What To Do If You Have a Worse Credit Score Than Your Spouse

When most couples talk about money, the topic of credit scores usually isn’t one that gets them fired up.  It’s much more fun to focus on a goal like buying a new home than it is to dwell on your credit score.

But, building your credit is one of the most critical steps to take in your 20s, since your credit score impacts most of the other parts of your financial picture.  The interest rates on your future mortgages and car loans directly depend on your credit score.  And, credit takes time to build, so even if you don’t need to take out a mortgage soon, the time to focus on this is now.

It’s very common to see a husband and wife have very different credit scores.  What steps should the person with the lower score take?

Differing Credit Scores Can Be a Huge Challenge for Couples

There are a lot of decisions couples need to make about how they handle their finances together when they get married.  Typically, these decisions involve deciding whether (and how) to combine financial accounts, how to manage monthly cash flows, and how to save and invest.

Credit scores aren’t one of the topics that tend to come up right away.  Unless you’re in the process of buying a home, they just aren’t a topic that tends to be on the top of people’s minds.

But, this doesn’t mean that it isn’t an important topic for couples.  On the contrary, being in a marriage where one partner has a significantly higher credit score than the other can be a huge source of stress on your relationship.  And, it can complicate the process of taking out a mortgage, since you will need to use both of your credit scores when applying for the house.

It’s important, therefore, to be aware of your partner’s credit score and to get out in front of any areas for improvement before you actually need to use the credit score.

How Do You Fix It?

The good news is that this is a fixable problem.  The bad news is that it can take a good amount of time to improve your credit scores significantly.  Which is why it’s critical to start as soon as possible.
This isn’t an exhaustive list, but if you’re looking to improve your credit score, start with these strategies:

Download your Credit Reports Every Year

Knowing is half the battle.  Use a free service like Credit Karma to pull your credit reports once a year.  And, make sure to look at reports from all three credit bureaus- Equifax, Experian, and Transunion.  It isn’t common, but sometimes there can be erroneous items on one report that aren’t listed on any of the others.  You can also get your credit reports through the website of each of these credit bureaus.

Dispute Errors As Soon As Possible

We’ll touch on this in a bit, but it’s so important that I wanted to call it out right away.  You’d think that the three credit bureaus are infallible, but unfortunately, they are far from it.  I’ve caught three different errors on clients’ credit reports in the past couple months alone.  If you see something that you know is a mistake on your report, use the link on the relevant credit bureau’s website to file a dispute immediately.  These things can take some time, but it is possible to remove factually incorrect information from your reports.  And, as I said, this is unfortunately a more common problem than you’d expect.

Recognize that Making Changes to Your Available Credit Usually Involves Taking a Step Backward Before You Take a Step Forward

This is crucially important.  If you open a new credit card and use it the right way (more on that in a bit), over time your credit score will likely go up.  But, whenever you request new credit, this creates what’s called a “hard check” on your credit that causes your credit score to drop for the time being.

Again, in the long run, this will be outweighed by you using your new credit wisely, but be aware that if you’re planning to take out a loan sometime this year, now isn’t the time to be opening new credit cards.

And as an FYI, “hard checks” typically remain on your credit report for two years.

Have Enough Credit Available…

This one is particularly important for those people fresh out of undergrad or a grad school program.

Double check how much available credit you have on each of your credit cards.  Typically, most people new to the working world have credit limits in the $300-$500 range.  Frankly put, that’s not enough to build a great credit score.  Request a credit increase to give yourself more of a foundation to build your credit history.

…But Don’t Use (Much of) It

One of the primary drivers of your credit score is how much you use the credit you have available.  A good rule of thumb is to always use 30% or less of the total amount of credit you have available on each credit card.

In other words, if you have one credit card with a $10,000 credit limit, never let the balance on that card get higher than $3,000.  And of course, pay off the balance every month.  Speaking of which…

Set Reminders

It’s hard to keep track of your finances when you’re busy.  So, make it easy on yourself!  Set reminders to pay your bills every month.

One of the easiest ways to mess up your credit score is to accidentally miss a payment.  Set calendar reminders to yourself to make sure you don’t forget!

Check Your Reports for Any Overdue Bills (And Either Pay or Dispute Them Right Away)

When you do your annual review of your credit report, pay close attention to any bills (medical bills are common examples) that have accidently or allegedly gone unpaid.

If you have a bill listed as in collection that has gone unpaid, first do some research to make sure the bill is actually yours, and if it is, that it actually wasn’t paid.  John Oliver did a great report on erroneous credit reporting not too long ago that is worth taking the time to watch.

If you have a reason to contest the charge, do so as soon as possible.  If you realize that you just forgot to pay the bill, take care of it ASAP.

Don’t “Shop Around” for Loans and Credit Cards….

Or, at the very least, be careful not to get firm quotes from more than one lender at a time.

As mentioned above, every time a lender does a credit check on you regarding issuing you a credit card or loan, this creates a “hard check” on your credit that hurts your score.  If you go to five different credit card companies requesting a credit card, that’s five “hard checks” that will appear on your credit report, even if you only open one card.

By all means, do your homework and shop around, but only begin the application process once you’ve made a decision.

Beware Retail Credit Cards

I’ll confess- I’ve goofed on this one myself.

Stores generally offer pretty good perks to entice you to open up a store credit card.  But, having retail credit cards directly impacts your credit score, and not in a good way.

Lenders view retail credit cards as a negative indicator, so it’s almost always a best practice to say no to the discounts that the retail stores offer you in order to save money on your mortgage down the road.

Give it Time

In most areas of financial planning, we can usually implement a pretty quick fix.  Whether it’s acting on a need to save more for retirement or to refinance a loan, usually the recommendations I provide to my clients can be acted on quickly and you can see immediate results.

Unfortunately, improving your credit score just doesn’t work that way.

Don’t get me wrong, there are things you can and should do today to improve your credit score.

But, it’s not a quick fix- it might be two years before you see substantial improvement.  Trust the process and give it time, and your score will improve if you manage your credit the right way.

 

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.

What Do I Do With My 401(k) When I Leave My Job?

The average millennial changes jobs four times before they reach the age of 32.  Generally speaking, this is a great thing from a financial perspective- salary tends to go up whenever you change jobs.

There are a few situations that can arise when we hop from job to job, though.  For example, what should you do with your 401(k) once you leave a job behind?  Too often, this step gets lost in the shuffle, and it can be easy to lose track of these accounts if you aren’t careful.  So, what should you do with your employer-sponsored retirement account once you leave?

Four Options

There are typically four options that you can pursue.  There’s no universal right or wrong answer here (although one option is significantly worse than the others). But, the most important thing is to develop a system to keep track of these accounts as you move from job to job.  I have a dedicated framework that can help with this- and I’m sharing it for free on my webinar on March 7.  The bottom line- whatever you do, make sure you are able to keep track of where all of your retirement accounts are!

With that being said, let’s discuss the four options in detail.

The Two Not-So-Good Options

Your first option is to cash out your 401(k).  As in, when you leave your current job, you technically can withdraw all of the money from your 401(k) to spend it today.

That being said, this is generally a terrible idea.  Retirement accounts should be kept until you’re ready to, you know, retire.  And, you’ll pay a hefty tax penalty by cashing out of your 401(k) early.  Just because it’s technically one of your four options, doesn’t mean you should actually do it.

Your second option is to leave it with your old employer.  There are some employers that force you to move it to an IRA if it’s a small account, but in most cases you can leave your old 401(k) with your old job.

That being said, there are a few reasons I typically don’t recommend this approach:

  • This is probably the easiest way to lose track of your account. If you leave all of your 401(k)s at old jobs, it can become difficult to monitor all of them.  And, of course, you really should be keeping an eye on your investments over time and adjusting them as you get closer to retirement.  As you have more and more 401(k)s, it can be harder to keep tabs on all of your different investments if they are scattered across account with your old employers.
  • Typically, employers charge fees on 401(k)s for people who are no longer employed with their company. Why pay that fee, that you aren’t getting any service for, if you don’t have to?

If your old 401(k) has great, low cost investments, it might not be a bad idea to keep your account there, but that generally is the only time I recommend this.

The Two Better Options

Two options down, two to go.  And luckily, these options are typically better.

Your third option is to consolidate your old 401(k) into your new one, if your new employer will let you.  The idea here is simple- why have two accounts to keep track of when you could combine them all into one account?  Moving your old 401(k) balance into your new job’s 401(k) is a great way to streamline your accounts.

This doubly goes if the fund options in your new 401(k) are good ones.  If you have good investment options that have low fees associated with them in your new 401(k), combining the two accounts is a no brainer.  You’ll be limited to the funds available in your company’s plan, but if they’re good, that might not matter too much.

Unfortunately, many 401(k)s use high fee accounts that can really eat into your retirement returns over time, and you aren’t getting anything in return for the fee you’re paying.  Which leads us to option four:

You can move your 401(k) into an IRA.  To do this, you’ll need to open up a brand-new IRA for yourself (unless you have one already, of course), and then request your former employer to transfer the balance to your new IRA.  You’ll then need to select the investments you’ll want to use in your IRA, and monitor their performance over time.

A few notes here:

  • When you request your old employer to move the funds to your IRA, make sure they know that you’re moving it to an IRA. Moving a 401(k) to an IRA is not taxable, but if they think you are just withdrawing your 401(k) to your bank account, you’ll need to pay a penalty to the IRS.  So, make sure they address the transfer to your IRA.
  • Make sure the account is a Traditional or Rollover IRA, not a Roth IRA. Transferring a 401(k) to a Roth IRA will cause you to be taxed on the entire balance of the account.  This can be beneficial for some people, but you definitely want to consult with a financial planner before you do this.  The key point- make sure that you don’t open up a Roth IRA by mistake!
  • One of the benefits of moving a 401(k) to an IRA is that you have full freedom over the investments in the account. You aren’t limited to a few funds in your 401(k), you can choose anything.  But, taking this approach means that you’ll need to screen your investments and rebalance your accounts over time.  I’d be happy to chat about this if you have any questions about how to do this.
How to Decide between Consolidating and Transferring to an IRA?

So, let’s take it for granted that you’re trying to decide between the last two options- combining your 401(k)s, or moving your old 401(k) to an IRA.  How should you go about making this decision?  A few key things to consider:

What are you Paying in Fees?- there are some great 401(k)s out there, but unfortunately, many of them aren’t so great.  Many 401(k) accounts only have a few funds to invest in, and they tend to have high fees associated with them.

Use a site like www.personalfund.com to evaluate how much you are paying for fees in your 401(k). If your new 401(k) has a lot of low fee options, it might make sense to combine.  If you have a lot of high fee options, it probably makes sense to go with the IRA.

Do you Need Help? Do you feel ok self-managing your investments, or do you want the help of a professional?  Most financial planners don’t provide direct investment advice on 401(k)s (although I do!), so if you want some help with your investments, usually you’ll need to move it to an IRA.  But keep in mind, that will come with an extra cost.

On the other hand, if you feel confident managing your investments yourself, you could pick either route.  It’s just a matter of which funds you’d like to invest in.  Speaking of which…

What Funds are Available?  As I’ve alluded to multiple times, 401(k)s typically provide some convenient funds to invest in, but they tend to be limited and higher in cost.  If you want a more extensive investment option, including stocks and index funds, you should probably move to an IRA.

There’s No Universally Right Answer

Ultimately, when you review the items listed above, you might find that you probably can’t go wrong between options 3 and 4.  It all comes down to personal preference, and how much you care about investment options and fees.  Ultimately, do your homework, and you should be able to sleep soundly with your decision.

And if you have further questions about retirement preparation, sign up for my webinar on March 7th to discuss these strategies in more detail!

 

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.

Thinking About “Investing” In Whole Life Insurance? Don’t!

Last month, I put out a request on social media for topic suggestions to write about on this blog.  The most common request I received, both via email and comments on my request, had to do with life insurance.

And for good reason.  Life insurance companies dominate the airwaves with ads, and sponsor sporting events across the country.  If you’ve ever been to a networking event or business mixer, odds are you bumped into multiple life insurance sales reps.  Insurance is a topic that seems to come up everywhere.  And it’s not something that most people were ever taught about in school.

There’s a lot of information out there about life insurance. A good chunk of it, in my opinion, is misleading, at best.  The good news is that if you do a little homework, this is a relatively straightforward issue for most people.

Unless you are in the top 1% of earners and are nearing retirement, run like hell if someone tries to sell you a whole or permanent life insurance policy.  For millennials, buy term insurance or don’t buy at all.

You Need Life Insurance If…

Let’s keep this simple.  If you just graduated college and aren’t married, you probably don’t need life insurance at all.

You need life insurance when you…

  • Get married
  • Have a child
  • Buy a house and take out a mortgage
  • Generally, you need life insurance when you have a financial obligation that would still need to be met if you were to pass away unexpectedly

In other words, you need life insurance when there is actually a need for you to, you know, have insurance.

This seems inherently obvious.  But, as we’ll get to in a bit, if you sit down to meet with a life insurance salesperson, they’ll likely primarily emphasize the investment benefits of a whole or permament life insurance policy, rather than the insurance itself.  I can’t say it enough, my advice to you when that happens: run like hell.

Types of Insurance

One more thing we need to run through before we talk about why I dislike most life insurance products.  And that is, the difference between the types of insurance itself.

Term Insurance

Term Insurance is insurance that is good for a set length of time, typically from 10 – 30 years.  If you pass away before the insurance expires, your family gets the specified amount of the policy.  If you pass away after the insurance expires, no benefit is paid out upon your death.  Think of it as “renting” life insurance for a set period of time.

In almost all cases, this is the type of insurance I recommend to people who need life insurance.  The reasons are numerous:

  • It’s much less expensive than other types of insurance policies
  • It’s temporary. Life insurance salespeople often argue that the temporary nature of term insurance is a reason not to get it. They couldn’t be more wrong.  Very few people need life insurance once they hit retirement.  Let’s walk through the reasons I specified as reasons to get insurance above:
    • You get married- you need insurance to replace your income if you were to pass away unexpectedly. Once you hit retirement, your income typically goes to zero anyway.  So, get a term insurance policy that lasts until retirement, and expires afterward.  Typically, there’s no need to pay for insurance beyond that point.
    • You have a child- you need insurance to cover the cost of raising your child and to pay for college. So, get a 20-25 year term insurance policy when your child is born to cover that amount.
    • You take out a mortgage- you need insurance to make sure the mortgage is taken care of if you were to die. So, get a term insurance policy that matches the life of the mortgage.
    • Generally, you need life insurance when you have any sort of financial obligation that would still need to be met if you were to pass away unexpectedly- get a term insurance policy that matches the length of the commitment.

Think of it this way: you get health insurance to make sure that you are adequately protected in the event something bad were to happen to you.  Life insurance should work the same way.  Quite frankly, if the money is “wasted” in that you never actually have to “use” either your life or health insurance policy, that’s a good thing!

Permanent Insurance

Permanent Insurance, of which Whole Life Insurance is the most common type, does not expire.  These types of insurance policies (of which there are numerous variations that work slightly differently) will automatically pay a death benefit when you die, and they do not expire as long as you continue to pay the premiums.

When you hear people refer to “investing” in life insurance, this is the type of policy they are referring to.  The premiums you pay are invested by the insurance company, who in turn passes on a portion of the resulting gains to you in the form of a “cash value”.  This cash value is an amount of money you can either take out of the policy to pay for [insert financial need here], or kept in the policy and paid out as a life insurance benefit upon your death.

See the problem here?  Keep reading…

Why I Hate Permanent/Whole Life Insurance Policies

Let me count the ways…

  • They’re expensive. Premiums for whole life policies can be significantly higher than term insurance policies.  I’ve seen quotes for whole life insurance be 10x higher than quotes for 30 year term insurance for the same person.
  • They’re complicated. Go back and re-read the paragraphs I wrote summarizing permanent insurance policies above. “Cash value”.  “Death benefit”.  Quite frankly, it was really freaking hard for me to summarize permanent life insurance policies in just a couple paragraphs, and I still ended up using technical terms.  Not to mention I didn’t get into any of the details.  These policies are incredibly complex, and it can be very easy for salespeople to highlight the alleged benefits of the policies and gloss over the complicated details.
  • Life Insurance is an inefficient way to invest: If I were to ask you to come up with a good way for you to invest your money, your answer would probably be a variant of “put my money into the stock market” or “buy a few stocks or bonds”. What you probably wouldn’t come up is the following: “I think it would be a great idea to pay my money to an insurance company, have them invest the money I give them into the stock market, that investment will make money, then the insurance company will take the profits from the investment, keep a portion for themselves (since, after all, they’re in business to make money), and then give me the remaining share”.  Your gut is probably telling you that that last sentence is insane.  Your gut is right.
  • It’s hard to take money out of life insurance: If you were to ever need to access money you have invested in the stock market, almost all of the time you’re able to get your money into your checking account within 24 hours. Money that’s “invested” in a whole life policy is much less liquid- meaning that it’s much harder to take money out of the policy than it would be for other investments.
  • “Guaranteed” does not equal “Better”: Whole life insurance generally has a “guaranteed” investment return associated with the cash value of the policy. Very conservative investors tend to highlight this as the primary reason to invest in a life insurance policy.  The only issue?  These guaranteed returns are usually way below the historical average for investments in the market.  Again, investing in life insurance is just a terribly inefficient way to invest.
  • Hidden Fees and Commissions: Finally, there are a lot of hidden fees and charges baked into the premiums you pay for whole life insurance. And, they can be huge.  Frequently, the life insurance salesperson who tries to sell you whole life insurance gets paid 100% of your premium for the first year you buy the policy, and a good cut of the premium each year thereafter. No wonder these life insurance reps almost always recommend whole life insurance over term insurance!  Simply put, life insurance salespeople are paid an astronomical amount to push whole life policies, even when term life insurance may be more appropriate.  Just say no.
So, What to Do?

If you need life insurance, find a fee-only insurance agency or financial planner to discuss appropriate coverage amounts.  “Fee-only” generally means that the advisor isn’t paid by commission and charges a level fee regardless of what you buy.  This helps to put you and the advisor on the same side of the table and removes conflicts of interest, to allow you to get the best advice possible.

An advisor who charges a flat fee is able to analyze your situation and get paid the same amount regardless of what type of policy they recommend.

And whatever you do, look for low-fee, low-cost term insurance first when you are considering life insurance.  If you want to invest, invest in the stock and bond market.  Use your life insurance for just that- life insurance.  Your wallet will thank you!

Why It’s Critical to Negotiate Your Salary

Just about anyone I’ve ever spoken with remembers the feeling they had when they accepted their first job.

I certainly do.  Getting ready to graduate college, signing on the dotted line to join a great and growing firm.  It was a wonderful feeling.

But before you accept the contract, there’s a critical step that many of us miss.  And it can come back to haunt you if you aren’t careful.

I started Pacesetter Planning as a firm dedicated exclusively for millennials for many reasons, but one of the biggest was that nobody ever taught us about financial topics in school.  Certainly, nobody ever taught me about this critical step to accepting your first (or second, or third…) job.

You absolutely have to have a strategy in place to negotiate your starting salary.

I’m not just talking about going in and blindly making demands.  No, there’s a lot of strategy involved.  I can help you develop and implement a negotiation plan.

But, it’s so important that you actually do it.  If you don’t, you could be literally costing yourself hundreds of thousands of dollars.

Don’t believe me?  Read on.

Millennials are Good at Many Things.  Negotiating Salaries Isn’t One of Them.

The good news is that we can fix this negotiating problem that we collectively have. The bad news is that most of us just aren’t doing it.

A study conducted by NerdWallet last year indicates that only 38% of millennials negotiate salary with their employers upon receiving a job offer.  Over 60% of millennials aren’t negotiating at all, even when they are told that the employer expects negotiating as part of the application process.

The most heartbreaking part?  According to the study, three out of four employers have room to negotiate salary by as much as 10%, if the new employee asks for it.

I get it, it feels uncomfortable.  But, the odds are high that your employer is expecting you to negotiate.  Develop a strategy, do you homework, and practice before you ask.  But you absolutely need to try – there’s too much on the table to avoid it.

It’s About Way More Than Just Your Current Salary

Negotiating an increase in your salary when you start a new job, or even in a job your currently hold, is about way more than just increasing your income right now.  That’s a nice benefit, don’t get me wrong, but that only scratches the surface as to why it’s such an important concept.

The key is that your future income is, in most cases, directly based on your current income.  Meaning, that the raise you get next year isn’t completely random.  It’s based on your current salary.  So, if you increase your salary now, your raise next year is going to be for a higher dollar amount than it would be if you hadn’t negotiated.  The year after that, your income is going to go up by an even higher number, assuming you get annual raises at your job of course.  Thus, if you negotiate your salary upwards as early as possible, your income will grow at an exponentially faster rate in the future than it would otherwise.

How Negotiating a 5% Raise Could Make You $220,000

Hypothetically, let’s say a company makes a job offer to two seniors in college, Max and Jess.  Each of them have the same amount of experience, and both are offered a starting salary of $50,000.  They are each 22 years old.

Max, happy with the offer, accepts a starting salary of $50,000.  Jess, however, decides to negotiate, and is able to earn a salary of $52,500 – 5% higher than the initial offer.

Let’s say that they then each get a 3% raise each year.  How do their salaries compare as they get older?

blog-5-negotiating-raise-chart-1

Jess started her career making $2,500 per year more than Max, but by the time they reach retirement age at 65, she’s making over $9,000 a year more.  This difference is only because she negotiated a raise before she took the job offer – there are no other differences in their compensation paths.  And, of course, this doesn’t take into account that Jess is probably more likely than Max to negotiate future raises, further increasing the difference.

At first glance, this might not seem like a huge deal.  Why am I making such a big deal about $9,000?  Because it’s about much more than that.  If you add up all of the earnings that Jess and Max would take home throughout their career, Jess cumulatively earns over $222,000 more than Max:

blog-5-negotiating-raise-chart-2

Seriously.  By making a quick phone call before accepting the job, Jess can earn nearly a quarter million dollars more than she would have if she hadn’t made that call.

If I told you that you could schedule a meeting this week that could earn you a quarter million dollars, would you do it?

Negotiating Isn’t Just for New Hires

Negotiating salaries isn’t just for new job offers.  Depending on your situation, it can be appropriate to negotiate a raise in your current job as well.

Again, there’s a right and wrong way to do it.  Do your homework and be able to back up your request with specifics about your job performance and industry trends.

And if you get pushback, or still aren’t comfortable with going to your boss to talk about a raise?  I’m about to share a secret about how employers base salaries.  It’s not a hard and fast rule, but it applies to many firms who work in competitive industries.

Here it is: most companies pay higher salaries to individuals who they hire away from their competitors.  Think about it – in order to attract the best workers, it makes sense that the company would want to offer “premium” salaries to employees that they recruit from other firms.  If you’re already working in the industry, why else would you consider jumping to a competitor?

Of course, there are plenty of other reasons you might not want to start looking for a new job.  Your company’s people, location, training, benefits, culture… the list goes on and on.  It might not be a good idea to jump around in the industry just to bump your pay.

But, your salary certainly is a factor.  What I’m trying to say is this: if you can see yourself making a change, keep in mind that doing so often comes with an increase in pay.  And if you’re a super savvy negotiator, having another job offer in your pocket could be a great way to get your current HR team to consider giving you a raise to stay!

Plan. Prep. Negotiate.

There are lots of different strategies here, but above all, it’s important to negotiate.  It’s about more than your current salary – any increase in pay today will have exponential effects for you down the road.

But, it absolutely needs to be done in the right way to give yourself the best chance of success.  If you want to learn more, schedule a fee, no obligation consultation to talk about how to do this the right way!

Should I Pay More Than the Minimum Toward My Student Loans, or Should I Save More for Retirement?

Over 40% of people under 30 are currently making student loan payments.  That’s a staggering number.  And while we often think of how these payments affect our current financial picture (I certainly know how it feels to see that withdrawal come out of my account every month!), the effect on our financial future is very much overlooked.

Simply put, how will our student loan payments affect how much we save for retirement?

Well, that’s not a hard question to answer.  If we can’t save as much now, we’ll have less later.  Thanks for that, Bill.

Fair enough.  Let me rephrase the question.  Say you are at a point in your career where you have some flexibility in your budget.  Even after you’re making your loan payments, you’re still able to save for retirement each month.

The question then becomes- is it better for you to pay down you loans quickly by making more than the minimum payment, rather than putting that money into a retirement account?

That’s a much more interesting question.  Let’s take a look.

Research Says…

Earlier this year, HelloWallet (a Morningstar-affiliated company) produced a report on the relationship between student loan debt and retirement.  The results, while not unexpected, were alarming.  They found that student loan balances directly correlated with having less money to spend in retirement.

HelloWallet even puts a number on it- for every dollar in student loan debt you owe, you’ll have $0.17 less in retirement.  Financial guru Clark Howard (one of my biggest influences) extrapolated from the report that because of the negative effects student loans have on retirement balances, “… in most circumstances, it’s better to save more for retirement than pay extra toward your student loans…”

Generally speaking, they’re right.  If we are just looking at two goals- paying off your debt versus saving for retirement-  most borrowers will come out ahead in retirement if they make the minimum student loan payment every month now and put their excess savings toward retirement, rather than trying to pay off the student loan ASAP at the expense of retirement saving.

It’s All About Compound Interest

What to do with the money you save each month comes down to the rate you earn and the length of time you are saving.  Investing more for retirement early in your career has exponential benefits to the money you’ll have available at retirement.

Take a look at the numbers.  The chart below shows how much you’ll have at age 65 if you start saving $100 a month at certain ages, assuming a 6% growth rate:

blog-post-3-chart-1

Notice anything?  Take a look at the difference in retirement values if you start saving at age 25 versus age 30.  For the 25 year old, over 25% of the account value at retirement comes from the $100/month invested between ages 25 and 30!

This idea of compound interest clearly illustrates the perils of paying down student loans at the expense of your retirement savings.  The earlier you start saving for retirement, the exponentially better off you will be when it comes time to retire.  The degree to which your student loans impact your saving will directly impact your retirement picture.

Let’s take a look at an example.

Meet Sarah

Sarah is a 25 year old lawyer who is hoping to retire at age 65.  She has a total of $25,000 in loan debt (point taken, after 3 years in law school, she probably has a lot more than that, but let’s keep the numbers easy to work with, OK?) and is on a standard 10 year repayment plan, paying $265.16 each month.  Her loans have a 5% interest rate.

On top of these loan payments, she’s able to save $200 extra per month to put toward retirement.  Once she’s done paying off her loans in ten years, she will put that extra $265.16 toward retirement as well, increasing her total monthly retirement savings to $465.16.  Sarah’s retirement savings earns 7% a year (about what the stock market has historically made on average).

Sarah is wondering whether or not she should continue to save $200 dollars per month for retirement now, or whether it might make sense for her to, say, put $100 of that money each month as an “extra” payment on her student loans to pay off the loan faster, and keep contributing the remaining $100 toward retirement.

What’s Sarah’s Best Option?

In the first scenario (saving $200 a month), by the end of her 10 year loan payment period, the loan is paid off and Sarah has ~$35,000 saved for retirement.  She then increases her payment amount as scheduled, and by the time she retires, her retirement accounts are worth $853,399.48.  Not too shabby!

But, what happens if she uses half of her monthly savings to pay off her loan faster? She is able to pay off her loan in just over seven years, and the second she pays off her loan, she increases her retirement savings per month from $100 to the full amount of $465.16.  Even though she’s able to contribute more over the first ten years in this example, take a look at her retirement account value.  She only has $823,844.59 at retirement this time.

blog-post-3-chart-2

This is a great example of the power of compound interest.  The more Sarah starts to save for retirement today, the more she’ll have at retirement.  Even if she has to pay a higher amount on her student loans.

Some Caveats

Again, there are a lot of factors at play here.  Not everyone is in the same position as Sarah.  This example doesn’t take into account a few points:

  • If your situation is an outlier, I’d recommend crunching the numbers to evaluate the strategy before you make a decision. What do I mean by outliers?  Cases where one of the factors we are looking at is either very high or very low.  For example, If you have a very high student loan balance, or very high interest rates, or are a very conservative investor (ie, you might not want to invest in a way that will lend itself to a 7% annual growth rate as identified above), carefully evaluate these factors before making a decision.
  • Of course, in this post we’re only looking at two goals: paying down student loans and retirement saving. If you have multiple goals you’re trying to save for at once, a more detailed plan is needed.  In particular, if you are weighing paying down student loans quickly versus a more near-term savings goal (ex: buying a house in five years), this decision is much less clear cut and needs to be evaluated.
  • This whole exercise assumes that you can afford to save beyond your monthly budget. If you can’t, definitely make the minimum payments on your loans.  In addition, you should review whether an income repayment plan may be a good fit for you.  Finally, review your budget to see if there are any ways to trim back on spending or increase your income.
  • We haven’t even addressed that most employers offer a match on funds that you invest in your 401(k). If your employer matches, putting extra money toward your loans at the expense of retirement saving becomes even costlier.  Employer matches on 401(k)s are the closest thing out there to free money, after all!
  • Most importantly, Sarah in the example above is incredibly disciplined financially. Not only is she diligently saving $200 a month (either in her retirement account, or split between retirement savings and making payments on her loans), but she also has the discipline to redirect her entire student loan payment amount into her retirement savings the second her loan is paid off.  This is much harder to do in practice than it is on paper, so it’s important to plan ahead and hold yourself accountable.

A Word on Interest Rates

Interest rates on student loans vary wildly.  Some can be as low as 2-3%, others can be in double digits.

Like I mentioned earlier, the average return in the stock market has historically been about 7%.  If your student loan interest rates are higher than this, it’s not a bad idea to prioritize payments to pay down the high interest rate loans first.

Particularly if these high interest rate loans are private loans, refinancing into a lower rate loan is a great option for those who have good credit scores.  For more information on this, sign up for my newsletter to download a free copy of my eBook on student loans.

Conclusion

There’s some good research out there that recommends to usually save for retirement before making extra student loan payments.  Don’t take that as the gospel truth, but generally speaking, this approach is the correct one.  In most cases, the benefits of having money in your retirement account to compound in value over time will outweigh having to pay your student loans a little bit longer.

Carefully look at your personal budget, student loan balance, interest rates, and retirement goals to make these decisions.  And don’t be afraid to reach out to an expert for a second opinion.

How Exactly Does Financial Planning Work?

“What is it you do?”

“I’m a financial planner who works with millennials.”

“That’s cool!  But what do you actually do for millennials?”

It’s a great question, and one that I get regularly.  The short answer:

  • I help my clients take stock of where their finances currently stand and work with them to plot out short, medium, and long term goals for the future.
  • We then come up with actions steps to address any potential shortfalls in meeting these goals.
  • I partner with clients to hold them accountable to the plan. Here’s a sample calendar showing how I do so for millennial clients:

sample-client-service-calendar

 

But, how do we come up with a financial plan?  What exactly does that mean?  Let’s go through step by step:

Dream Big

The first step in our financial planning process starts with a big picture discussion.  Talking about where you want your finances to take you is a broad conversation, but it’s that way intentionally.  The beauty of financial planning is that no two people are the same, so everyone’s goals will be different.

That being said, we have a structured process in place to work through the goals discussion.  With each client, we sit down together and develop short, medium, and long term goals.

Long term goals as usually retirement focused, but we don’t stop there.  We talk about savings goals- whether it be for an emergency fund, a new house, or even your child’s college education.  We talk about growing income and monitoring spending.  We talk about goals to pay down debt.  And we talk about goals around credit scores to help make buying your next car or new home more affordable.

This isn’t a comprehensive list of goals that go into a financial plan.  Everyone’s situation is different.  Some of these goals above might not be relevant to you at all, and that’s perfectly ok!  Or, you might have several financial goals that I didn’t mention.  Great! Let’s add them to the list.  My point is that in the process of going through short, medium, and long term goals, I work with my clients to develop a comprehensive picture of where they want their financial journey to take them in life.

People often think of finance as being overwhelming, detail-oriented, and maybe even just plain boring.  But these big picture discussions are often an inspiring way to start the planning process.

Let’s Get Organized!

Now that we know where we’re trying to get to, it’s time to map out where you are financially right now.  The second half of my initial meeting with a new client is to help them get their financial life organized.

I can’t tell you how critical it is to gather all the loose ends of your financial picture in one spot.  When you do, you’ll probably be amazed at just how much you have going for you financially!

And when I say everything, I mean everything.  That money your employer takes out of your paycheck that goes into your 401(k) each month?  Awesome, let’s get a copy of your 401(k) statement and document how much you have saved there already.  Vaguely remember your company sending you a notice about a long term disability insurance plan that you have through your job?  Great, let’s find out how much it’s worth for you.  These details are easy to overlook, but they’re important.

One important note: this is a team activity.  I’ve seen way too many people in my profession begin their first meeting with a client by simply sending them a questionnaire to document what investment accounts they have, how much they want to spend when they retire, how much they owe on their mortgage… the list goes on and on.

Nobody likes to begin a meeting with someone they just met by getting a huge, difficult homework assignment.  I pride myself on helping my clients get organized financially rather than just telling them to do so.  I provide software that helps to aggregate all of your bank and investing accounts in one place.  I’ll help go through your employee benefits with you.  I’ll help you brainstorm other financial items that you may have working for you, but might not even realize it.  Going through these details isn’t always fun, but I do my best to make it painless!

Develop a Plan

After we set some goals and get you organized, we conclude our first meeting and set the next one.  In between, I come up with a draft plan to tie together your goals with the information we got organized to see whether you are on track.  If you are, that’s great!

But usually, there will be a few things that you may need to adjust in order to meet some of your short, medium, or long term goals.  Based on our conversation and analysis, I’ll brainstorm some ways we may be able to help get you to where you want to go.

Plan Discussion

Then, we get back together and walk through your draft plan step by step.  From income to retirement to investments to debt to credit scores- we will cover each of the planning areas relevant to your goals.  We will review where you are now, identify what you’re currently doing to meet your goals, and discuss whether you are on track.

We then will flag the goals you aren’t on track to meet unless we make some adjustments.  I’ll walk you through step by step the potential adjustment options I identified, and invite you to add any that you can think of as well.

Then, we have some decisions to make.  Which adjustment is most important to make?  Which is the easiest to implement?  I don’t believe it’s effective to try to make changes to everything at once.  So, I recommend making one or two changes immediately, and putting together a schedule for when to implement the rest.

Implementation

After our call, I’ll update the plan based on our discussion, send you the “final” version, and set our next check-in meeting.  I put final in quotes, because a good financial plan is a living document.  We will review the plan each year and make updates based on your progress.

The first page of your financial plan will specifically call out the action items to take, in the order you should take them.  You’ll leave our plan delivery meeting with an easy-to-understand list of steps you should take 1) now, 2) in the next few weeks, and 3) in the next few months.  By implementing the changes gradually, not only will you take meaningful steps to improve your financial life, but you’ll do so in a way that will be easier than trying to do it all at once.

Depending on the items in your financial plan, we sit down again anywhere from two to four times a year to review progress and make updates.  See the calendar above for an example of what that schedule might look like.  Regardless of your goals, we will meet at least twice a year to review your budget and rebalance your 401(k). Of course, we’ll also review your progress toward your most important goals and make sure the changes that you implemented are working.

Just like a personal trainer at a gym, it’s my job to do everything in my power to make your financial dreams a reality.  These check-in meetings serve as accountability touchpoints for you, to help make sure you are taking the steps you want to in order to achieve your goals.

And, Of Course…

…you never need to wait until our next meeting to touch base with me.  I’m only a phone call or email away!

I hope this is helpful to show you what working with a financial planner is really like.  Next Thursday’s post will detail an example of how I can help prioritize goals.  If you’re interested in learning more, you can schedule a free introductory call here.