The Future of Roth IRAs

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If you’ve ever spent any time on a personal finance blog, you’ve likely come across one, or two, or twelve articles comparing the Traditional IRA to a Roth IRA.  (If you haven’t, congratulations on finding more interesting things to read about!)  At the time of this posting, for example, a Google search for “traditional vs Roth IRA” yields approximately 94,600 articles.

So rather than walk through the usual IRA material (although we do provide a quick summary to get you up to speed), in this post I wanted to discuss future potential changes to the tax treatment of Roth IRAs.  Over the years, I’ve had several people raise concerns about contributing to Roth IRA accounts, fearing that the “tax free” treatment of the accounts may be taken away in the future.

Long story short, I think it’s unlikely that Roth IRAs will be taxed in the future, and it shouldn’t stop you from contributing to one today.  While it’s certainly possible that some of the details will change over time, Congress has very little incentive to change the tax treatment of these accounts.

What is a Roth IRA, exactly?

I know the legal and tax structures of retirement accounts isn’t the most fascinating topic (at least for some of us!), so I’ll keep this short and sweet.  If you’re looking to save for retirement outside of your 401(k),  you have two account options to choose from: a traditional IRA and a Roth IRA.  What’s the difference between the two?

  • When you pay tax on your savings-  all retirement accounts have some tax advantages built into them, but you need to know how the taxes work to make the best choice.  With a traditional IRA, you receive tax advantages in the beginning; the money you contribute to the Traditional IRA isn’t taxed this year, and it grows tax-deferred in the account until you retire.  But, since you didn’t pay taxes on the money now, you’ll pay income tax on all the money you withdraw from the IRA when you retire.  Roth IRAs have the exact opposite tax advantages; you pay income tax on the money you contribute to the account now, but the growth and withdrawal of money in the account is tax free when you retire.
  • Income limits- There are a few restrictions placed on both types of accounts.
    • If you make “too much money”, you can’t directly contribute to a Roth IRA.  The IRS website is the best place for a complete list of details on these limits (and the other bullet points on these lists), but as a starting point, your ability to contribute to a Roth IRA in 2018 starts to phase out when your income exceeds $122,000 for single taxpayers and $193,000 for married (filing jointly) taxpayers.
    • This limitation isn’t in place for Traditional IRAs, but your ability to deduct your contribution may be reduced or eliminated if you or your spouse have a 401(k) (or similar) plan at work.  Again, you can refer to the IRS website for the complete set of details.
  • Flexibility– The Roth IRA is a more “flexible” account to work with than the Traditional IRA.  For example, while most early withdrawals from a Traditional IRA are taxed and penalized, you can withdraw your contributions (as opposed to the investment earnings) of your Roth IRA without penalty.
How to Decide if You Would Be Better Off With Roth

When deciding between these two types of accounts, the main driver of your decision should be based on your tax rate.  Simply put: if your tax rate now is higher than you expect your tax rate to be when you retire, a Traditional IRA is probably the right choice for you.  Take the tax deduction now while your rate is high, and pay taxes at the lower rate when you retire.

On the contrary, if your tax rate is relatively low right now, paying taxes right now and getting the tax free income in retirement is likely the better deal for you.  This makes the Roth IRA a particularly compelling choice.

Remember, though, it’s not enough just to look at today’s tax rates to make this decision.  You need to think through how you expect the tax rates themselves to change over time.  Just because you expect to have lower income when you retire than you do now doesn’t mean that your overall tax bill will be lower if Congress raises the tax rates over the next few decades.

Ultimately, this is a decision you need to make based on your overall financial situation.  But in my view, given that tax rates are at historically low levels right now, I think it’s likely that tax rates will rise between now and when we retire, making Roth IRAs a good deal for most low- to middle-income millennials.  (Keep in mind, though, that I don’t think the same way that Congress does – thankfully! – so this is purely my opinion, and not a specific recommendation.)

Will Congress Kill the Roth IRA?

Roth IRAs are fairly popular (as far as financial topics go…) with people in our generation.  Nevertheless, I often get questions about whether or not the Roth IRA will actually be tax free several decades from now when we retire.  Will Congress really honor the promise of the Roth IRA?

In my opinion, yes, they will.  I completely understand the concern that the Roth IRA may be taxed in the future, but I think it’s highly unlikely. Here’s a few reasons why:

Politically, it would be extremely difficult. The people who would be affected the most by a tax on Roth IRAs are the elderly and the retired, who also happen to statistically be the most dedicated voters in this country.  There’s a reason that proposed changes to Social Security and Medicare almost always fail; retirees vote, a lot.  The AARP is one of the most well-organized lobbying groups in the country, and any law change that negatively affects retirees will be met with strong resistance.  Simply put, this isn’t a winning issue for Congress to take up. 

Congressional math is silly.  I probably shouldn’t pick on Congress as much as I do in this post… but they just make it so easy.  Because here’s the thing: the way Congressional legislation is reviewed, taking away the tax benefits of Roth IRAs will actually decrease the amount of taxes collected.

Intuitively, this doesn’t make sense.  Why would taxing a tax-free account decrease tax revenue?  Because of the system that Congress uses to evaluate budget bills.  The Congressional Budget Office uses a 10 year future projection to evaluate the tax impact of the bills it passes.  And in a relatively short time period like ten years, eliminating the Roth IRA would decrease the amount of tax revenue the government collects for two reasons:

  • People don’t take a lot of money out of Roth IRAs every year, so the overall projected tax increase is relatively small.
  • On the other hand, a lot of people contribute to Roth IRAs today… and remember, you’re taxed on the income that you put into a Roth IRA.  If Roth IRAs are eliminated, this savings will be redirected to tax-deferred accounts like the Traditional IRA or 401(k), which will decrease the amount of taxes the government collects now.

Over the long run, eliminating the Roth IRA would increase the amount the government collects in taxes.  But, Congress only evaluates the effects of tax legislation on a ten year time horizon… which means that if they were to pass a bill eliminating the Roth IRA, they’d be passing a tax cut bill, not a tax increase.

Silly?  Absolutely. Good for the Roth IRA?  Yes.

It is much easier to use Roth IRAs now than it ever has been before. Not only has Congress not made moves to eliminate the Roth IRA, they’ve technically made it easier to contribute to a Roth IRA.  Indeed, over the past several years, Congress has passed legislation allowing you to “convert” your traditional IRA into a Roth IRA, potentially allowing people over the income limits mentioned above to contribute to a Roth IRA indirectly.  This is a good strategy for certain individuals, but it’s a complicated process that shouldn’t be attempted without consulting a financial planner or tax professional.  But, it goes to show that Congress isn’t making it harder for you to access a Roth.  On the contrary, it’s easier now than ever before.

If we look at all of these factors, it becomes pretty clear that taxation on Roth IRAs is not a likely scenario in the near future. If you think a Roth IRA is the right choice for you, don’t let fear of future tax law changes hold you back.

Planning For the Future

That being said, there are a few different possibilities of legislation that could feasibly happen in the coming years affecting Roth IRAs, but none of them are reason enough to deter you from using the accounts.

The first possibility is the implementation of some sort of required distributions on Roth accounts in the future. Under the current tax law, you need to start taking distributions from a Traditional IRA when you turn 70.5 years old (because making it an even “70 years old” would have made too much sense…), but you don’t currently need to do this with a Roth IRA.  It wouldn’t surprise me if Congress implemented mandatory distributions from Roth IRAs at some point in the future… but that’s not a reason to not contribute to one.  

Another possibility is for Congress to implement a maximum amount of money that can be held in a Roth IRA. By restricting the amount that can be held in a Roth IRA, the government could prevent you from contributing to a Roth IRA in the future… but as I mentioned before, Congress doesn’t have a strong incentive to do so.  And again, this isn’t a reason to avoid contributing to a Roth IRA today.

Making a Contribution

Once you decide which account to use, it’s time to put money into your IRA of choice.  And if you happen to be reading this article between January 1 and April 15th of any given year, you have an additional choice to make.

Currently, there are caps on how much money you can put into IRA accounts – both traditional and Roth – each year. These caps were relatively steady for a few years, but there’s been an increase from 2018 to 2019; last year you could put $5,500 per year into an IRA, and now you can put $6,000 starting in 2019.  (Once you turn 50, you can add an extra $1,000 to your IRA each year).

But, you have until Tax Day (April 15th, or the next business day if it falls on a weekend) to make your contribution for the prior year.  So, as I mentioned, if you are reading this article at the beginning of the year, know that it isn’t too late to make an IRA (Traditional or Roth) contribution for last year!

If you want help figuring out which type of IRA is right for you, or need retirement savings advice in general, don’t hesitate to reach out! I would love to set up a free introductory phone call with you to walk you through what you need to know.

Solving the Millennial Retirement Savings Challenge

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Last week was a big week in the financial world — America Saves Week! From February 25th through March 2nd, the finance community came together to help impact the lives of Americans through motivating, encouraging, and supporting them to save money, reduce debt, and build wealth (particularly through automated savings).

Now, there is an important distinction to make here; “saving money” doesn’t just mean adding money to your bank account, it means paying down debt as well. When working with clients, there are two main metrics I like to focus on:

  • The first is Net Worth. This is the concept of how much money, investments, and “stuff” you have, minus how much debt you owe. As you grow through life, this number should continue to increase every year, which can be achieved by either saving money or paying down debt.
  • The second, and more relevant metric is a little bit harder to describe and calculate.  To boil it down, it essentially summarizes “What is the likelihood you will be able to retire at a decent retirement age and not run out of money?”  There are a lot of factors to consider when running this sort of calculation; I use advanced statistical software to run this type of projection.

I want to talk about both of these metrics in this post.  Because while many millennials are doing a good job saving in general – either by adding to their bank accounts or paying down debt,  statistics show that many of us are “behind” when it comes to retirement savings.  

Why Retirement Will Be a Challenge for Many of Us

Currently, we are saving significantly less for retirement than previous generations did, for several reasons:

  • Student loan payments. Many millennials are directing their would-be retirement savings to pay off student loans in a way that our parents and grandparents did not have to do.
  • Rising cost of housing. When our parents and grandparents were our age, buying a house was much more affordable. For a typical family, the cost of a home was only around 2 times their average annual salary. In today’s economy, purchasing a home on average costs about 4 times their average annual salary — and that is not even considering that most of today’s jobs are in large cities, where the cost of housing is even higher.
  • Lower company retirement benefits. Most of our grandparents had pensions through their jobs. Some of our parents even did too. Because of the rise in independent contractors and the gig economy, it is becoming harder and harder to come by solid retirement benefits — even 401(k)s are harder to come by than they used to be. Average employer contributions have fallen, too, which is putting more pressure on the individual to save on their own.
  • Relatively flat wage growth since the financial crisis. Since around 2008, there has been very little wage growth across the country, meaning that while prices have gone up, our incomes haven’t necessarily. We have less spendable money than previous generations, making it harder to allocate a significant portion of it to retirement savings
  • Social Security and Medicare are expected to cut benefits in 15-20 years. Having these programs to fall back on when we retire might not even be a possibility for a lot of millennials. If these programs are cut, it will mean that much more pressure is put on the individual to completely financially support themselves through retirement.

Simply put, we face a greater set of challenges in preparing for retirement than our parents and grandparents.  Which means that unless we prepare accordingly, we will either need to delay retirement or partially sacrifice one of the most beneficial strategies we can use to help save for retirement…

Compound Interest

 Compound interest is often described as “magic” or “a miracle” for people trying to save up money over time. The idea that the we can keep our money invested — and the return will exponentially increase over time — is a very appealing one to investors of any age. Consider the graph below.  If this year we invest $1,000 at an 8% rate of return, next year we will have $1,080, in 10 years we’ll have $2,200, in 20 years we’ll have $4,600, but in 40 we see this number grow all the way to $22,000. In the simplest of terms, earnings go from $0.80 in the first year, to $1,750 in the 40th year (that’s a pretty significant increase!).

This looks amazing — and it is! — but there is one key takeaway you should note — you need to keep your money invested and untouched for a very long time to see the “magic” of compounding happen.  Compound interest is a beautiful thing, but we lose most of the benefit if we don’t start investing early enough.

(And, of course, the chart above assumes a constant, consistent 8% investment return each and every year.  While the long-term annual return in the stock market is around 8%, we know that it can vary drastically from year to year!)

As we’ve already discussed, as a generation we are putting more and more money towards student loan payments and housing costs.  Which, in turn, means that less and less money is being put towards savings that will compound in retirement accounts and we begin to lose the impact of the compounding, making it harder for us to have enough money to retire at a “normal” age.

Retirement Shouldn’t Be Your Only Priority!

This isn’t entirely a bad thing.  One of the major criticisms I have of the financial planning industry is the degree to which we focus on retirement.  I started Pacesetter Planning back in 2016 because I believe that financial planning should be about more than just saving for retirement.  Short-term goals, such as buying a house, planning a career change, and paying down debt are important too!  The key is finding the right balance between your short- and long-term financial priorities.

Ultimately, you shouldn’t be putting all your money aside for retirement.  Too many people in this world work as hard as they can, in jobs that they hate, saving as much as they can for 40 years so they can “retire”… and then abruptly change everything about the way they life their lives. Instead, you should create your dream life right now so that you won’t be in a rush to retire in the first place!

Saving for retirement is important… but I’d rather have you create a fulfilling life, balancing your short- and long-term goals, and work in a job that gives you energy, doesn’t burn you out, and is something you won’t be in a rush to retire from.  But, of course, you will want to retire at some point… so how should you approach retirement savings if you feel “behind” in your long-term savings?

The Answer is Surprisingly Simple

To be prepared for retirement, the key is to continue to save more — even if you’re not directly saving for retirement.

Remember, paying down debt is an entirely valid form of saving, including your mortgage debt if you have it (although buying a house is NOT a way to save…more to come on that next week!).  So while you may not be doing a lot of “traditional” retirement saving at the moment, that doesn’t mean that you aren’t saving at all.

This brings up the question — How can short-term saving help you if the money isn’t going into retirement accounts? Well, there are two primary inputs into the calculation we use to determine how much you need to save for retirement, and short-term saving can have a big impact on one of them.

  1. How much do you have saved? This is pretty intuitive, and what we usually focus on. Once you have enough money in your retirement accounts, you can retire.  This input includes the amount of money you are currently saving for retirement, and how much you expect your cumulative savings to be worth by the time you retire.
  2. How much do you spend each year? The second component doesn’t have anything to do with savings at all… or at least, it doesn’t have anything to do with savings directly.  In order to know how much money you need to retire, we need to know how quickly you’re going to spend your money in retirement.   The more you spend, the more you’ll need to have saved for retirement.

The last sentence above hints at the key link between how your short-term savings and debt paydown can help you retire earlier.  The more you spend, the more you’ll need to have saved for retirement.

The problems holding our generation back from saving for retirement largely aren’t related to spending at all!  We’re saving… but the savings is being redirected elsewhere.  Which means that if you continue saving at the rate you’re saving, even as you pay off your student loans and accumulate enough money to make a down payment on a house, you’ll need less money set aside for retirement to begin with because your spending is low!

That’s worth repeating: If you lower your spending today, and build the habit of saving so that you continue to save once your loans are paid off, the less you will need to save for retirement in the first place. Saving money – even for short-term goals – helps you retire earlier because it decreases the amount of money you need to retire in the first place.

Think of retirement savings as filling a bucket with water. Over the course of your career, you’re putting money into your retirement savings “bucket”. When you retire, you start spending that money you’ve saved – for the sake of this metaphor, let’s say that when you retire, you poke a hole in the bottom of the bucket so water starts to leak out of your “retirement savings”. How quickly the water flows out of the bucket is critically important. If you spend a lot, you better make sure you have a TON of water in that bucket before you poke the hole in it, because the water is going to flow out of the bucket really quickly.

On the other hand, if you only poke a small hole in the bucket, the water inside will flow out of the bucket very slowly.  Which means that you don’t necessarily need a huge bucket of water to begin with!

If you want to spend a lot of money during retirement, you need to make sure you save enough to be able to retire comfortably.  The more you spend, the more important compound interest is to you. But if you keep your spending in check, the water will leak slower, meaning that the bucket has to be less full in the first place.

Big Idea: There is a “Double Benefit” When it Comes to Increasing How Much You Save:

Increasing your retirement savings will fill up the retirement savings “bucket” faster, which will certainly help you retire earlier.  But, filling the bucket is only half the equation.

If you’re spending less money, you’re slowing the the speed at which the water flows out of the bucket in the first place, which means that the water level does not need to be as high. If you are able to do both of these things, you can maximize your potential savings and have much more flexibility in when you can retire.

The key, though, is to be able to maintain this over time. Once you student loans have been paid off, redirect this type of saving to saving for something else. Even if you can’t save for retirement right now to fully benefit from the “magic” of compound interest, you can still put yourself in a great position to retire. By following these saving tips, and assessing what you would like retirement to look like for you — you can easily put yourself in the position to get where you want to be!

If you still have questions, or would like help walking through a savings plan, please contact me and we can set up a free introductory call!

Why Budgeting Doesn’t Work For Most People (And How To Make It Work For You!)

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Visa card example of why budgeting doesn't work

When most people think about trying to improve the state of their finances, “budgeting” tends to be one of the first words that comes up.

And that’s a shame.  Really.

I’m not sure I’ve ever met anyone who actually likes budgeting.  And there are a few good reasons for not liking traditional budgeting:

  1. Most of us think that “budgeting” means at best, being cheap, and at worst, cutting our spending on things that we like to spend money on.
  2. Budgeting isn’t easy. In fact, the way most of us try to make budgets for ourselves, it takes effort to consistently make it work.

What happens when we make something that isn’t fun difficult as well?  We don’t actually do it.

Which is why I like to approach budgeting with a very different mindset.  In this video, I discuss how to approach budgeting in a way that will make you more aware of where your money is going each month. We also discuss ways to align your budget with what’s actually important to you, in a way that’s easy to maintain.

Most people make it easy to spend a lot of money, and hard to save.  In the video below, I’m going to show you how to make it hard not to save money.

To download a FREE copy of the Newlywed Money Checklist that we discuss in this piece, click here to grab it!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 29, 2018.)

Introduction:  How Can I Make My Budget Stick?

Welcome, everyone! Welcome to our weekly Facebook Live chat. We broadcast this at 8:00 PM Eastern time every Monday.  Today, we’re doing a little bit earlier because I’m going to be in a meeting with a client at 8:00 PM.

Today, I want to talk a little bit about budgeting.  And specifically, why I think budgeting tends to not work for people.  And we’ll share some strategies to get around this.

I got a question from someone today who follows the page- let’s call him Eric. (I typically don’t use people’s real names because I know money is a sensitive subject for people. And so, I try to respect everybody’s anonymity for these questions.)

Anyway, I got a question from “Eric”.  It says, “Hi Bill, I’m a big fan of the new video series and have a question that I’d like your opinion on. I recently downloaded your Newlywed Money Checklist and I’m currently working through it with my wife.  We got to the section that discusses creating a budget and we got stuck with it. We’ve tried a few things in the past related to budgeting and they never seem to really work for us. How do we make a budget for our family that actually sticks?”

Amen, Eric! That’s a great question.  One that I get quite a bit actually.  First off, congrats on not only your recent marriage, but taking a step forward and downloading the Newlywed Money Checklist.  And not only just downloading it, but actually working through it. That’s awesome. It’s a big step.  If anyone wants to grab this checklist and follow along as we go, click here to download it.

Most Budgeting Strategies Are Difficult to Maintain

So let’s get to the heart of the question. Budgeting really and truly doesn’t work for a lot of people. And the reason for this is that we make it so difficult for ourselves to actually do it and stick to it.

I’ve seen a lot of different strategies that people have used over the years to try to manage their budget.  Everything from creating spreadsheets- literally typing in all different ways that they spend their money.  Or, using a tracking site like, where you sync your credit cards and they pull in your transactions for you.  Sometimes, people try a strategy where they literally only spend cash as a way to really try to prevent yourself from overspending.  And even a derivative of this, which I actually like a lot, called the Dollar Bill Savings Method. I’ll probably talk a little bit about that strategy on another Facebook Live because I do think it’s kind of an interesting strategy for people who are struggling with trying to save.

But ultimately for most people, however you do it, budgeting means keeping track in detail of where your money is going each and every month.

There’s a reason why that doesn’t work and why I don’t like to think about budgeting in this way. It’s really two-fold.

Budgeting Highlights our Weaknesses

First and foremost, I think we tend to overlook it, but most people I talk to have some sort of anxiety, or shame, or even guilt about how they handle their money. It’s not something we’ve ever been taught, and it’s not something we’re inherently good at. We need to practice how to handle our money over time. Most of us are far from perfect in this regard, and we tend to not like to pay close attention to things we’re not perfect at.  As a species, this is something that all of us struggle with.

Here’s the thing- paying close attention to our budget tends to emphasize these weaknesses, or are these things that we’re unhappy with.  And as a result, people just don’t like to pay attention to their budget, which I think is perfectly understandable. But ultimately, it doesn’t help solve the problem

Traditional Budgeting Methods Are Hard

And secondly and probably most importantly, it’s a lot of work. We make it really, really hard for ourselves to actually track our budget.

If we’re using spreadsheets, we need to update them manually.  If you’re using Mint, you actually have to remember to log on to see how you’re doing.  And then once you get there, a bunch of your transactions are categorized incorrectly, so you need to go in and fix those. And finally, they don’t track your cash spending at all on these platforms. So, you have to actually manually input all the different ways you spend your cash.

Budgeting sucks. Plain and simple. It’s not easy. It’s not fun. And if you make it hard on yourself to do something that’s not fun, guess what?  It’s not going to happen. Like most New Year’s resolutions, you start budgeting, you’re excited about it at the beginning, it lasts a couple of weeks, but as soon as things get busy, it’s the first thing that we tend to drop because it’s something that we don’t enjoy and it’s hard.

Introducing… Two New Ways to Think About Budgeting

Which is why I like to think about budgeting in a completely different state of mind. To me, budgeting isn’t about only spending $20 at Starbucks this month. (And if you spend $21, that’s BAD, and Mint’s going to send you a nasty email calling you out on it!  Give me a break.) That’s not healthy. I don’t think that’s the way we should be doing budgeting.

Instead, budgeting is about two “A” words. Awareness of where your money is going (and awareness is never a bad thing, right?)  And aligning your money with what’s actually important to you.

So let’s walk through these one by one, starting with awareness.

Budgeting = Awareness

If you want to start budgeting, this is what I recommend, particularly for people who want to be saving more and find that they’re having a hard time doing it. I want you to do this:  before you start breaking out the spreadsheets or syncing all of your accounts to Mint, walk through this exercise.

This is something that, full disclosure, is not something that I’ve developed myself. For those of you who have followed the page for a while, you’ll know that I consider myself to be a “disciple” of Carl Richards. Carl is a two-time New York Times bestselling author of books about how to manage money.  (If you are serious about making improvements to the way you handle your finances, they are must-reads.  You can find them here and here.) He also writes a weekly column in the New York Times about money that I highly recommend. This is an exercise that he does and I think it’s really instructive here.

If you’re having a hard time budgeting and want to get started, do this for me over the next two weeks. Whenever you go to spend money, no matter what it is, no matter where it is, no matter what you’re spending it on, whether it’s necessary or whether it’s just for fun, do the following.  Whenever you spend money from today until two weeks from now, stop for a minute. And just think about it.

Actively try to think about how you’re spending money. Say to yourself, “Hmmm. I just went to the store and bought $125 worth of clothes. Isn’t that interesting?”

“I just spent $45 a bar… Isn’t that interesting?”  Just stop to think about it for a minute. Literally think about it. There’s no judgment, but whenever you spend money, just stop and be mindful about it for a second before you start rushing to the next thing.

You might be surprised, if you actually stop for a couple of seconds to pay attention, about the trends that you start to notice with where your money goes. You know, I frequently hear from people who do this who didn’t realize how much they were spending in particular categories of expenses that they didn’t actually really care about.

They spend money on whatever it is, they just do it, and it’s habitual. But when they actually stopped to think about it, they started to catch on to some of these trends.  So before you start putting yourself through a ton of work to track your transactions manually, stop and reflect on what you spend money on.  And see what you notice.

If it doesn’t work for you, then move on to the second piece that we’re to talk about, but give it a shot.

Budgeting is about bringing alignment between what your say is important to you financially and where your money actually goes.
Aligning Your Money With What’s Actually Important To You

The second strategy, the other way I want you to try to think about budgeting has to do with aligning where your money goes with what’s actually important to you.  Putting your money toward the things that are important to you, FIRST. This is my preferred method because I think it probably is the easiest one and it’s the fastest way to get results when it comes to your budget. There are a few steps involved.

First and foremost, I want you to figure out how much money is coming in every month, and I’m not talking about your annual salary divided by twelve. I’m talking about how much money actually gets deposited into your bank account every month.  After taxes are taken out, after your 401(k) contributions- how much money is coming in every month?

How Much Do You Actually Need To Save?

The second piece is a little bit harder. And it involves figuring out how much money you actually need to be saving to make sure you’re able to do the things that are important to you.

Never mind what you should be saving. What do you actually need to save?

Look, this is a complicated step.  It’s not easy to calculate how much you need to be saving to retire when you want to 30 or 40 years from now. It’s not easy to figure out how much you need to be saving to pay for a child’s college several years in the future. But you need to actually sit down and do this, first and foremost.

If you need help with that, reach out. I’ll help you figure out what those numbers are for you- but however you do it, you need to figure them out.

To recap this budgeting method so far: step one, how much money is coming in? Step two is how much do you actually need to save?

Automate, Automate, Automate

And then once you have that, I want you to login to your bank and schedule an automatic transfer coming out of your checking account every month to either a savings or an investment account for that dollar amount.

If you go through step two and find that you need to save $2,000 every month, I want you, tonight, to go ahead and set up a $2,000 transfer from your checking to your savings account every month.

And that really is the key here. We make it hard on ourselves to save.  For most people, when money comes into the checking account, we spend it and then whatever’s left over, we save it… if we actually remember to log in and transfer it to your savings account.

I want you to set this transfer up automatically. Make it hard for yourself not to save.

Remember, this isn’t permanent. If there are some months where you have higher expenses – if a car breaks down, if you just want to spend a little bit more money that month – that’s OK. You can always go to your savings account and transfer money back to your checking account.

But make that the hard step.  Pay yourself first, and then, if you actually need a little bit more money, you can pull a little bit out of savings. I’m giving you permission to do that.

But don’t make it easy for yourself to just spend that money. Actually put it away and make it so you actively have to think about taking it out. And if you do that, you’re going to be much, much more likely to actually make your budget work for you.

Spend the Rest, Guilt-Free!

And once you do that, once you set up the transfer for how much you need to save every month, spend the rest however you want. I don’t care.

If you’re able to save as much as you need to in order to accomplish the things that are important to you, I really don’t care where the rest of your money goes. And frankly, neither should you.

As long as you’re actively putting money toward the things that are most important to you, do whatever you want with the rest. Don’t worry about it, and don’t feel guilty about it. You’re saving as much as you need to. It’s really that easy.

It’s Not Always That Simple

Now, there’s one caveat. If you tend to actually spend more than you have left after putting money into savings, that’s when this strategy can get a little bit more difficult. And then, and only then, is when I want you to just start thinking through budgeting in the “traditional” sense. At this point, you’ll need to look to cut spending from particular places.

If we’re able to save as much as we need to save and you have a little bit of money left over, you don’t need to worry about it. But if you find that you’re having a hard time saving what you want to be saving, this is when we’re going to start trying to find ways to cut back.

And from there, here’s what I would do, in order, if you’re looking to solve this problem.

There Are Two Components to Budgeting.  Start with the One that Nobody Ever Talks About

First and foremost, when we talk about budgeting, there’s two components to it. There’s the income side and the spending side.

Most people tend to only focus on the expenses, but if you really are having a hard time saving as much as you need to every month, I want you to actually start by looking at the income side. Are there ways you could grow your income? From putting your money into investments that actually pay you income that could help potentially close that gap, to negotiating a higher salary at work if you think you’re underpaid and can back that up, to even starting some sort of side hustle. You might not actually need to cut your spending at all.

When we think about budgeting traditionally, we tend to only focus on the spending piece. But we really should be taking a look at the income side as well. So first and foremost, let’s start there.

Find the Easiest and Most Impactful Ways to Trim Spending

If that’s not enough, or if growing your income isn’t an option for you for whatever reason, the next step is not to start nickel and diming on your coffee every month.  That’s the hardest way to actually do this.  Instead, what are your top three or four categories of expenses every month? Where does most of your money actually go?

Now, for most people, this is some sort of combination of your rent or mortgage payments, student loan payments, transportation costs, food or even clothing. Pull all that stuff together in those big categories and ask yourself, what’s the easiest and least impactful cut that you can make to your biggest areas of expense?

In other words, if the goal is to cut your spending by a certain dollar amount every month, what’s the easiest way to actually do that? For most people, that’s not going to be coffee, right? Start with the biggest areas of expenses.

So maybe it means that it might make sense for you to move to a cheaper apartment the next time your lease is up. Or taking the bus or subway a little bit more rather than taking Ubers. Or if you have student loans, trying to switch your student loan repayment plan might be a good idea (if you have federal loans).  If you have private student loans, maybe trying to refinance them is a good idea. Or trying to cook a little bit more at home might be a good idea if you spend a lot on food.

The point is, there’s a lot of different ways to do this.  And each one is different, depending on what you actually need to be doing.

Make That Your Goal.  Not Just Budgeting

But only if you need to, write and make that your New Year’s Resolution. Don’t just make budgeting your resolution, but actually find the easiest and most impactful areas to cut if you need to. And when you do that, you’re going to find your budget tends to just come in order.

Make it as easy as you can on yourself. Make it hard not to save for yourself and from there, only if you need to cut spending, cut the pieces that are the easiest and most impactful for you to cut.

But ultimately, if you take anything away from this video here today, recognize that if you’re struggling with traditional budgeting and you feel like it doesn’t work for you, you are not alone.

Make Budgeting As Easy As It Can Be

The best thing you can do to make your budget work is to figure out how much you need to save every month and set it up to save that amount automatically. Move it from your checking to your savings account without thinking about it, without actually going in and doing it every month, and make the rest of your spending revolve around that. If you need to pull some of that money out of savings for whatever reason, you always can do that, but make that the hard part.

It doesn’t take a lot of time to do this. But you should be making it easy for yourself to save rather than the other way around.

Anyway, I hope this was helpful. Thanks so much to “Eric” for sending in this great question and working through our Newlywed Money Guide.  You can download that guide here if you’d like to learn more.

And again, if you have any questions about figuring out how much exactly you need to be saving every month, reach out and I’d be glad to help you out however I can. Thanks so much for joining us, and I hope you have a great day.

How to Take Control of Your Finances after Graduation

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[Don’t miss the free giveaway in this post! Click here to download our comprehensive student loan guide!]

Congratulations to everyone graduating this semester! 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 done 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.

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 written 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.

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 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 workforce, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide.  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 Do I Do With My 401(k) When I Leave My Job?

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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. 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 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.

How to Allocate Your Money Effectively

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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”.

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.

How to Pick Investments in Your 401(k)

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Stop me if you’ve heard this one before.

You get a new job, go in for your first day, excited to get started.  Six hours into an eight hour onboarding training, you get a packet from HR with a 40 page document about your 401(k).  And, for the most part, you’re essentially left to set it up on your own.

You dig a little deeper and set up a certain percentage of your paycheck to go into your 401(k) directly. Now, it’s time to select the funds in which to invest.  The million dollar question- where in the world to start?

I’ve seen plans have as many as 50 different funds options to choose from. And most plans give very little guidance on how to make your decision.  So, what do you do?

A Very, Very Brief Primer on Mutual Funds

This probably warrants its own separate post, but before we talk about how to choose a fund, it’s important to know what exactly you’re choosing.

The funds available in a 401(k) are mutual funds.  There are a wide variety of mutual funds, but the general idea is the same across the board.  If you put $10,000 in a mutual fund, the manager of the fund will invest it into a wide variety of stocks and bonds.  The fund manager then reallocates these investments over time according to the fund’s objectives.  When you wish to withdraw your money, you recieve your portion of the funds growth (or losses).

Mutual funds are a great way to diversify your money.  When you put your money into a mutual fund, you aren’t just buying a single company’s stock.  Generally, you’re putting your money into hundreds of stocks and bonds within a single fund.

Every mutual fund has a different objective, and risk level.  On one end of the spectrum, some funds only invest in smaller companies in Africa and Asia.  These are considered very high risk/high reward investments.  On the other end, some mutual funds only invest in US Government bonds. In turn, these are very low risk funds (that in turn, offer much less upside potential). Most funds are somewhere in between.

Your 401(k) Investments Should Be Fairly Aggressive Early in Your Career

There’s no right answer for exactly how much risk you should take with your investments.  The amount of risk you take generally depends on two things- how much risk you want to take, and how long your money will be invested.

This second piece is the key here.  Your time horizon for how long your money will be invested can sometimes override your risk preference.  For example, even if you are a very aggressive investor who wants to take a lot of risk,  it’s not a good idea to invest that money aggressively if you are planning on using your investments to buy a house in six months.  If the market were to crash, you might not have enough money to buy that house.

The flip side is also true.  If you’re investing for a long time, it probably makes sense to take more risk in your investments.

For millennials, the biggest risk to your retirement assets doesn’t have anything to do with the stock market at all.  The biggest risk is inflation.

To phrase it differently, inflation has averaged around 3% every year.  Meaning, that every year, the things you buy tend to get about 3% more expensive.  If your investments for retirement aren’t at least keeping up with inflation, you’re essentially losing money.  The investment risk for a retirement portfolio that averages 6-8% a year is well worth it. Particularly because a “less risky” portfolio averaging a 2-4% return could leave you with less money, inflation adjusted, than what you have today.

All of this is a long way of saying- if you’re in your 20s, you want to make sure you focus your investments on growth to maximize the portfolio’s value by the time you retire.  Swings in value in your 20s and 30s are a small price to pay to beat inflation over time.

…But As You Grow Older, Make Your Retirement Accounts More Conservative

Just because a growth-focused 401(k) portfolio is right for you now, doesn’t mean it always will be.  As you get older, shift some of your portfolio from stock funds to bond funds.

A good rule of thumb is to move 10% of your account from stocks to bonds every 10 years.  That way, by the time you retire, your portfolio is likely to have a good mix of growth and income-focused investments, varying slightly depending on how much risk you’re comfortable with.

So, How Should You Invest? You Have Two Major Options

With all that being said, what funds should you choose in your 401(k)?  While all plans offer different fund choices, you generally have two options:

  1. Retirement Target Date Funds

Almost all plans have retirement date target funds.  The name of these funds varies from institution to institution, but they generally contain “Retirement” or “Target Date” in the name, followed by a suggested retirement year.

If you decide to go this route, choose the fund that corresponds with your expected retirement date.  The target retirement dates are typically stated in five year increments.  For example, a 25-year-old expecting to retire in about 40 years might choose the “Retirement Target 2055”, since 2055 is about 40 years from the current year.

These funds can be a great option for one simple reason: simplicity.  All of the stuff I describe above about how your investments should start out focused on growth, and become more conservative over time?  Target date retirement funds do it all for you.

Target date retirement funds are designed to be, in theory, the only fund you “need” in your portfolio.  They are well diversified, automatically rebalance, and become more conservative over time.

The only problem?  They can be expensive.  All mutual funds have some sort of cost associated with them that come out of your account.  Typically, since target date retirement funds do this work for you, they can be much more expensive than other fund options in your portfolio. This could leave you with tens or even hundreds of thousands of dollars less when you retire.

I recommend doing a cost analysis of the different fund options in your portfolio using a site like  Or, I’d be happy to conduct a 401(k) review to make sure you aren’t leaving money on the table.

  1. Build Your Own Portfolio

If you want more control, or lower fees, on your retirement accounts, you can build your own portfolio.  The great news with this option is that it allows you to customize the portfolio to your liking using the funds available. And, this method typically costs less in those ongoing fees I mentioned above.

If you go this route, you need to make sure you choose anywhere from four to ten or so funds that span the various sectors of the financial markets.  You want to have some exposure to large US companies and small ones.  You should have a certain percentage of your portfolio in foreign stocks.  And adding anywhere from 10-30% of your portfolio in bond funds is a good idea too.

If cost is the downside of the retirement date funds, complexity is the downside to this second approach. How you allocate your investments has a huge impact on your long term portfolio returns.  You therefore want to make sure you have your funds weighted appropriately.

And, unlike with the target date retirement funds, you need to worry about keeping your funds balanced over time.  What do I mean by this?  Hypothetically, let’s say you choose two mutual funds for your 401(k)  putting 80% of your 401(k) into the XYZ Company Stock Fund, and 20% into the XYZ Company Bond Fund. (Obviously, I made these funds these up to illustrate the concept.  And, you probably will want to have more than two funds if you aren’t using a target date retirement fund.  But, let’s keep it simple for now).  Now, let’s say that this year, stocks have a bad year, and bonds have a relatively good year (again, all hypothetical).  At the end of the year, even though you started 80% stocks/20% bonds, your portfolio might be 65% stocks/35% bonds, since the value of the stocks fell and the bonds rose.

When you are managing individual funds, you need to keep an eye on the portfolio being thrown out of balance in this way.  Typically, I recommend logging into your 401(k) twice a year and rebalancing to bring the portfolio back to 80%/20%, or whatever weighting you choose, to make sure it stays in line with your overall investment objectives.

In practice, once you have the portfolio set up appropriately, it isn’t that hard to rebalance it twice a year.  But, it a) takes a bit of time, and b) involves remembering to do it.  For this reason, I include rebalancing my clients 401(k)s twice a year as part of my comprehensive financial planning package.


You ultimately have two options- use the readymade target retirement funds, and pay a higher cost, or select the funds yourself and manage them independently.  There ultimately isn’t a “right” answer for everyone across the board.  And of course, if you have further questions about your investment options, how to rebalance, or even just to get a second opinion, I’m only a call away.

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

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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!

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

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Should I Pay More Than the Minimum Toward My Student Loans?

[Interested in testing out some of these strategies for yourself?  Click here to download our free student loan guide!]

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:


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.


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.


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.

[Interested in testing out some of these strategies for yourself?  Click here to download our free student loan guide!]