I sometimes get asked to dispense with some free financial advice. Frankly, there are times when it doesn’t make sense for someone to pay a financial planner to put a plan together (sacrilegious, I know!). In those cases, the person I’m speaking with can likely benefit from one (or more) of my Ten Free Tips to Financial Freedom.
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Have a budget – stick to it
Budgeting is both one of the easiest and hardest tasks for people to complete. It’s easy because anyone can do it. You simply need to sit down with pen and paper (you can also use Excel or our handy online ) and write down how much money you bring in every month and how much you spend each month. It’s difficult because you MUST be honest with yourself with how much you spend and what you spend it on. Remember the acronym GIGO – Garbage In, Garbage Out.
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Pay off your credit cards (if you have them) every month
Unfortunately, some people do not understand that credit cards are actually loans given to them by banks. Not only are they loans, they’re expensive loans. According to the Federal Reserve, the average credit card rate currently stands at 14.14%. That’s one expensive loan! (Auto and home loans are a fraction of that.) If you have a credit card: Pay. It. Off. At the end of every month, you need to pay it off. If you pay the minimum, the loan will continue to grow exponentially.
Store “same-as-cash” credit cards can be even worse. The interest rate on these offers often start as zero for a set amount of time. If you do not pay the balance off by the due date, the card will charge you interest on the entire amount for the entire period. These cards tend to make the 14.14% noted above look low! If you do a “same-as-cash” deal, be sure to pay it off in advance of the due date.
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Save an emergency fund
According to an article in the Washington Post that references both the Federal Reserve and the United Way, 40% of American adults don’t have enough money to cover a $400 emergency expense. We need to get that percent much, much lower. When you prepare your budget (Tip #1 above), be sure that you factor in savings for an emergency fund. Initially, save $1200 so that you don’t have to worry about the $400 emergency expense as noted in the article. (This will actually cover three of those emergencies. Everything happens in three’s, doesn’t it?)
Once you’ve met the $1200 savings goal, keep chugging away. The ultimate goal is to get 3-6 months of expenses put aside for an emergency. Keep in mind, this is for an emergency. Not a vacation. Not an upgraded vehicle. An emergency.
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Protect yourself!
Sixty-four percent of US Households subscribe to Amazon Prime. That’s impressive. Heck, I subscribe. Who doesn’t love free two-day shipping? (Legal stuff: Note that I’m not saying that it makes the stock of Amazon a good buy or bad buy. I make no judgement of individual stocks. I’m simply pointing out a statistic for a company easily recognizable to the general public.) I also own life insurance. Disappointingly, LIMRA statistics show that only fifty-four percent of US Households own life insurance. That same study points out that one-third of Americans believe that they need more life insurance and nearly 40% wished their spouses had more!
Those statistics are striking. Whether you need life insurance or not and how much you need are something that you should speak with a financial planner about. In the meantime, our free online calculator can help you determine how much life insurance you do need.
Don’t forget the other types of insurance that you need to protect yourself. Some of those include (but not limited to): Auto Insurance, Disability Insurance, Homeowner’s/Renter’s Insurance, Liability Insurance, Long-term Care Insurance and more. (While we do not handle all of the above, we can help with some. Give us a call if you have questions.)
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Do not buy a new car
If I told you that I had an investment that would lose 37% of it’s value within five years, you would likely laugh at me and walk away. While a car is not (usually) an investment, Edmonds.com points out that the average new car does lose 63% of its value within five years. They actually lose 11% the minute they’re driven off the lot! During the first five years, cars lose between 15-25% EACH YEAR.
That does not necessarily mean you need to stay away from newer cars. (Assuming it’s in your budget and you can afford it.) However, be aware that cars do lose value. Forget the Joneses. Buy a slightly used car and let someone else lose money.
How much can you afford to spend on a car? Find out here.
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Maximize your retirement savings
If you have a retirement plan available at the company/organization you work, you should make sure to save at least as much as you can to receive the company match. If you have the ability to save more or don’t have a plan through work, be sure to discuss with a financial planner to help determine the most appropriate way to save additional funds.
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Stay diversified
Chasing returns is tempting and part of the human psyche. When you see a sector of the market performing well, it can be easy to get caught in the trap of following the “hot thing”. Unfortunately, the “hot thing” can turn cold…quickly. We’ve all heard the expression “Don’t put all of your eggs in one basket”. It’s important to remember that expression with your investments. It’s easy to understand why diversification is important when you view the Asset Class Return Chart. Just in 2017, Emerging Markets (EM) was the best performing Asset Class. In the first half of 2018, they were the worst performing. An allocation based upon your individualized risk tolerance will keep you diversified and help keep you from chasing returns.
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Save at least 10% of your income – 20% is better
Everyone wants to hear a “rule of thumb” when it comes to deciding how much to save. The most common is to save 10% of pre-tax income for retirement. That amount can range all the way up to 20% of your income. While both provide an approximate amount that needs to be saved, neither is designed for your situation. While there are free tools that you can use to help determine how much will need to be saved every month/year, you should consider working with a financial planner to nail down this number more precisely.
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Work with an advisor who utilizes a fiduciary process for your investments
Are all investment advisors the same? No. Do they all use a process to determine what investments to include in your portfolio? No. Some have no process at all. Others strictly use third-parties to manage your portfolio. Still others do not act as fiduciaries. A properly structured fiduciary process will ensure that your investments are reviewed according to your Investment Policy Statement.
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Stay disciplined
All of the advice or free tips in the world won’t matter if you don’t work to change your situation. Stay focused on the goal. Keep doing what you need to do to reach if. If you don’t, it will all be for naught.
We can help you stay disciplined and help put you on track to reach your financial goals. Give us a call at (517) 887-9905 or simply schedule a no-obligation appointment with us.