Words of Wisdom from Planners Around the Country

Jane Young, CFP, EA

Jane Young, CFP, EA

While recently attending the national conference of the Alliance of Comprehensive Planners, I interviewed dozens of fee-only, Certified Financial Planners.  I asked them to share the most important piece of advice that they can give to their clients.  The answers were not exciting or complicated but practical, common sense recommendations that are useful to most everyone.   The most common piece of advice, by an overwhelming margin, was to save more and spend less.  Below are the top ten most important financial steps you should take according to some of the finest financial planners in the industry.

  1. Live Below Your Means – Establish good spending habits early. Monitor your expenses for about three months and create a realistic spending plan that you can stick with.  Make intentional decisions to keep your spending well below your income and always maintain an emergency fund.
  2. Save at Least 10% of your Gross Income – Start saving as early as possible. Everyone should save at least 10% of their income.  If you are getting started later you may need to save closer to 15% to 20% of your income
  3. Look at the Big Picture – Take an integrated approach to your finances. Your financial life is a big puzzle with a lot of interlocking pieces.   Don’t make decisions in isolation.  Create a financial plan that serves as a roadmap to integrate all areas of your financial life including investments, taxes, insurance, retirement planning and estate planning.
  4. Be True to Yourself – Live, spend, and invest in accordance to your values and goals, not to impress or compete with others.
  5. Create a Realistic Investment Plan – Create a diversified investment plan that you will stick with during significant market fluctuations. Your portfolio needs to support your investment time horizon and the level of risk that you are comfortable with.
  6. Hire a Good Financial Planner – Managing your finances can be more complicated and time consuming than you realize. A financial planner can help you integrate all aspects of your financial life and can provide an objective perspective on your situation.
  7. Don’t Invest in Complex Insurance and Investment Products – Avoid insurance and investment vehicles that require a team of attorneys to understand. The words in small print are probably not in your best interest.
  8. Maximize Contributions to your 401k and Roth IRA – Fully utilize tax advantaged retirement plans and take advantage of an employer match where available.
  9. Don’t Let Family Members Derail Your Financial Plan – Don’t sabotage your financial security by paying for all of your child’s college education or by supporting adult children, parents, or siblings. You need to help yourself before you can be of assistance to others.
  10. Leverage Your Real Estate – Don’t be in a hurry to pay off a low interest mortgage on your personal residence. You can benefit from appreciation on your home with as little as 10% to 20% down.

The Secret to Financial Freedom is Living below Your Means

Jane Young, CFP, EA

Jane Young, CFP, EA

Over the years I have observed that a comfortable retirement and financial security can best be achieved with reasonable lifestyle choices.  One of the biggest detriments toward reaching financial independence is spending beyond your means and spending on things you don’t really need.  You don’t necessarily need millions of dollars to retire comfortably but you need to follow a lifestyle that minimizes your living expenses while allowing you to indulge on things or experiences that are really important to you.  Good financial planning requires a balance between current expenses and saving for the future. 

Many Americans have a habit of systematically increasing expenses in lock step with salary increases.  Along with a big raise or promotion comes the inclination to buy a bigger house or a new car.  As we progress through our careers, earning a higher income, we continually take on more financial obligations becoming hand-cuffed to our jobs and our bills.  By increasing your lifestyle every time your income increases you can get caught up on an endless treadmill, trapped with a lot of debt for a house and cars that may be more than you really need.  I’m all for enjoying some of the benefits that come from all your hard work but it’s prudent to spend below your income.   Avoid the temptation to live an extravagant lifestyle and compete with your neighbors, colleagues and friends.  Instead, take pride in following a solid financial plan by saving for the future to achieve greater financial freedom.

As a rule of thumb, save or invest at least 10 – 20% of your income and maintain a buffer of 4 to 6 months of expenses to cover emergencies or a change in your ability to earn a living.  Try to keep your housing expenses below 28% of your gross income; this includes your mortgage payment, insurance and taxes.  Avoid systematically increasing your expenses.  Give yourself some breathing room in case you want or need to make a career change.  Save for the future and keep your options open.  As your income rises automatically put a larger portion into savings and retirement.

To keep expenses under control, examine what is important to you and set some priorities.  You have worked hard and you deserve some of the nice things in life but spend your money on things or experiences that genuinely make you happy.   If you want a really nice house you may decide to spend less on vehicles, vacations and clothing.  If you love taking extravagant vacations consider buying a smaller home and less expensive used vehicles.  Never buy on impulse – always look for ways to save money on the purchase of things you decide are important to you.  

Prioritize your spending to live below your means, save for the future and focus on what truly brings you joy.