Let’s face it. Money is not everyone’s strong suit. Especially in an age of mass consumerism, financial stability can feel elusive. But with the right financial professional by your side — and the right information to guide you — that stability can be obtained.
We reached out to Emily Dafferner and Reid Wesson, CERTIFIED FINANCIAL PLANNERS™ at Reliant Investment Management, to find out some of the pressing questions they believe everyone should be asking when it comes to money management. We hope you find some useful information that will help get you on the road to long-term financial stability.
What’s the first step in establishing a strong financial plan?
The first step is to develop a plan and have the intention to stick to it. It’s a process of developing your goals and objectives — knowing what you want to accomplish with your money and also acknowledging your strengths and weaknesses. It’s important to know your strengths because those will help you reach your goal. And then also your struggles or pitfalls, so you know what to look out for along the way. From there, your plan should capitalize on your strengths and minimize those weaknesses.
Another thing to note with developing a financial plan is that accountability helps. If you’re married, that accountability could come from your spouse. If you’re single, it could be a friend who you’re honest and real with when it comes to finances. On top of that, it’s great to have a financial advisor who will help you prioritize and make decisions.
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What pieces of information are good to have before meeting with a financial advisor?
You’ll need your current financial data. That includes your income, any investment or retirement accounts, credit accounts and any debt. All of those are helpful to have because what you’re going to look at in that first meeting is where you stand. To do that, we need all the facts. It’s also good to be prepared just to talk about what you want to accomplish with your money. What are those goals and objectives? Your output is only going to be as good as your input. You need to provide as many details as possible.
What are some simple ways to gain more financial control?
Awareness matters. You have to know exactly where you’re spending your money. Know what you own, and know what you owe. If you’re unaware, then start to track your spending habits for a couple of months. Take a look at every dollar spent, and you’ll see what your habits are. There are plenty of mobile apps and technology that can help. Or, you can just do it manually at the end of the month.
What are some “sneaky” ways money slips through the cracks?
Subscriptions. Find out what your recurring charges are — any automatic payments going out. It’s a good process to check those subscriptions to see if you’re duplicating anything or just not using one of those services. Honestly, those are practices we can do every year, and that will trim a significant amount of money from your spending.
What are some of the most common pitfalls of financial planning?
One is simply not paying attention to what you’re doing with your money. Money should serve a purpose for you and accomplish a goal. Not being intentional is a big pitfall. Another is setting a plan that’s too constraining. If you set the parameters really tight, then there’s no freedom. It shouldn’t be painful. It’s good to have some flexibility to account for lifestyle shifts and changes. We all know things happen in life that change our circumstances, and that’s when flexibility really matters. Another big pitfall is just not being honest with yourself about where you’re struggling. It’s best to be honest, especially if you’re working with a financial planner. Be honest about what your habits are. If you’re willing to do that, then you’ll be better equipped to set yourself up for success.
Should I pay down and/or off my loans or save and invest more?
It depends on your circumstances. It depends on the type of debt, the interest rates you’re paying and your earning capacity. You should never forgo free money. By that, we mean, if your employer is offering a match to your retirement savings, that’s free money and you need to take advantage of that. That’s money you should save. It’s good to prioritize paying off bad or high-interest debts, but at the same time, it’s still important to accomplish long-term goals — like retirement savings. It’s really a multifaceted answer.
How do I know if my estate plan is up to date? How often should I review it?
You should review and update your estate plan every time you have a major life change. That would be something like marriage, divorce, birth, adoption or adding to your family in some other capacity. It could also be death or disability — all of these things are reasons to revisit your estate plan and make sure that it is set up to accomplish what you want it to accomplish. Whether that’s making a provision for your family, or if you’re an empty nester, then leaving a legacy — whatever that may look like. It’s good to review it every couple of years anyway. Most people don’t, but it really is a good idea just to think, “Is this still what I want to do with the finances I have? Is this still how I want my money to be used when I’m gone?”
How should I prioritize my savings (i.e., 401k, IRA, taxable, etc.)?
The first thing you want to do is take advantage of any employer match for your retirement account. Secondary to that, we do encourage individual retirement accounts. It’s good to prioritize a Roth account if you’re eligible for it. You’re saving money by investing money you’ve already paid taxes on, but that money, particularly if you’re young, has the opportunity to grow for 30 or 40 years tax-free. Those withdrawals, when the time comes, come out without tax. And, it’s tax-free to your heirs, should you not spend it in your lifetime. If you’re not able to do that, then there’s nothing wrong with saving in a traditional IRA account. It just has different tax rules associated with it.
Also, it’s wise to always save first. If you wait to save so you spend on everything else – there won’t be anything left over. Learn to have it automatically drafted from your check, or just be disciplined to save first. That will be your key to success.
How much should I be spending on major purchases (i.e., house, car, etc.)?
It’s dependent upon circumstances like your income and the amount of savings you currently have. We can give you the general rule of thumb that you want your housing expenses to be 30 percent or less of your gross income. If you’re thinking about buying a car, don’t finance it for six or seven years. Make it a shorter amount of time, and it shouldn’t be more than about eight or 10 percent of your gross income. It’s all dependent on what you can afford based on your other expenses.
What’s the importance of an emergency fund?
A statistic came out last year that 40 percent of Americans cannot afford a $400 surprise expense. That’s kind of a staggering number. If you’re in this category, you’re not alone. This should encourage you to strive to build an emergency fund. It keeps you from going into debt for surprise expenses. We all know that things happen. Sometimes appliances break, or we need new tires or our car breaks down. Sometimes we unexpectedly lose our jobs. You need to be prepared to cover those unexpected expenses — and that’s what an emergency fund allows you to do. Once you have it, if you have to use it, it’s important to replenish it and build it back up.
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