How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

The first 90 degree day of the year (at least here in Philadelphia) means a lot of things to different people.  Memorial Day Weekend.  Weekends at the park or pool.  And, of course, graduation season.

Congratulations to everyone in Class of 2017! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being doing with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation about a one time, quick start session!

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve wrote about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the work force, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

What Millennials Need to Learn from the ESPN Layoffs

Well, this is a bummer.

The big news this week is that ESPN, once considered the fastest growing and most stable news organization in sports, is laying off numerous reporters and on-air personalities.

Layoffs are a cruel reality of the world we live in.  Unfortunately, reports of companies cutting jobs pop up in the news far more frequently than they should.  And there’s something about how public ESPN’s move was that makes it hit home all the more.

But there are a few important lessons in this story for all of us, particularly for millennials who are relatively new to the workforce.

There’s No Such Thing As 100% Job Security

No matter how quickly your company is growing, no matter how good your last performance review was- in today’s day and age, job security flat out isn’t something that we can count on.

Sure, there are a limited number of exceptions.  Tenure can help if you work in higher education.  Unions can, too.  But for the most part, it’s a mistake to treat a job as completely stable.

Some best practices to help deal with this unfortunate reality:

  • Talk to that recruiter who just hit you up on LinkedIn. Even if you aren’t looking for a new job right now, it never hurts to have the conversation and build a relationship with someone who has the capability to make hiring decisions. If you’re ever out of a job on short notice, you’ll be happy to have these connections!
  • Update your resume. If you’re anything like me, your resume hasn’t been updated since your last job interview.  A best practice is to update your resume – and LinkedIn bio – once a year.  That way, it’s ready to go whenever you need it.
  • Network, Network, Network. There’s many ways to do this one, but you absolutely have to be networking in your industry.  Attend a conference that caters to professionals with your particular area of expertise.  Use a site like Meetup or Eventbrite to find local networking events in your city.  Building relationships is the name of the game.
  • Mind your finances. Of course, there are huge financial concerns with the risk of job loss too.  Which brings us to our next major point…
You Absolutely Must Have an Emergency Fund (In Cash)

As a financial planner, I help people meet a wide variety of financial goals.  From retirement, to paying down student loans, to buying a home– there are a ton of different ways to allocate your money to improve your financial future.

But none of those things happen until you have an emergency fund.

You read that right.  Of course, you need to meet you minimum financial obligations.  Pay the minimum on your student loans each month, don’t miss credit card payments, contribute to your 401(k) until the match point.  You know the drill.  But, before you start looking to invest any “extra” money, you need to work to build an emergency fund.

The golden rule is to (eventually) build up to the point where you could support yourself for six months, without holding a job, just from your emergency fund.  But I wouldn’t focus on that right away- that’s a pretty intimidating goal for most people to reach.

Instead, calculate your average spending for one month, and focus on accumulating that much money in your emergency fund.  Once you have that much, focus on doubling it.  And so on, until you get to six months.

In other words, being so far away from reaching your emergency fund savings goal isn’t an excuse to not try to reach it in the first place.  Start small, and focus on saving a month’s worth of expenses at a time.

And one more thing- I don’t care how low savings rates are, you need to keep your emergency fund in cash.  If you invest your emergency fund and you were to immediately lose your job just as the stock market crashes, it won’t do you much good.  Set a goal for your emergency fund, and keep it in cash.  Preferably, in a separate savings account from the rest of your savings, so you won’t be tempted to spend it.

What’s More Secure: A “Side Hustle”, or a Full Time Desk Job?

If you were to ask 100 people whether it’s safer to have a full time job with an employer, or to work for yourself, I’m guessing that over 95% would say that it’s safer to have a full time desk job.

That may well be true.  It takes a lot of work to build your own revenue streams from the ground up.

But if you start your own business as a “side hustle”, and slowly grow it over time to the point where it could become a full time endeavor for you, I’m not so sure that this type of model is less secure than working for a “real” company.

Let’s put it like this.  Pretend that you have experience designing websites and writing code.  Would it be more secure for you to A) work for a company that does web design and be paid a salary, or B) to work as a freelancer part time and (over time) build up to 50 web design clients, enough that you could quit your full time job?

In Scenario B, if a client were to “fire” you, you would lose a total of 1/50 of your income, or 2%.  In Scenario A, if your employer were to lay you off, you’d lose 100% of your income.

The point of this isn’t to try to convince you to quit your full time salaried jobs.  Rather, I’d encourage you to revisit the way you think about your income and job security.  Finding a side hustle that you are passionate about and can sell to other people is a great way to diversify your income streams.  Just as you wouldn’t invest all of your money into one stock, it’s a best practice to diversify your income sources as well.

Hopefully, This is Never Relevant to You

Obviously, I hope you’re never in a situation where you’ve been laid off for a job.  But just in case, following the steps I outlined above will leave you more prepared to handle this situation.

The Why, When, and How of Combining Your Finances With Your Spouse

“Now that we’re getting married, how should my partner and I manage our money together?”

It’s one of the most common questions I get from my engaged and newlywed clients. It can be hard enough for us to manage our own money. Adding a second person to the mix makes things all the more complicated.

First and foremost, there’s the challenge of how to manage your money together with your spouse. Which accounts to use, how to monitor your finances together- there are a lot of questions here. Enough that I created a guide to walk you through my methodology for combining accounts.

But before we get into the how of managing your money together with your spouse, we need to take a step back.

Start with Why

Whenever I discuss combining money with your spouse, the very first question I typically ask is- why do you want to combine your accounts together?

Is it a matter of convenience? It’s certainly easier for you to keep track of your family finances if everything is in one place. Or is a philosophical matter? You’re one family, after all, and many people want to manage their finances as such.

Do you and your partner want financial autonomy in your day to day lives? Or, do you view your financial future as being completely intertwined with each other. Or maybe somewhere in between?

There’s no right or wrong answer here. But the approach you should take is largely dictated by your answers to these questions.

One Important Note

Pacesetter Planning provides financial advice, not legal advice. Before you decide to completely integrate your financial accounts with your spouse, it is recommended that you consider speaking with an attorney. If you decide not to completely combine accounts, you can certainly still use my framework for managing money together.

If you do decide to keep your accounts separate, you should add your spouse as a beneficiary to your accounts as soon as possible. This way, if something were to happen to you, your spouse will inherit the assets without legal complications.

That being said, my personal philosophy is that if you’re getting married, you should be “all in”. So, I don’t have a problem if couples want to completely integrate their accounts- as long as they want to for the right reasons, as discussed above.

The Next Question- When Should You Combine Finances

You shouldn’t actually combine your financial accounts with your partner until you’re married. Period.

Couples in our generation operate differently than our parents and grandparents. These days, it seems like the norm is to take big steps, like moving in together, before you are engaged. I know and I get it- I lived with my wife for over a year before we got married.

But just because some societal norms are changing, doesn’t mean that everything should change. Particularly when it comes to legal issues.

You might view yourself as “basically married” to your boyfriend or girlfriend, and there’s absolutely nothing wrong with that. But, you bank won’t view you as married until you’re actually legally married. Nor with the courts, if you were to break up. These situations become much more complicated if you have shared financial assets that you’re trying to split between two non-married people.

There’s nothing wrong whatsoever with jointly managing your finances with your boyfriend or girlfriend if you are living together. In fact, I usually encourage it. My guide on managing your finances with your partner will show you how. But managing your finances together doesn’t mean you have to actually combine your accounts. One more time for good measure: don’t do that until you actually get married.

Hopefully, it just means you’ll have separate accounts for a few more months or years. But in the worst case scenario, it can save you a ton of trouble by waiting.

How Do We Go About Merging our Finances?

You’ve talked about why you want to combine finances with your spouse. You are, in fact, spouses, so it’s an appropriate time to merge your money. Now, how do you do it?

I have a three-tiered framework for how to combine finances with your spouse. You’ll get a step by step walkthrough of this in my free guide. In this guide, you’ll learn how to:

1. Identify your shared financial goals with your spouse, and why these are so critical to keep in mind when you set up your joint financial accounts

2. Inventory each of your current financial accounts, and create an account map that shows you exactly where your money is today and how it’s being used.

3. Choose which accounts to use and Confirm you have enough accounts in line with your goals.

There are a lot of steps to combine your money the correct way, and it’s critical that you take the time to make sure that nothing falls through the cracks. Download my free guide on combining your finances today, and you and your spouse will have a roadmap to make sure you’re set up for success.

How to Allocate Your Money Effectively

[Click here to register for my webinar, “How To Organize Your Finances and Create a Roadmap Toward Financial Freedom”!]

Ever since I founded Pacesetter Planning, I’ve worked with my clients on a wide range of financial topics.  I’ve gotten a variety of questions from clients and potential clients, and while everyone’s situation is a little different, generally they fall into the following categories:

  • How do I manage my finances with my husband/wife/fiance/significant other?
  • How much do I need to buy a house?
  • How much should I be saving for retirement?
  • How do I select investments?
  • Should I put extra money toward my student loans or should I direct that money elsewhere?

As you may have noticed, I’ve addressed a good number of these topics at a high level on this blog already (and will continue to do so).  But, you may have picked up on something else.

All of these Questions are Interconnected

It’s hard to make financial decisions in a vacuum.  Often times, the hard part isn’t answering these individual questions, but finding the right answer to them all at the same time.  It often isn’t practical to increase your saving for retirement and buy a house and pay extra on your student loans all at once.  These decisions need to be made together, and there’s usually not a clear right or wrong answer.

That, of course, is where I come in.  I help my clients develop plans to manage their finances, prioritize their goals, and help them allocate their money accordingly.  We set targets and track progress against these goals, updating as needed.

You Need a Framework to Make these Decisions

While everyone’s circumstances are a little bit different, I use a strict framework and process to help clients make these decisions.

And I’d like to share it with all of you.

On Tuesday, March 7 at 8 PM EST, I’ll be hosting a free webinar called “How to Organize Your Finances and Create A Roadmap Toward Financial Freedom”. You can register for the webinar here.

On this webinar, we’ll discuss:

  • How I recommend clients structure their accounts to keep track of their finances
  • How to implement a system to manage your income month to month to pay yourself first
  • How much money you’ll need to retire, and what it will take to get there
  • How to balance your everyday spending with your short and long term financial goals
We Face Greater Financial Challenges than our Parents and Grandparents.  Plan Accordingly.

Sometimes I get pushback when I say this, but I truly believe that millennials face much greater challenges than previous generations.  Think about it for a minute.

Most of our grandparents worked 40 years at the same job, retired and received a pension from their company to fund their retirement.  They have Social Security.  When they were our age and looking to buy a home, housing prices were about twice the average annual salary.

Many of our parents may have had multiple jobs over the course of their careers, but most of them only had one job at a time.  Some of them may still have a pension, but all will (barring some sort of catastrophe) receive Social Security.  And again, the average home price when they were in their twenties was around twice the average annual salary.

Now?  The average millennial changes jobs four times before turning 32. More than 1/3 of millennials have a side job.  The average price for a home has jumped to about 3.5x the average annual salary. Most of us have some type of student loans.

Pensions? Social Security?   ¯\_(ツ)_/¯

We have some big challenges ahead of us.  The good news is that these challenges can be beaten.  But, you need a method and a plan to get you there.  I’ve got it for you.

I Want to Teach You Everything I Know

I didn’t get into financial planning to only work with rich clients.  My goal is to help make all of my clients wealthy someday.  The more people I can help, the better.

Sign up for my upcoming webinar, and let me know if you have any questions you think I should address.  I look forward to sharing my methodology with you all.

How to Manage Your Finances When You Don’t Have Enough Time

I started my career as a financial consultant with PwC, one of the Big 4 accounting firms.  While my career ultimately took me down a different path, I have nothing but fond memories of my time there.

At any of the Big 4 firms, you work hard.  Providing excellent service to your clients comes with long hours, sometimes for weeks and months at a time.  And for those in the accounting and tax side of the business, “Busy Season” – the time of year leading up to audit and tax filing deadlines – are exponentially more grueling.  During Busy Season, a 70 hour work week might be considered relatively light for the time of year.

Working long hours over six or seven days of the week isn’t unique to the Big 4 firms, of course.  But, given that we are heading into the Big 4 busy season, I wanted to take a look at strategies for keeping your finances on track when barely have any time to do anything other than work.  And to that point- I’ll try to keep this article as succinct as possible.  After all, if this is in any way relevant to you, you’ve probably got to get back to work!

Set Goals Ahead of Time

If you’ve ever had a few weeks or months when work has been all-consuming, you know how easy it is to not make time to think about your finances.  By the time the dust has settled and you check your bank accounts for the first time in a few months, you realize that you haven’t made any progress toward your goals.

There are ways to avoid this.  And it begins by setting goals for yourself before busy season starts.  Ask yourself, “What’s something that I could achieve with relatively little time involved that would make me feel great about the state of my finances three months from now?”.  For example, “I want to save an extra $50/week in the next two months because my firm is paying for dinner every day”.

Setting these goals up front is the best way to make sure you actually make progress.

Let’s take a look at some tips for how to manage these goals around certain financial topics:

Cash Flow and Budgeting
  • Set calendar alarms on relevant dates as reminders to pay the bills and credit cards every month. When you’re swamped with work, it can be easy to miss a rent or credit card payment.  Set up alarms for yourself in advance  to make sure you don’t forget!
  • Utilize software and apps to their fullest potential. Whether it’s free app like Mint or a more comprehensive solution provided by your financial planner, set up a system to automatically track your spending and provide alerts to notify you if you’re spending more than you planned in a particular category.  Plus, having an easy way to view all of the pieces of your financial picture on your phone can’t be beat when you’re busy.
  • Know your budget. As annoying or boring as it may be, you have to know your numbers. Know how much you can afford to eat out every month.  Know how much transportation will cost you.  I’m not one of these people who tells you that you need to give up your $4 cup of coffee a few times a week or you’ll never be able to retire.  Get real.  Focus on the large categories in your budget (rent, transportation, and food), but monitor for irregular expenses and big chunks of your budget going to small purchases (the ones that really add up each month).
Savings
  • Automate, automate, automate. In this day and age, there’s no reason for your saving habits to rely on you remembering to manually transfer money from your checking to your savings accounts each month.  Based on your budget, take 10 minutes to set up your direct deposit to put a set amount per paycheck directly into your savings account.  Or, set your savings account to automatically debit your checking account each month.  In addition to saving time, it’s a great way to increase your chance of actually hitting your savings goals.
  • Multiple savings accounts are your friend. I encourage all of my clients to have multiple savings accounts for each of their goals.  It’s easier to track your progress toward building an emergency fund, saving for a vacation, money for a down payment on a home, etc. if you have a dedicated account for each of them!
  • Block off ten minutes each month to do a quick check in on your goals. And yes, I literally mean that you should send a meeting invite to yourself and have the time blocked off on your calendar.  Have you ever noticed that even when we have more important things to get done on any given day, we still tend to show up for any meetings that are on our calendar, even if they’re about a low priority task?  Why is that?  Because we tend to prioritize things that are set in stone in our calendar.  Do the same for your finances, a little at a time every month, to review your progress.  It doesn’t have to take long, but blocking off ten minutes to review your budget and savings progress can work wonders.
Investing
  • Review and rebalance before busy season begins. I know better than to try to schedule meetings with my clients who work for Big 4 firms from mid January to April. So, we sit down in December instead and make any adjustments to their investments at that time.  You can do the same thing on your own, particularly if you are a proponent of passive investing.  Rebalance your accounts before busy season starts, and when it ends.  If you have a well diversified portfolio of low cost ETFs or index funds, you (usually) can get away with not checking your accounts regularly when things are busy if you take care of them before and after.
  • Consider stop loss orders… at your own risk. If you are the type who can’t bear a drop in your investments and are particularly nervous about monitoring them less frequently than usual when you’re busy, stop loss orders may be a potential solution for you.

For those unfamiliar- stop loss orders essentially allow you to automatically sell your investments once they fall below a certain price.  If the stock in question never falls to that price point, you keep your investments. As such, they can be a good way to limit your losses if the market plunges.

However, be warned- this is not generally a strategy I recommend for busy people.  While stop loss order can be effective in selling your investments before the market plunges, if you aren’t paying attention to when to buy back into the stock, you can end up losing – big.  For example, say that from January to May of this year, the S&P 500 Index falls 15% from January to February, and then rises 20% from February to May.  If you have a stop loss order to sell your S&P 500 ETF if it falls 5%, you would automatically sell the S&P fund once it drops 5%.  This essentially saves yourself 10%… at the time.  But, if you don’t check your account until May, you wouldn’t buy back in when the market is low, and you would lose out on the 20% growth.

So, stop loss orders could be an option for you- but be careful with them.

Delegate

Managing all of these things on your own is doable, but it is still hard work.  There’s nothing wrong with delegating some of these tasks to a professional if you don’t have time to do them!

Anything from a traditional asset manager to a robo-advisor (or both!) can handle your investments for you when you’re busy.  That’s right, you just read a financial planner recommending you to use a robo-advisor.  I do things a little differently than most planners in the industry.

A financial planner can also help you monitor your spending and budget, progress against your goals, and keep you up to date on market conditions.  If you think that would be helpful to help keep yourself on track, we should talk.

Post Busy Season

After busy season settles down, block off a full hour to take stock of where you’re at. Review your progress against the goals you set for yourself before busy season.  Correct any issues you’ve identified.  And consider how you might approach next year’s busy season similarly, or what changes you will make.

How to Keep Holiday Spending From Blowing Up Your Budget

With Thanksgiving behind us, the holiday season is here.  And with it comes travel plans, parties, family gatherings, and, of course, gifts.

With all of that comes costs.  Significant ones.  A study from PwC estimates that millennials will spend over $1,000 on holiday-related expenses this year, up 26% from last year alone.

I’m not writing this to say that’s a bad thing.  Heck, I’m the lunatic who starts listening to “White Christmas” in October.

Here’s my question instead.  No matter who you are, spending an extra $1,000 in a particular month is enough to blow up anyone’s budget.  From a financial planning perspective, how do you prevent irregular expenses from destroying your monthly spending projections?

It’s not Just about Holiday Presents

What do I mean by irregular expenses?  Spending that isn’t completely unpredictable, but doesn’t happen every month.

Breaking your leg and needing to pay for an x ray isn’t an irregular expense- it’s an emergency, and its why I encourage all my clients to have an emergency fund before focusing on other financial goals.  That’s not what we’re talking about here.  Instead, we’re looking at the money you spend every year or so in a way that’s predictable, but not frequent.

Holiday spending is particularly relevant in December, but this isn’t the only irregular expense that comes up during the year.  This also relates to:

  • Car insurance payments (usually made twice a year)
  • Renters or homeowner’s insurance payments
  • Reoccurring medical expenses (for example, a refill on prescriptions or contact lenses every x months)
  • Annual car registrations and inspections
  • Car maintenance (ex: new tires every 60,000 miles)

Some of these are more predictable than others, but you get the picture.  If you aren’t careful, you can have a huge, irregular expense in your budget every other month.

Getting back to the holidays, I’m not just picking on gifts.  There are a lot of other costs that can add up around this time of year- travel expenses, shipping costs, decorating, cooking/baking, and Christmas cards, just to name a few.

So, what should you do about it?  There are two main ways you can approach irregular spending.

Option 1: Keep and Fund an Irregular Expense Account Using Past Average Spending

Personally, this is my favorite method to approach these issues.  In a nutshell, using this approach you would average out your yearly expenses across every month, and use these savings to cover the expenses when they come due.  Let’s break it down.

First Step: Estimate Your Yearly Irregular Expenses

In order to plan for your irregular expenses, you have to have a ballpark idea of what they are.  While it can be difficult to calculate some irregular expenses, generally I recommend that you let your own spending history be your guide.

With bank account and credit card information online, it’s not terribly difficult to piece together a ballpark estimate of your past irregular expenses.  (Note: I didn’t say “fun”.  I said “It’s not terribly difficult”. Going back through old receipts isn’t something that makes anyone excited, but it’s important!)

For example, let’s say that on average, you’ve spent $1,000 on holiday gifts/travel/decorating/cooking every year in December, $500 every March and September on car insurance, and $150 on annual car registrations and inspections.   If these are your only irregular expenses, your total for annual irregular spending is $2,150.

Just to be on the safe side, let’s round up by a couple percentage points and use $2,200 instead.

What does this mean?  On top of your monthly budget for rent, food, etc., you need an extra $2,200 to cover your expenses each year.

Second Step: Break It Down By Month

In this step, we’re going to divide your annual irregular spending into an average amount per month. Then, add that amount to your current monthly budget.

The idea here is that rather than only thinking about holiday spending in December, it’s best to set aside some money every month so that when the holidays roll around, your budget stays intact.

Going back to our example, if you spend $2,200 on irregular expenses every year, averaging that out every month means that you’d spend $183.33 per month on these items if you spent it evenly throughout the year.

So, how do you stop irregular expenses from blowing up your budget?  Estimate them on a monthly basis, then save that amount each month.  That way, when it comes time to buy that holiday gift or get your car inspected, you can use cash you’ve saved up in advance to cover it.

Is it easy to save $183.33 each and every month?  It might be, or it might not be, given your budget.  That isn’t really the point.

The point is that if you did the first step correctly, you’ve been spending that money already in the past year or two.  Rather than dealing with it in large chunks, you’re planning ahead to make it easier on your wallet when the time comes.

Third Step:  Where to Put the Money in the Meantime?

Saving a set amount each month to cover sporadic expenses is great.  But that begs the question- where do you put the savings?

I’m a big believer in having multiple savings accounts for different goals.  Assuming you aren’t paying fees on your savings accounts (if you are, you shouldn’t be!  There are plenty of free options out there), the only drawback to having multiple savings accounts is just keeping track of them.  And, I’d argue that it’s much easier to keep track of your money if you have different accounts earmarked for different purposes.

Your emergency fund is different than your irregular expense fund, which is different than your travel money, which is different from your savings to buy a house…. You get the picture.  One of the easiest ways to keep your money allocated for the correct purpose is to use different accounts.

So, if you set up a separate irregular expense account, your goal should be to contribute to it evenly each month to fund these expenses.  Make it easy on yourself, and automate this savings.  Schedule a direct deposit from your paycheck, or an automatic debit from your checking account, once a month to make sure you’re saving what you need to be saving.  Your wallet will thank you when the holidays roll around!

Fourth Step:  Reevaluate Annually

I work with all of my comprehensive financial planning clients to update their financial plans annually.  There’s a good reason for this: things change, and change often.  What worked for you this year might be too much or too little next year.  Set your targets based on what you’ve done in the past, but make sure to reevaluate at least once a year to make sure you’re saving the appropriate amount.

Tangent

We need to have a brief time out before we go to the second option for how to keep holiday shopping to blow up your budget.

So far, we’ve only talked about irregular expenses.  But, irregular income works exactly the same way.  If your cash flow increases once or twice a year, either earmark those funds toward a long-term savings goal, or average out this income each month to treat it more like a raise than a bonus.

What am I talking about here?  For people who have seasonal income, this definitely applies to you, but I bring this up to primarily speak to one irregular source of income that most of us receive each year- your annual tax refund.  If you get $500 back from the IRS every April, build it into your monthly income budget for the rest of the year, just like we did for your irregular expenses, rather than spending it all at once.

Time in- time to talk about the second option for handling irregular expenses.

Option 2: Benchmarking and Flexibility

Let’s say that the thought of diligently setting aside money in January and February that you won’t be able to touch until December gives you some anxiety.  What do you do then?

The short answer, of course, is that you need to come up with a way to pay for your holiday expenses in real time.  This isn’t fun either, but there are a few good ways to go about it.

First Step: Set Spending Caps

Before you start your shopping, set some hard caps for yourself.  Again, this best done in conjunction with your historical spending, but the key is to come up with a realistic number and hold yourself to it.

For example: this year, you might commit to only spending 1.5% of your annual income on holiday-related items.

That’s a great first step, but now it’s time to divide it up.  Let’s say that 1.5% of your annual income is $1,000 (if your post-tax income is $66,666.67).  How are you going to spend that?  For example:

  • $50 for decorations
  • $75 for baking expenses
  • $75 for Christmas cards
  • $250 for a train ticket home
  • $550 for gifts

From there, divide each category down even further.  Of the $50 you’re spending on decorations, $35 might go toward a Christmas tree, $15 toward lights.  For your gift budget, break it down by person.  This way, once you’re browsing your favorite online stores, you have your targets in mind before you buy.

Second Step: Flexibility

Of course, limiting your expenses in this way is great, but it doesn’t completely solve the problem of where the money is going to come from.  Hopefully, by putting reasonable caps on your holiday expenses, you’ve made the burden light enough to solve the problem through some flexibility in your budget.

Obviously, your rent and electric bill still need to be paid.  But most people I’ve worked with have some discretionary money built into their budget somewhere.  Maybe its money you set aside for eating out on the weekends, or for going to the bars.  Maybe you like to go to the movies or to sports games. All of those things are great, and they absolutely belong in your budget.  But, when these irregular expenses come up, they should be the first place you look to cover the costs if you haven’t been setting aside money for them.

Saving and cutting down on discretionary money isn’t fun, but your wallet will thank you come New Year’s if you plan accordingly!

The Elephant in the Room

If you’ve made it this far, you may have noticed I left out a step.  I’ve made an assumption and left it unaddressed until this point, but it’s an absolutely crucial one.

You need to have a monthly budget.

I don’t think anyone actually likes budgeting. But, I can’t overstate the importance of a monthly budget if you want to make financial improvements in your life.

I was in this position a few years ago.  I never sat down to budget how much I was spending on food, transportation, entertainment, etc. each month.

And guess what?  I wasn’t saving anything.

So I know it’s not fun, but I also know that in order to meet just about any financial goal you have, the first step is going to be to make a monthly budget.

If you want to learn how to do this and (more importantly) how to make yourself stick to it, click here to schedule a free intro call.