money...Why Would I Need Any Income Investments?

But I’m looking to grow my money. Why would I want income investments in my account?”

This is a common question I get from Wela clients as we talk through the process of developing a retirement savings portfolio to meet their particular objectives. It’s a great question that makes sense. And here’s the answer.

When we think about saving for retirement, we often visual our efforts as growing something -- a “nest egg” that expands with every deposit we make in our retirement account.

But a well-crafted retirement strategy is actually more like a machine than an incubator. It has several moving parts that work together to leverage your contributions and move you towards your goal. The twin motors in that machine are growth and income investments, which work together, with each taking the lead at different times in the journey to and through retirement.

Income investments

Income investments

Growth stocks are shares in companies that currently prioritize expansion and increased market share. These businesses pour most of their profits back into operations, and thus don’t pay dividends. Netflix and Amazon are good examples. If/as a growth company expands, investors benefit from the steady, sometimes dramatic, rise in value of their shares. Growth stocks are what people talk about at the office coffee machine. “Yeah, I bought Acme Corp at $10 a share five years ago and just sold it for $71.”

Income stocks are boring by comparison. They tend to be established companies in mature industries – think Proctor & Gamble, Apple, Disney – that are unlikely to show dramatic growth in share price. Instead they just ton the revenue and pay their shareholders a regular dividend.

Related: Income Investing - Cut Through The Clutter

Bonds, which are essentially a loan to a business or government, are another source of income, as owners of the bond receive regular interest payments. Investors can also receive income from alternative investments, including real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

So, let’s assemble Wela’s version of the retirement investment machine. It consists of three buckets based on the above – stocks, bonds and alternative investments – designed to grow your money while providing diversity to protect you from market volatility.

Stocks – During most of your working career, your portfolio should contain mostly shares in growth companies. Ideally, these stocks will significantly appreciate in value over the years and decades, providing a nice profit when you liquidate them in retirement.

But you should also hold some income stocks to provide diversification and stability. The dividends these shares pay can be reinvested in your portfolio, turbo-charging your growth.

Related: How To Build Your Investment Portfolio To Meet Your Retirement Needs

When you retire, we recommend shifting your focus to income stocks. You can continue to reinvest their dividend income, or use it to help fund your lifestyle. Income stocks also tend to be less volatile than growth shares and thus offer the stability you want in retirement.

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend, “owning your age” in bonds. When you are in your 40’s, bonds should make up 40% of your portfolio. When you are 50, that percentage should be 50%.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

Alternative investments – This smallest bucket of non-stock or bond assets provides more income and some insulation from the gyrations of the stock market.

So, why should you hold income investment when you’re seeking growth? Because income investments – stocks, bonds and alternative investments – can both enhance and protect that growth. The dividends, interest and other payments generated by income assets can be reinvested, even as those assets themselves insulate you from volatility by providing diversity and stability.

Your investment machine isn’t hitting on all cylinders unless you have income assets in the fuel mix.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.