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. 

10 Actions Millionaires Take That You Can Too

We recently wrote about the 7 habits that made your next door neighbor a millionaire, but we think it's worth revisiting this older article of ours on 10 actions millionaires take that you can too.

In his 1996 bestseller, The Millionaire Next Door, Thomas Stanley detailed the traits of the average millionaire. Notice I didn’t say rich person... I said millionaire. These are people who have a net worth over seven figures who are also “financially free.” That excludes that guy who makes $50,000 a month but then spends $60,000 a month living in the city, driving a Bentley, and eating at Chops three times a week.

Not much has changed about this group from 1996. So today, in 2017 we’re still talking about good, old-fashioned millionaires -- couples (and some individuals) who are truly rich. These are people with plenty of money to pay the bills when the clock strikes 5 on their working careers.

I see these people every day of the week. They drive Toyotas, Hondas, Kia’s -- and the occasional Jeep Cherokee. They have saved for a long time and finally find themselves in a position to quit their job and live life on their own terms. Here’s what they have in common.

1. Job Stability – They tend to stay with one employer for a very long time - sometimes 30 or 40 years. Being a company man or woman can offer huge rewards, including a very nice ending salary, significant pension benefits, and hefty 401K balances. I know it’s almost unimaginable in this day and age to work for the same employer for a couple of decades, but there are still people who do it, including teachers and other government workers.

2. Steady Savers – I’ve rarely met a rich retiree who didn’t start making the maximum contribution to a 401k in their 20s or 30s. As of 2015 you can save $18,000 in a 401k or 403b, and $24,000 if you are over the age of 50. That doesn’t count your company’s “free match” if they are generous enough to give you one.

3. Save the Raise - One trick I’ve seen these savers use is saving at least half their pay raises. Instead of putting the money towards a new boat or vacation, those added dollars end up in retirement or brokerage accounts.

4. Investors – Millionaires who own stocks tend to hold their investments for decades (not just years). They let their dividends re-invest over time and thus participate in the long-term growth of our economy. This makes them investors rather than “savers” who only invest in CDs or money markets.

5. Owners – Business owners, partners and other employees who are “fully vested” in a company tend to end up with substantial savings.

6. Mortgage – One key “rich” person move is to get rid of the mortgage by age 65. This may take two or three extra payments per year.

7. No Fancy Toys – Very few millionaires own BMWs, Mercedes, $3,000 watches, or $5,000 suits. Nearly 40% of the “rich” buy their cars used.

8. Credit –The better your FICO score, the lower the interest rates you will pay on your mortgage and car loans. The “rich” do this by carrying low debt loads.

9. No Lotto – Rich people don’t buy lottery tickets. It’s a fact. I’ve never seen a millionaire buy a lottery ticket, and I’ve never met anyone who won the lottery and still had the money three years later.

10. Own real estate - They bought homes that were not overly priced or extravagant in rentable areas. They would maintain them appropriately, rent them out consistently. They paid down their mortgages and ended up with cash-flowing assets that built their net worth slowly over 30 years.

The lesson: An average income, carefully managed, can generate considerable wealth over a period of time. To borrow a line from radio’s Dave Ramsey, “Live like no one else today, and one day you’ll be able to live like no one else.”

If you’re ready to start growing your wealth, create your free Wela account. We’ll help hold you accountable as you get started on your path to becoming a millionaire next door.

7 Habits That Made Your Next Door Neighbor A Millionaire

Back in 1996, Thomas Stanley released the book, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. We're big fans of this book in the Wela office because it gives a great overview of the keys to financial success. While we don’t believe you need to be a millionaire to be financially successful (wealth is about more than just money), we do believe that people who follow the habits of their millionaire neighbors are much more likely to be comfortable with their financial situation and more likely to reach their financial goals.

We topped the scales in with over 10 million households in the U.S. with $1 million or more in investable assets, excluding the value of their primary residence. While there was likely a variety of factors that helped push these families to seven-figures, we’re sure it was due in no small part to these families' good financial habits. Good news, you can also build these habits.

Let’s look at seven common habits of these self-made millionaires.

  1. They pay themselves first. Self-made millionaires understand that to build wealth they first have to invest in themselves. The average millionaire actually saves 20% of their income which falls in line with our TSL budget.
  1. They live below their means. They understand that it’s better to be anonymously rich rather than deceptively poor. They also know that they can’t save 20% of their income if they’re spending it every month.
  1. They’ve been with the same company for a very long time. Which is typically in a vocation that they love, and it’s rewarded them with a nice ending salary, a significant pension benefit and/or a hefty 401K balance.
  1. They don’t buy fancy cars. Very few millionaires are driving around in BMWs or Mercedes. Instead, they’re happy to give you a lift in their 10-year-old economy sedan.
  1. They’re not trying to impress the Joneses. Sure, the Joneses are nice people, but do they really need another new SUV?
  1. They are comfortable with taking some risk. They understand that without risk there can be little to no reward, so they take sensible risks like investing in the stock market.
  1. They set financial goals, but they’re different from yours. The millionaire next door understands that not planning is the same as planning to fail. They’re not saving up for things, though; instead, they’re saving for financial freedom.

If you’re ready to get started building these habits in your life, create your free Wela account. We’ll help hold you accountable as you get started on your path to becoming a millionaire next door.

Entrepreneurs - Why They Need Retirement Planning Too

why theyneedretirementplanningtoo (1) Entrepreneurs are a special breed in the world of personal finance. Unlike most of us, they’re not expecting a steady paycheck every couple of weeks. Their personal financial planning needs can be much more complicated, as can their retirement planning.

We’ve reached out to Mitch Reiner to get the skinny on how entrepreneurs should manage their retirement planning.

Q: Why are entrepreneurs typically so bad at planning for retirement?

Just like everyone else, it's because retirement seems so far away.  Entrepreneurs control things in their businesses every day, and every decision made affects the day-to-day outcome. We can control things with our business with direct decisions. Saving in stocks and which allows the outcome be uncertain and feel uncontrolled is foreign to entrepreneurs.

Related: 4 Questions To Answer When Planning For A Happy Retirement

 

Q: Why should an entrepreneur save for retirement if they’re planning to sell their business when they’re ready to retire?

Two reasons:

  1. Diversification: Despite your confidence in your business and industry, things could go wrong.  An employee could sue you, your industry could take a sharp downturn (tech in 2000 or housing in 2008), you could have employees steal from you, or there could be a million other things that could affect your largest asset.
  2. Seperation: It's healthy to manage your life responsibly inside and outside the business.  You should pay yourself a reasonable wage that covers your living expenses so that you are controlling your lifestyle and spending OUTSIDE of the business. Despite the fact that it would be nice to “write everything off,” you should know how much your real lifestyle costs you and live within it by paying yourself and living out of your personal budget, not your business one.

 

Q: What is the first step an entrepreneur should take if they want to start saving for retirement, but they don’t know how?

Determine how much you need to live on OUTSIDE the business and begin living by TSL on your personal income, not the business income.  Pay yourself a reasonable salary, save 20% of your salary, and invest your savings as if you were an employee of your own organization (the CEO, of course, but still an employee).

Related: How much should you budget for taxes, savings, and life (TSL)?

 

Q: How can an entrepreneur optimize their retirement saving? Can they have the business match their contributions like a traditional 401k?

This completely depends on your type of business and situation. If you are a sole proprietor or partner with a spouse, you can get aggressive with the amount you put in a retirement plan and have your company match.  However, if you have a lot of employees, you are bound to do safe harbor contributions and matching and therefore need to take into account the cost of plans and the benefit you are providing to your employees and balance that with the tax savings.

Related: How The U.S. Government Taxes Your Investments

 

Q: How should their business fit into their retirement planning?

From a future equity value standpoint, it should be a sweetener.  While working and growing the business, think of it as a direct way to control your earnings capability and growth.  By running your business, growing it and managing expenses, you should be able to “give yourself a raise” and earn more income over time.  This would then increase your amount that you need to save because you are abiding by the 20% TSL rule.  Then, if there is equity long-term, this is a bonus in the end.  Maintain liquidity outside the business.  Operate your life as though your business could be taken away from you tomorrow.

 

4 Questions To Answer When Planning For A Happy Retirement

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According to a study done by Wes Moss, the happiest retirees spent, at least, five hours each year planning their retirement before they actually entered it. No matter if you’re just around the corner from retirement, or perhaps it’s still a far off thought, take the time today to plan for retirement so when the day comes when you can stop setting your alarm, you can retire the confidence of having a full plan in place.

A good place to start is by answering four questions. We have worked with many people on the verge of retirement and helped them transition financially confident into retirement. One thing that I have learned is that answering these questions early… well before retiring… helps someone actually pull the trigger on retirement. All too often we see people talk about retirement and then get gun shy when the date comes because they haven’t fully answered these four questions.

Even if you’ve answered these questions before, it’s a good idea to review them once more to see if any of your answers have changed. Keep these answers as up-to-date as possible to be sure you’re on track with your retirement strategy.

Question #1: What is your asset allocation?

Asset allocation simply means your investment mix of stocks and bonds. In retirement, you typically want to utilize the assets you have invested to generate income. Typically this income comes via dividends from stocks, interest from bonds and distributions for other investments. The key to getting the appropriate asset allocation is balancing risk but still having some stock exposure to help you keep up with inflation. Stocks tend to be a good inflation hedge.

At Wela, we use OYA which means, "own your age" in income. It’s a good rule of thumb when determining how your portfolio should be allocated. If you are 60 years old, then the rule of thumb would say to have 60% in the income bucket (investments that have a guaranteed but lower return like bonds) and 40% in the growth bucket (investments that are riskier but have the potential for a higher return on investment, like stocks). If you’re 40 years old, then this rule of thumb would say you should have 40% of your portfolio in the income budget and 60% in the growth bucket.

We have a tool inside the Wela portal which can help you quickly calculate exactly how you should be invested based on this rule of thumb, and you can chat with an advisor about your retirement investment strategy. Sign up here.

Related: [Infographic] How To Own Your Age In Investments

Question #2: How much do you spend every month, and how are you going to fill this gap?

This is how you determine exactly how much savings you’ll need in retirement. Identify what your monthly needs will be in retirement. How much money are you going to need to keep the roof over your head, food in the pantry, yourself insured, and then have some fun?

We suggest you start by looking at what you are currently spending on a monthly basis. Then take that number and see how it will change based on what you envision for your retirement. Will you have these same expenses in retirement, or do you plan to pay off your house beforehand? Do you want to travel more or are you going to move to and stay at the beach? There is a general rule of thumb in the financial planning industry that people will live off of 70% of their pre-retirement salary once they’ve retired, but that number may change based on your plans for retirement.

Once this number is understood, you have to identify what streams of income will help you hit this spending amount. We recommend that you first look at your Social Security, pensions, rental income or any other streams of income. Once you’ve added these amounts, whatever the difference between this amount and the amount you want to spend would be filled by income from your investments.

The basic idea here is that if you need $4,000 per month to live on and you have $1,500 coming in from Social Security and a small pension, this would mean that your investments would need to generate $2,000 a month for you in retirement. Wes Moss has a rule of thumb that says for every $240,000 you have invested, you can expect to withdraw $1,000 a month in retirement.

$240,000 x 5% (withdrawal rate) = $12,000 / 12 months = $1,000/month

Related: How Much Money Do You Need For Retirement? It’s Not As Simple As Following A Chart

Question #3: What are you going to do daily in retirement?

You’ve hopefully already thought through this a bit while answer question #2, but it’s important to know what you’re going to do in your retirement. It is necessary to have a strategy for how you plan to stay active in both a mental and physical capacity. Just because you have time to sit on the couch, doesn’t mean that you should. Think about this seriously before you retire, and get a plan! Whether that means volunteering with a local charity, playing golf daily, or just regularly spending time with your grandchildren, having a plan in place for how you’ll use your new found free time with help keep you mentally and physically in better shape.

Question #4: What do you want to do with your money?

This question needs to be answered with where you want your money to go when you are no longer here anymore. Do you want to leave it to heirs, do you want to put it in a trust, or donate it to a charity? This question should be answered before retirement so you can properly plan your estate. You’ve worked hard to grow your nest egg, so don’t leave it unprotected and without a plan.

Related: Estate Planning Basics

Retirement is nerve wracking because you are transitioning from having a steady paycheck that is fulfilled by an outsider to having to fulfill your own paycheck. By answering these questions, you can move into retirement comfort with this new reality. These are questions we oftentimes work with users and clients at Wela to answer. If you have a question about planning for retirement, your investment strategy, or maybe your financial goals, create a free Wela account today to talk with one of our advisors. We’re here to help.

 

 

Disclosure:  This information is provided to you as a resource for informational purposes only.  It 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.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information 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.