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Effects of Saving an Extra $20 Each Week

Saving just a little bit extra each year can have a profound impact over the long term.  Investor’s Business Daily ran some pretty interesting numbers showing the impact on one’s retirement if an extra $20 is saved every week.  Here is some of the findings based on certain age ranges:

Recent College Grad: invest $20/wk earning 6% and by retirement, that pot of money will be about $330,000.

Someone in their mid-40s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $40,000.

Someone in their mid-50s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $14,000.

The results are pretty clear – consistently investing over many decades can have exponential benefits on your financial situation.  Even small amounts can add up to have a big impact when time is on your side.

 

 

Critiquing a Financial Plan

The following article examines five young people and their financial plan (more like their lack of planning).  They are then offered some preliminary advice about how to improve their situation.  Unfortunately, in every case I found the advice to be overly simplified.  Here’s the article

And here are some overarching strategies that apply to all the case studies:

1)      Emergency fund.  Start here first and make it a priority to build an emergency fund that can cover non-discretionary expenses for 3-6 months.

2)      Save more.  If you can’t save more now, earmark any future raise toward saving.  When asked about a rule of thumb for how much to save, I’ll often respond with “Save as much as you can”.  Young people and millennials are unlikely to have pensions and with the questionable future of Social Security, the burden to save is placed on their shoulders much more than previous generations.

3)      Automate.  Make sure any savings are set to occur automatically.  The mental anguish of writing a check every month or year to a retirement account can be surprisingly difficult.  Many times it is our own biases that create obstacles to reaching our own goal and simple processes like automating our savings can have a huge impact.

4)      Disability.  Life insurance is commonly discussed when a couple has children.  But disability insurance is rarely brought up.  What’s odd is that people are more likely to file a claim for disability insurance than life insurance.  And it doesn’t apply just to physical injuries, either.  We’ve had several clients and prospects tell us about their long term disability that affects their ability to do a desk job as a result of a bad car crash.

 

Using The Money Management Tool: Connecting Accounts

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with a prospective client who has many accounts and struggles to keep track of where they are located.

Situation: A prospective client approached us looking for help managing his investments. He had about 10 different accounts – multiple checking and savings accounts and a several different retirement accounts from current and previous employers. These accounts were held with several different financial organizations.

Problem: He struggled to keep track of all the accounts. He was constantly forgetting passwords used to view his balances online. He was spending hours trying to stay organized and reading the statements. The inconvenience grew to the point where he just ignored his accounts.

Solution: The Money Management Tool could be used to connect all the accounts together. After establishing the connections between the tool and his accounts, he would be able to see daily account balances for all the accounts from a single account. No more trying to remember multiple passwords or trying to read different statements each month.

new account

If you or someone you know needs help getting their financial house in order, this tool can help.

Contact us today to get started.

Do It Yourself Investors May Be Hurting Themselves Without Knowing It

The last time I changed the oil on my car, I inadvertently drained the power steering fluid thinking it was engine oil.  Then I added engine oil and thought I was all set.  I proceeded to drive a car around town with no steering fluid and twice as much engine oil as I should have.  It didn’t take long before I realized I really screwed up my car.  It was an expensive mistake but I learned that maintaining my car should be done by the experts.

This same concept applies to investing as well.  These two articles capture some of the biggest issues we come across when we talk with prospective clients:

Financial Illiteracy May Have Cost Investors 200 Billion Over 20 Years

20 Common Investing Mistakes

15 Mistakes People Make In Retirement

Mistakes in retirement can be costly and unfortunately very common. Money magazine’s recent article captures 15 examples.

While I have seen every one of these 15 mistakes actually happen, the most common issue I’ve seen this year is Number 7 on the list: Not knowing how much to withdraw.

This has become more pronounced as a result of the flat market. Investors who saw an 8-10% rate of return on their account could take out about 8-10% each year and end up with an account balance close to what it was at the start of the year. But with the markets flat to down slightly, investors who continue to take out 8-10% each year are seeing their account down by that amount.

The general rule of thumb is to take 4% per year. Take out more on a regular basis and you run the risk of depleting the account.

The One-Page Financial Plan: A Book Review

I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues.  In particular, he focused almost exclusively on the emotional issues that investors face.  What does money mean to the investor?  What are the investor’s goals?  It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.

For folks that need a plan and don’t know where to start, this is a useful resource.  It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like.  It is the most difficult part of financial planning.

It lacks specificity and implementation ideas.  Since every investor has a unique situation.  This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page.  The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money.  Rather it focuses on concepts at a high level.

If the goal is to starting thinking and talking about the future, this is a great place to start.