The story below is from our November/December 2022 issue. For more stories like it, Subscribe Today. Thank you!
Consider these tips for your financial future into 2023 and beyond.
Fundamental money management advice is similar among professionals. Certain things just work. The past couple of years, though, have brought on dramatic changes that have disrupted lives and the usual flow of money. What was easy three years ago may be a struggle today. When life throws you surprises, it’s always good to go back to the basics.
As a Dave Ramsey Endorsed Local Provider and Smartvestor Pro, I often reference his 7 Baby Steps. Most households seem to agree with these tips, others not so much. What’s most important is to understand what they mean for you, they’re guidelines. It’s important to familiarize yourself with what they are before crafting your money plan.
Emergency Savings
Dave Ramsey advises setting aside $1,000 for emergencies as Step 1. This is doable for just about anyone. It won’t last for long, though, and that’s why he suggests finishing your work here in Step 3.
Standard advice is six months of living expenses in a liquid account. Data shows unexpected life events either cost that much or take that long to recover from. Few expect to lose a job or get in a terrible car accident, but it happens. Having that financial cushion while you recover eases the stress.
Today’s inflation and rising interest rates should be considered too. A six-month emergency fund may not be enough in tomorrow’s dollars. Banks vary in the interest rates they offer so it’s important to shop around. If money isn’t appreciating at least as quickly as inflation is deflating it, emergency funds are shrinking. Seek a savings account that matches or exceeds the inflation rate in interest payments.
What is a liquid asset? It’s one where money can be retrieved quickly without penalties or fees. Most think of cash, or savings and checking accounts, which are the most liquid, but there are other options. Certificates of Deposit (CDs) can be a good choice if they’re short term or scheduled to mature at different times. Money Market accounts can earn more interest than traditional savings, so these can be a good option too. A house, car or other tangible assets, not so much. While stocks are liquid, they’re generally not a good place to put emergency funds since markets can fluctuate. It’s better to choose when to move this kind of money around.
Get Out of Debt
Credit card debt is expensive. It’s best to pay off all balances monthly, but for people who have maxed out numerous cards, getting out from under that debt can feel overwhelming. Ramsey recommends a debt snowball effect, whereby one starts with the lowest balance card and keeps chipping away until this is paid off completely. Then move on to the next lowest balance card, thus snowballing the debt payoff.
While this approach can be encouraging as one tends to reach accomplishment milestones more quickly, it can result in shouldering debt and its associated costs longer than necessary. Interest rates on cards can vary wildly. If the lowest balance card charges 9% and a higher balance one is at 28%, borrowing will cost a lot more in the long run. Consider splitting extra payments between the lowest balance and highest interest cards instead.
Investments or Retirement Savings
The rule of thumb has traditionally dictated employees put 10% of their earnings into investment accounts. With rising interest rates and inflation concerns, 15% is a more strategic approach. Allocate this toward 401(k)s or other retirement accounts, preferably as automatic paycheck deductions. This strategy is even more appealing if an employer offers a match.
Those who have locked into a good mortgage or car loan rate are fortunate. However, most will need replacement cars or a different house during their lifetimes. Interest rates are going up, cars are more expensive with high demand and low inventory. Home prices and loan costs are rising too. Investment returns aren’t paying what they used to. It’s necessary to factor higher future costs into retirement saving strategies. Make 15% the new normal.
College Fund Savings
Paying for your child’s college tuition is a personal decision, but if chosen, should be worked carefully into your financial plan. People who make covering the cost of higher education a priority run short on retirement fund savings during their prime working years. A college student has a lot more time to pay off their debt than parents do to plan for retirement. Options such as grants, scholarships, and jobs can help shoulder the cost of education.
Most kids would hate for their parents to give up their retirement savings to pay college costs. There’s a great life lesson to learn in being self-sufficient too. Sure, if there’s extra to put aside for a college fund that makes sense. What doesn’t so much is getting to retirement without reserves. Your child may or may not attend college, but you will retire.
Pay Off Your House
We were in an historically low interest rate environment. Many were able to lock in at 3% or less on a 20-year note. Sure, it feels great to have a home free and clear, but paying off a house right now shouldn’t be a priority. People can’t borrow for that kind of rate anymore. Inflation is causing everything to be more expensive. If that’s not convincing, consider this: even Dave Ramsey estimates return on investments at 10-12%+. Focusing on paying down a mortgage at 3% instead of investing the same money to earn much more is a missed opportunity.
Build Wealth & Give
We live in a community where charitable giving is admired and celebrated. That makes a lot of sense for people who have assets and are living comfortably. Of course, if someone can take care of their family and give back to people in need, they should. Where it gets to be a tougher call is when a family is struggling. Like the “Put your own mask on first” airline advice, people should make sure they’re equipped to help others so both thrive. Tithing and charitable giving should be budgeted.
For those already set on the retirement savings front, citizens are required to take minimum distributions from an IRA at age 70. People who don’t need the money can get more bang for the buck by sending disbursements directly to the charity. If money does not pass through a personal account and is instead dispersed directly from the IRA, the charity saves the cost of paying taxes on that money.
How one manages their money is a personal decision. There are proven techniques that work for most, but not all. The idea of baby steps is great for anyone faced with financial challenges or new to money management. People are motivated when logging accomplishments. It’s easier to do when the goals start small. Awareness is the first step to financial understanding. Knowing where one is right now makes it easier to get to where one wants to go.
The story below is from our November/December 2022 issue. For more stories like it, Subscribe Today. Thank you!