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Budgeting: The Bedrock of Financial Stability

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 Budgeting: The Bedrock of Financial Stability

Most Americans overspend, and many use credit cards to cover it. According to a NerdWallet survey, 83% of Americans say they overspend, and a similar proportion who have a monthly budget (84%) say they exceed it. Of those who’ve ever gone over their monthly budget, 44% say they usually use a credit card to pay for the additional purchases they make when going over budget.  Credit cards can carry some hefty interest rates, some exceeding 27%!  Yikes. We’ll talk more on this in section 3.

Budgeting is what kickstarts a lot of the financial planning I do with our clients where retirement and wealth building is at the forefront.  They have found that with strict budgeting (over the course of 3-6 months) have really opened their eyes to past spending habits.  Do this, print off (yes the old fashioned way) your last months bank statement and break it all down.  Highlight what you could have gone without for that month, add it up and then see how much you could have been saving towards another financial goal you have.  I use the 70-20-10 rule a lot of the time, even in my own finances.  70% should be used towards living expenses, 20% goes towards retirement or savings strategies and the other 10% is for your “fun bucket”.

2. Emergency Fund: Shielding Your Finances from the Unexpected

The Federal Reserve found that 39% of Americans would struggle to cover an unexpected $400 expense! Having an emergency fund provides a financial buffer and reduces the need for high-interest borrowing in times of crisis… such as using your credit card.

As we all know, an emergency fund serves as a financial safety net, protecting against unforeseen expenses like medical emergencies, sudden job loss, loss of major appliances, etc.  Everyone’s emergency fund size is different, rule of thumb is 3-6 months of living expenses in cash.  Most people ask, why 3-6 months?  Generally, your employer provides some form of benefits for working with their company. The benefit is short and long-term disability.  Short-term disability will pay you 60% of your gross income roughly 3 days after the disability claim for 3 months. After 3 months, your long-term disability will then kick in (or 90 days) and pay you until social security retirement age (or 67 years old) – this also pays out 60% of your gross income.  Check with your human resources department to see what benefits you have, most of the time your employer will cover the premium for the policy upon employment.  Here is the catch (there is always a catch), the 60% you receive is now taxable at your current tax bracket.  The need for an emergency fund is more important than ever when it comes to protecting your family and yourself in the event of a disability as 1 in 4 people will become disabled of some sort before the age of 67 years old.

3. Debt Management: Tackling Liabilities Strategically

Fact: The average credit card debt per household in the United States is over $7,000, according to the Federal Reserve. Strategic debt management not only reduces the financial burden but also contributes to improved credit scores.  You would assume that paying off your credit card each month will help you increase your credit score, it does but not as much as keeping a small balance on your credit card – this will increase your score faster than if you did pay it off each month.  As time goes on and you continue with this strategy, the credit card company will increase your credit limit.  Credit limit is what the credit card company tell you how much you can spend on that card when you open up credit with that carrier.  The more credit limit you have, your credit score will go up. This is purely dependent on your income, credit score, payment history, credit utilization and large expenses.

Managing debt strategically is essential for financial health. Beyond understanding the difference between “good” and “bad” debt.  Is there such thing as “good” debt? Yes. Lets break it down in your own finances.  Write all your debts out each one with an interest next to it.  Your “good” debts will (typically) be the ones with the lowest interest rates (mortgage, education, business or health bills) or ones that build your wealth or provide future income and your bad debts will be the ones with high-interest rates (credit cards or hard money lenders) or ones that you can’t afford or make income from. 

When talking with my client about debt, I always mention the debt avalanche method. Now that we have your debts written out, list them smallest to largest.  Keep making the minimum payments on all debts except the ones with the highest interest rates, start paying as much as possible on those until they are knocked out one by one.

4. Investing for Long-Term Growth: Navigating the World of Investments

Fact: Historical data from sources like the S&P 500 index shows that, on average, the stock market has provided an annual return of around 9.66% over the past 20 years. Investing in a diversified portfolio can significantly outpace inflation and traditional savings over the long term.

Investing is a powerful tool for long-term wealth growth. The importance of diversification and risk tolerance in building a resilient investment portfolio is key for gaining momentum in your portfolio. Diversification means you have a spread of investments so that your exposure to any one type of asset is limited.  For instance, having all your money spread out amongst large, mid and small cap funds, international, commodities, real estate and bonds.  Take a look at your 401k statement or your other investments accounts, what are you invested in?  Chances are you may be in whats called a Target fund.  Simply put, these accounts over the course of every 10 years will become conservative in risk – this is not a bad thing – it just means the company you invest money with will automatically lean out your portfolio from taking a large hit when we have a down market.  Take a look at the holdings you are in in that target fund.  I like to take the Warren Buffet approach.  If you don’t know who Warren Buffett is, he is one of the most legendary investors of our time.  He is an American businessman, investor and philanthropist and CEO and chairman of Berkshire Hathaway.  He has been know to generate 19.8% compounded annual gain in market value since 1965.  His philosophy, wherever his dollar bill is invested in the market he spends his own personal money on their products and services – he drinks a Coca-Cola every day for instance and generates a whopping $736 million a year. Since you are a shareholder of that company when you invest, your goal is to ensure that stock increases overtime so you capitalize your returns.

Let’s spend some time on compound interest.  This will significantly enhance your returns over time.  Let’s say you put $100/month in the bank monthly (gaining roughly 1% interest) and you do that for the next 30 years.  At the end of 30 years, you will have roughly $41,877 and you have put in $36,000.  Now, let’s say you invest the same money in the market (gaining 9.66% rate of return), you will have about $186,706 at the end of 30 years. The power of compounding is a great cheat code to your future!  That is why it is essential to start as early as possible.  

My goal with my clients is to ensure they reach the appropriate level of wealth at the age they wish to retire. So what is that that magic number?  There is no cookie cutter dollar amount that you have to have at a certain age, it is purely based on the income need at that time and how you want to live.  At my firm, we tackle just this, we take the guessing game out of knowing how much income you need to live a fulfilled life. We pressure test your situation and build a road map to ensure you know how much you should be saving each month to be on tract to fulfill your needs when you want to retire, if that is a goal for you.

5. Retirement Planning: Ensuring Financial Comfort in Golden Years

Fact: According to a report by the Economic Policy Institute, nearly half of American families have no retirement savings. Early planning and consistent contributions to retirement accounts are crucial to ensuring a comfortable retirement.  When I read this, I was in shock.  If this pertains to you, do not be alarmed.  You can change the direction of your retirement savings by talking to a financial advisor and map out exactly how you want to live.

Retirement planning is more than a recommendation; it’s a necessity. Beyond emphasizing the significance of employer-sponsored plans (like a 401k) and individual retirement accounts (IRAs), or other investment products. We will discuss the benefits of early planning, considering factors of inflation and how that can impact retirement planning income.

A tool that we use often for families is a Roth IRA.  This should be an essential part of anyone’s financial income future.  This product allows you to invest up to $7,000/year (for the tax year of 2024) into the market.  When you go to pull the money out for income in retirement (over the age of 59 ½ otherwise you will incur a 10% early withdrawal fee) tax-free. The money you have put into this account has already been taxed going in and doesn’t need to be taxed again, even the growth. How cool is that!  Check with your employer to see if they offer a Roth 401(k) and ensure your hard earned dollar bills are being funneled into that account while also receiving the companies match.

Now that we have saved up a coupe of money, now it is time to pull it out. How do I do this?  There are many ways.  First a foremost, I would check with your social security administer and see what your projected income would be at full retirement age (generally this is age 67 years old – as of now).  Next, I would take money out of accounts that are taxed, we do not want to defer the taxes any further than we want to.  Lastly, taking income from tax free accounts (this includes Roth IRA’s and Roth 401(k)s).  For some, this will be your basket of money. For others, you may have other sources of income including crop, rental income, other business income sources and/or the sale of business, etc.

All-in-all, if you do not work with a financial advisor I would highly recommend sitting down with one and talking through what you want your life to look like through a financial lens.  Most advisors will not charge you a fee, others might.  Finally, everyone asks me what should I be investing in for the future and without hesitation, I notably say technology.  A few tickers I like are QQQ, FCNTX, VGT, XLK & IYW with very low expenses.


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