Smart Financial Moves for College Graduates

Jane Young, CFP, EA

Jane Young, CFP, EA

After finishing school and hopefully landing a rewarding job, college graduates face a myriad of financial obligations and opportunities.   Here are some steps for graduates to get started in the right direction.

Create a Budget and Live Below Your Means – Based on your income, create a spending plan that leaves you with a little extra money at the end of the month.  Your budget should include saving at least 10% of your gross income.  Spend less than you earn so you are prepared for unexpected bumps in the road.  Initially this may involve renting a smaller apartment, living with roommates or driving an older car.  As your career progresses, avoid increasing expenses in lock step with earnings increases.

Establish an Emergency Fund – With the money you are saving, build and maintain an emergency fund equivalent to 4 to 6 months of expenses.

Avoid Credit Card and Consumer Debt – Pay your credit card bill in full at the end of every month.  If you can’t afford to pay for your purchases when the bill arrives then postpone or re-evaluate the purchase.   Avoid or minimize debt on vehicles and other consumer purchases.

Payoff Student Loans – Devise a plan to payoff your student loans.  Consider consolidating or refinancing your loans if it will save you money.  Consider both the interest rate and the duration when evaluating loans.  Generally, you want to pay off student loans in less than ten years.

Buy Adequate Insurance – It’s essential to have good health insurance coverage; if you aren’t covered by your employer you may be eligible for continued coverage on your parents plan.  You will also need good car insurance and renters insurance on your apartment.  Additionally, consider long term disability insurance and an umbrella liability policy.

Contribute to Your Employers Retirement Plan – Many employers offer a 401k or 403b plan to help you   save for retirement using before tax dollars.  At the very minimum contribute up to the match that your employer may provide.

Contribute to a Roth IRA – Once you start earning money you can also save for retirement by contributing to a Roth IRA.  The benefit of a Roth is since you initially invest with after tax dollars, you don’t pay taxes when the money is withdrawn in retirement.   This is a tremendous opportunity for recent college graduates because your money can grow tax free for forty or fifty years.

Travel and Have Some Fun – While you’re young and relatively independent, set aside some money to explore the world or do something adventurous.  Once you buy a house, start a family or assume more job responsibilities it’s harder to get away.

Educate Yourself on Finances – Start reading personal finance books and articles.  Here are a few books to consider; “The Money Book for the Young, Fabulous and Broke” by Suze Orman, “Personal Finance for Dummies” by Eric Tyson, and “The Millionaire Next Door “ by Thomas J. Stanley and William Danko.

Give the Gift of Financial Wisdom this Christmas

Jane Young, CFP, EA

Jane Young, CFP, EA

This year, the best Christmas gift for your adult children may be the gift of financial wisdom. Unfortunately, most young adults successfully graduate from school without a practical understanding of personal finance.  Starting out with a solid foundation and some smart financial habits can help your children live a happier, more fulfilling life.

Upon graduation from school, young adults are starting with a blank slate.  They are probably accustomed to a frugal lifestyle that is more about friends and experiences than expensive cars and fancy restaurants.  Before they take on a host of new financial commitments, encourage them to establish a lifetime habit of living below their means and saving for the future.  Work with them to develop a budget, establish an emergency fund and save for the future.  Help them to avoid the common tendency to increase their expenses in lock step with their income.  They can experience more freedom and opportunity by living below their means and gradually increasing their standard of living.

Another concept that is not taught in school, is the difference between good and bad debt.  Help your children understand the danger of high interest rate credit cards and consumer debt.  Encourage them to limit the number of credit cards they use and to get in the habit of paying credit card balances in full every month.  Also explain the importance of establishing a good credit rating by paying their bills on time.  Help them understand that low interest, tax deductible mortgage debt can be useful where high interest credit card debt can be very detrimental to their financial security.

It’s also important for them to understand some basic investment concepts including the power of compounding.  For example, if they invest $100 per month for 30 years for a total investment of $36,000, in 30 years with a return of 6%, their money can grow to over $100,000 due to compounding.   They have the benefit of time! By investing early, they have tremendous opportunity to grow their money into a sizable nest egg by retirement.

Understanding the importance of diversification and the relationship between risk and return is also essential.  Encourage your kids to avoid putting all of their eggs in one basket and help them understand that getting a higher return requires taking more risk.  It’s best to invest in a variety of investment options with different levels of risk and return.  Caution them that anything that sounds too good to be true probably is.  There is no free lunch!

To augment the personal wisdom that you can share, consider buying your kids a book on personal finance for Christmas.  Some books to consider include The Richest Man in Babylon by George S. Clason, Coin by Judy McNary, The Young Couples Guide to Growing Rich Together by Jill Gianola and the Wealthy Barber by David Chilton.

Stock Market Investing Requires a Long Term Perspective

 

Jane Young, CFP, EA

Jane Young, CFP, EA

The recent volatility in the market has prompted some investors to question the future direction of the stock market.  Unfortunately, the stock market is impacted by so many factors that it is impossible to predict short term movements.  Over the long term, the stock market has always trended upwards but the path has been anything but smooth.   We could be on the tipping point before a major correction or at the beginning of a long bull market – we just don’t know. 

As a result of this uncertainty, it is impossible to effectively time the market.  Not only do you need to accurately predict when to sell but you also need to know when to re-enter the market.  Even if you select the right time to sell, there is a good chance you will be out of the market when it makes its next big move.  

To compound this issue, decisions to buy and sell are frequently driven by short term emotional reactions.   The fear of losing money can trigger us to make a sudden decision to sell, or the fear of missing an opportunity can cause a knee jerk reaction to buy.  We need to resist these very normal emotional reactions and maintain a long term focus.  The stock market should only be used for long term investing.  If you don’t need your money for at least five to ten years you are more likely to stay invested and ride out fluctuations in the market. 

If you lose your long term perspective, and react to short term emotional reactions, you can get caught up in a very detrimental cycle of buying high and selling low.  An example of a common cycle of market emotions begins when the market drops and you start getting nervous.   Over time you become increasingly fearful of losing money and end up selling your stock investments after the market has dropped considerably.   Then you sit on the sidelines for a while, waiting for the market to stabilize.  The market starts to rebound and you decide to jump back in after that market has gone back up.  Afraid of missing a great opportunity, you buy at the market peak.   This is a self-perpetuating cycle that can be very harmful to your long term investment returns.

To avoid the temptation to time the market and react to emotional triggers, keep a long term perspective.   Focus on what you can control.  Maintain a well-diversified portfolio that is in line with your long term goals and your investment risk tolerance.  Live within your means and maintain an emergency fund of at least four months of expenses.  Invest money that you will need in the short term into safer interest earning investments.   By limiting your stock market investments to long term money, you will be more likely to stay the course and meet your investment goals.

Financial Pitfalls to Avoid

Jane Young, CFP, EA

Jane Young, CFP, EA

Below are some common pitfalls that I have observed over the last seventeen years as a financial planner.  You may have a smoother journey toward reaching your financial goals if you can avoid some of the hazards along the way.

Living Beyond Your Means – Take the time to review your monthly expenses and compare them to your income.   Establish a budget where you spend less than you earn.  A good way to deal with unforeseen financial issues is to always save at least 10% of your income and avoid unnecessary debt.

No Emergency Fund – Everyone should maintain an emergency fund of at least three months of expenses.  This should be higher if you don’t have a lot of job security or your income fluctuates.  Without an emergency fund, large unexpected expenses can quickly throw you into a negative debt spiral.

Too Much Debt – Avoiding debt is a mindset.  There is good debt and bad debt – it may be wise to secure a low interest, tax deductible mortgage when purchasing a home.  This enables you to start building equity and reap the benefit of appreciation as the value of your home increases.  However, it is generally not advisable to finance personal items such as furniture and appliances.  If you can’t pay cash, you should probably wait and save up for the purchase.   Avoid credit cards if you can’t pay off the entire balance at the end of the month.  

Overspending on Vehicles – Financing the purchase of a new vehicle can negatively impact your monthly budget.  I have seen clients and friends take on car payments in excess of their home mortgage.  Vehicles are depreciating assets and they are not a good investment.  When possible you should buy a used vehicle and save your money to purchase your car with cash.  Unless you have a lot of disposable income, minimize your vehicle expenses and buy with functionality in mind.

Putting Kids Through College at the Expense of Retirement – I know you love your kids and you want to give them a good start in life but don’t sacrifice your retirement.  There are many ways to minimize college expenses and finance a college education.  You can’t take out a loan to finance your retirement.

Get Rich Schemes – I’ve heard them all – every few months someone will ask me about some new product or investment scheme that promises low risk, double digit returns.  There is no free lunch, if it sounds too good to be true, it is! 

Emotional Reaction to Movements in Market – Stocks are long term investments, you need to be willing and able to ride out the fluctuations in the market.   Over long periods of time, the stock market has trended upward; however, there will be periods with negative returns.  Avoid the natural tendency to react emotionally to market downturns.  Stay the course and follow your long term plan.

Tips to Acheive Financial Fitness

Jane Young, CFP, EA

Jane Young, CFP, EA


The first step toward financial fitness is to understand your current situation and live within your means. Review your actual expenses on an annual basis and categorize your expenses as necessary or discretionary. Compare your expenses to your income and develop a budget to ensure you are living within your means and saving for the future. The next step is to pay off high interest credit cards and personal debts. Once you have paid off your credit cards, create and maintain an emergency fund equal to about four months of expenses, including expenses for the current month. Your emergency funds should be readily accessible in a checking, savings or money market account.
Now it’s time to look toward the future. Get in the habit of always saving at least 10% to 15% of your gross income. Think about your goals and what you want to accomplish. If you don’t own a home, you may want to save for a down payment. When you purchase a home make sure you can easily make the payments while contributing toward retirement. Generally, your mortgage expense should be at or below 25% of your take home pay.
Contribute money into retirement plans, for which you qualify. Make contributions to your 401k plan, at least up to the employer match and maximize your Roth IRA. If you are self-employed, consider a SEP or a Simple plan. If you have children and want to contribute to their college expenses, consider a 529 college savings plan. Do not contribute so much toward your children’s college fund that you sacrifice your own retirement.
As you save for retirement, be an investor not a trader. Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short term events. Don’t overreact to sensationalistic stories or chase the latest investment trends. Establish a defensive position by maintaining a well-diversified portfolio, custom designed for your unique situation. Slow and steady wins the race!
Don’t invest in anything that you don’t understand or that sounds too good to be true. If you really want to invest in complicated products, read the fine print. Be especially aware of high commissions, fees, and surrender charges. There is no free lunch; if you are being offered above market returns, there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company, not the investor.
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets with a well-diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe, and risk tolerance. Your portfolio should contain a mix of fixed income and stock based investments across a wide variety of companies and industries. Rebalance your portfolio on an annual basis to stay diversified.

Understanding Mutual Fund Fees

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Jane M. Young, CFP, EA

When investing in mutual funds it is important to be aware of the associated fees.  High fees can significantly impact your total investment return.   All mutual funds have operating expenses and some have sales fees, commonly known as a load. When you invest in mutual funds you have a choice between load and no-load funds.   A mutual fund load is basically a commission charged to the investor to compensate the broker or sales person.   As the name implies, no-load funds do not charge a sales fee.

The first type of load fund is an A share fund, where you pay a front end sales charge plus a small annual 12b-1 fee.   A 12b-1 fee is a distribution fee that covers marketing, advertising and distribution costs.  The typical front-end load is around 5%, but can go as high as 8.5%.  Class A shares offer breakpoints that provide you with a discount on the sales load when you purchase larger quantities or commit to making regular purchases.  The 12b-1 fee associated with most A shares is generally about .25% annually.

The second type of load fund is a B share, where you pay an annual fee of around 1% plus a contingent deferred sales charge (CDSC), if you sell before a specified date. The CDSC usually begins with a fee of 5% that gradually decreases over five years.  After five years or so the fund converts to an A share fund.  The actual percentages and timeframes may vary between fund families.  Most mutual fund companies have stopped offering B share funds because they are usually the most expensive option for the investor and the least profitable option for the mutual fund company.

The third type of load fund is a C share that charges a level annual load, usually around 1%.  This is on-going fee that is deducted from the mutual fund assets on an annual basis.

Generally, any given mutual fund can offer more than one share class to investors.  There is no difference in the underlying fund.  The only difference is in the fees and expenses that the investor pays.

All load and no-load mutual funds charge fees associated with the operation of the fund.  The most significant of these expenses is usually the management fee which pays for the actual management of the portfolio.  Other operations related fees may include administrative expenses, transaction fees, custody expenses, legal expenses, transfer agent fees, and 12b-1 fees.

These annual fees are combined and calculated as a percentage of fund assets to arrive at the fund’s expense ratio.  The expense ratio is an annualized fee charged to all shareholders.  The expense ratio includes the fund’s operating expenses, management fees, on-going asset based loads(C shares) and 12b-1 fees.  The expense ratio does not include front-end loads and CDSCs.   According to Morningstar the average mutual fund expense ratio is .75%.

 

 

Stock Can Be a Good Option in Retirement

 

 

 

 

 

 

Jane M. Young

As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments.   One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement.  Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times.  After many years we may leave a traditional career field for some well-deserved rest and relaxation.  However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working.  As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.

Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement.   The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years.   It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection.   A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more.   Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.

We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed.  Money that is needed in the next few years should be safe and readily available.  Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance.  Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.

A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments.  Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down.  However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments.  There may be several good reasons to cover retirement expenses by selling stock.   When the stock market is up it may be wise to harvest some gains or do some rebalancing.  At other times there may be tax benefits to selling stock.

 

Mutual Funds May be Your Best Option

 

 

 

 

 

 

Jane M. Young

Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team.  Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.

One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks.  With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies.  Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks.   You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.

Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio.  Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks.  Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends.   It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies.  Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.

Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks.   Stock mutual funds are a good option for your serious money.  However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.

For diehard stock investors, there are some advantages to investing in individual stocks.  Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds).  With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.

Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account.  When you own an individual stock, capital gains are not recognized until the stock is sold.   In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient.   On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund.  Capital gains must be paid on sales within the mutual fund, before you actually sell the fund.  Mutual funds are not taxable entities, therefore all gains flow through to the end investor.

Financial Words of Wisdom from Widows for Widows

Jane M. Young, CFP, EA


I have met with numerous widows over the last few years to get a better understanding of what they are experiencing and to learn how I can best support and assist them.   Below I have shared some of the most meaningful and consistent messages and comments I heard from these brave women.  I hope this is helpful to both men and women who have recently lost a spouse and family members of someone who has recently lost a spouse.

  • Avoid making major decisions during the first year.  I think I heard this from everyone I spoke with and it is very wise advice.
  • Be obsessively selfish, after the loss of a spouse it is especially important to focus on you and physically take care of yourself.  Later, once you are feeling better you can help others.
  • Grief is very sneaky, one moment you feel fine then it sneaks up on you.  Expect some irrational behavior.
  • Be easy on yourself, it is normal for grief to last three years.  The fog will begin to clear after the first year but things will still be fuzzy for up to three years.  This can be difficult because friends and family expect you to heal more quickly than is realistic.  Everyone grieves differently but three years is very normal.
  • During the first year you feel like you’re operating in a fog, it is easy to forget key dates.  You frequently feel lost and confused and forget how to do things.
  • Grief can consume hours and hours of your day.  It’s hard to focus and get things done.  There is very little energy to learn new things.  It’s normal to feel apathetic.
  • The loss of a spouse is a huge tragedy in your life.  Everyone else seems so focused on themselves. Try not to get upset at others who go on with their own lives as if nothing has happened.  They are busy and they don’t want to open themselves to the pain.
  • It’s very important to take the time to select a trusted team of professionals.  Your team should include an attorney, financial planner and an accountant, if your financial planner does not prepare taxes.
  • Being a new widow can be very scary, it is scary to be alone.  You have a tremendous need for encouragement and acknowledgement that you are making progress.  Try to spend time with positive and supportive friends and family.
  • It’s hard to shift from making plans and setting goals together to making plans and setting goals on your own.  You don’t have to do everything the way you had planned with your spouse.  You need to set your own course and reach for new hopes and dreams.

 

Learn More About Long Term Care Insurance at Our Next Fireside Chat on July 11th

Please join us for lunch, at Pinnacle, for our next Fireside Chat on July 11th at 11:30.  We will discuss Long Term Care Insurance.  As always this is purely educational and free of charge.  Please call Judy at 719-260-9800 to RSVP.  Please let us know if there are any topics that you would like us to discuss at future Fireside Chats.

“What is Modern Retirement and Will You be Ready?” Join us on September 7th for our next Pinnacle Fireside Chat.

Please mark your calendars for our next Pinnacle Financial “Fireside Chat”, to be held on Wednesday, September 7th from 7:30am – 9:00am.

Jane will discuss the characteristics of modern retirement and how to plan for it. She will explore different approaches to retirement and some of the factors to be considered. She will also explain the various plans available to help you save for retirement.

The Fireside Chat sessions are informational only (no sales!) and interactive — a great opportunity to learn new things and ask questions in a relaxed environment. These sessions are open to your family and friends, so please feel free to pass this email along to anyone that you think might be interested in attending.

Please call Judy (719-260-9800) if you would like to attend this session on September 7th, as space is limited.

We hope to see you on September 7th! Coffee and donuts will be served!

You Are Invited to our 1st Fireside Chat of 2011 on Thursday, February 10th

Please join us at Pinnacle Financial Concepts, for our first Fireside Chat of 2011. This is a great opportunity to join us in a very relaxed atmosphere to ask questions, and get prepared for filing your tax return. On Thursday, February 10, from 7:30 to 9:00 a.m. our topic will be “There’s No Such Thing as a Stupid Investment Question” with a bonus (apologies to David Letterman) of “The Top 10 Things to Think About During Tax Season”. We’ll have a basic overview of investment definitions and things to know about investments to spur a discussion on the topic.

Please call 260-9800 x2 to reserve your spot at this chat. There is no charge, but we will limit the number of available seats and schedule an overflow date if needed.   Free coffee and donuts will be served and, as always, this is purely educational, no selling!!