Financial Security Big Picture

September 17, 2020 O'Connor Family Law Newsletter

Getting Your Money to Work for Your Future.

For the sake of discussion, this article will assume that you have cleared all (or the overwhelming majority of) your debts and have finished establishing your emergency fund. Also, please note that this is general financial advice. For comprehensive, long-term financial planning, consult with a professional or pick up some books on Financial Planning. Finally, only you can decide what goals and investments will make you happy or unhappy. Watching investments grow in the bank is fulfilling for some, but not for others.

If you’ve come this far, you have achieved quite a bit. You’ve accomplished the most important short-term goals of financial security by creating a budget, paying off your debt, and establishing an emergency fund to secure you through the rough times. Without noticing, or maybe you did notice, you were applying the principles of SMART goal planning and organization. You can take these principles and apply them to all of your plans going forward to increase your odds of success, as well as bridge the gap from where you are now to the longer-term goals that many of us share: buying a home, going to college, earning more money, saving for retirement, etc.

From where you sit now, what goals you set for yourself will be largely dependent on where you were over the last few years in relation to your financial health as well as how old you are. Generally speaking, a 25-year-old will have different financial goals from someone who is 50. However, there are a few things that you will need to consider as you take your next steps towards the future, regardless of your stage of life. The first thing is your credit score.

You are entitled to a copy of your credit score, for free, ever year. If someone asks you to pay for something to receive it, don’t. Use the link on the FTC website to get your copies, do not use or any of the paid ads on the top of Google who are trying to sell you something. Review your report every year to make sure things are correct. If you need to, you can appeal certain items and have them removed if they aren’t accurate. If you have outstanding debts on your report, pay those off too just like you paid off your other debts. You want to do everything you can to get your score above 750, which will generally be the point at which you qualify for the best rates on things like home or auto loans.

While you get a handle on that, you should also now be considering how to bridge the gap between short-term and long-term goals. This will mean focusing on the mid-term; the things that may take three to ten years to achieve. A popular goal here would be to develop a second income stream by possibly figuring out how to monetize a hobby or starting a side business using an underutilized skill that you currently have. This second income stream goes a long way towards successful retirement planning. It might mean setting up strategies to achieve side-objectives towards your long-term goals and working towards those, or just simply setting a goal that can’t be accomplished in the next year, but won’t take you until you’re retired to see, such as the down payment for a house.

From this point, your specific path will likely diverge from everyone else and it gets hard to give specific advice, so to wrap our financial stability series up, we’re going to close with some quick bits of advice:

  • The greatest predictor of increased earning potential is education and skills training. If your goals are to earn more money, look into pathways for getting credentials and skills that you need. Go to community college first to knock out general courses for lower cost, then transfer to a 4-year school to finish things up. You do not need 100k in loans to get a college degree. If it means taking $20,000 in loans to pay for a degree that will increase your earning potential by 20% or more within 2 to 4 years, is it worth it?
  • If you’re going to invest in stocks or other equities, keep the following in mind:
    • Time in the market is better than timing the market.
    • You will generally never beat basic market indexes by picking your own stocks.

Over any ten-year period in the history of the US, including the Great Depression and Great Recession, the market indices have always been higher than the start of the period. So, unless you intend on investing a lot of personal time doing diligence on the nature of the companies you are picking, your should heavily consider using the 3 fund portfolio. Your 3-fund portfolio will invest you in indices that track the total stock market – it buys stocks in every company for you. All you have to do is purchase investments in the fund and forget it. This isn’t to say you can’t buy individual stocks, just do your diligence first. Just bear in mind, most people are bad at it and professional brokers aren’t much better.

  • Savings accounts at your local bank are not good places to save money for long-term goals. If you’re planning on making a large purchase within the next year or two, it’s fine. Anything longer than that, you may want to explore better investment accounts. Retirement accounts like 401(k) and Traditional or Roth IRA, education specific accounts like a 529 Savings Plan, etc are all better places to keep your money because they will typically have higher returns or provide you with benefits like lowering your tax burden. Also, even the best interest rates on a basic savings account with your bank likely aren’t good enough to keep up with inflation. Effectively, stashing your money there over the very long term means it becomes less valuable – you lose purchasing power.
  • For long-term savings goals, the general rule of thumb is to save 10 to 15% of your income a year. Stash it away into your investment accounts and learn to live off the remainder. This is more effectively done if you have access to tax-deferred (tax-advantaged) accounts like a 401(k). These accounts will allow you to make investments with your pre-tax income on the goal of paying it later when you finally draw the money. Then, ideally, by the time you retire, you will also be in a lower tax bracket than if you were actively working. So not only will you get the benefit of the growth from the untaxed money, but when you draw it later, it would be taxed at a lower rate than if you had paid taxes on it today.
  • Don’t stop setting goals and don’t stop trying. No matter where you are in life, there are strategies and goals you can achieve to ensure your financial security. Not reaching a specific goal doesn’t mean failure, either. No one ever claimed to be broke if they had $600,000 saved as opposed to a million.

We’d wish you luck, but you’re not going to need it.