The Social Marginal

Last month I wrote about the basics of getting started with planning for your future sans Social Security if you’re getting started at a young age.  Now I’m going to touch on a couple additional issues that are applicable if you’re getting into the game a bit later in life, primarily targeted at individuals who are between thirty and fifty years old and are just “waking up” to their financial future and their need to plan for it.

Depending on what end of that thirty to fifty year old age range you’re at, this can be a very stressful revelation, and as such, if you are experiencing a great deal of financial stress without an appropriate plan for your future, I highly suggest seeing a professional financial advisor and getting their help to lay out a plan appropriate for where you are in life and what your plans are for the future.  With that said, all of the initial steps I wrote about in my first post on this topic still apply, some just need further elaboration if you’re getting started later in life.

Debt becomes a more important factor.

Yes, the older you are, the closer to retirement you get, and as such, debt becomes a more important factor in your financial plan.  Often when people don’t save until they are over thirty, then they also have bad habits with debt.  If you don’t, more power to you and you can breathe easy as you likely won’t have any issue accruing enough wealth to be able to retire at a reasonable age if you buckle down and start saving now.  However, if you are carrying a load of debt, you need to evaluate the difference between your smart debt and not-so-smart debt and work out a repayment plan to follow closely (there are millions of resources covering how to do this, so I won’t bother regurgitating the topic here).

When you retire, you ideally want no debt going into it as the more debt you have, the more you have to have saved to be able to cover the payments; sort of counterproductive towards saving for your retirement in the first place.  Younger individuals have the luxury of time to repay their debt and then start on their retirement savings, you don’t.  To fully maximize long term growth and benefits of your available retirement programs (Whether than be an IRA, 401k, etc), you’re going to need to be putting something into them consistently if you’re in this age range, you can’t afford not to.  Of course more should be going towards paying off your debt still than towards your retirement, but you at least need to be putting in enough to cover any employer matches on a 401k/IRA program and/or to maximize your personal IRA contribution for the year (which is currently $5,000/year for individuals 49 and below for a Roth IRA).

Basically, be very aware of your debt, get it under control and once you have it under control, start diverting that money you were putting towards your debts towards your retirement instead.

Invest with long term taxability and stability in mind

By this point in your life, you should have a good idea what your tax bracket currently is and what it should be when you are planning on retiring.  That means that you need to start making decisions based on that data.  This is where issues such as a traditional vs. Roth IRA/401k are important (whether you’re going to pay taxes on your principle at your current tax rate or on your dividends when you decide to withdraw them at your tax rate at that point).  A larger percentage of your overall investment portfolio should also start to focus on stable, guaranteed yields rather than higher risk growth oriented stocks/funds; basically you need to start looking more towards bonds, etc at this point.  Attempting to play ‘catch up’ by making high risk investments with what money you do have is not a good idea.

Family matters

If you are over thirty years old, have any relatives or loved ones you care about and don’t have an up-to-date will or testament, you need to get off your ass and create one or have one created for you by an attorney.  Make sure to entrust a copy of it with a trusted friend/family member, or, ever better, your lawyer.  It will relieve a great deal of stress and confusion that could otherwise occur during an already very stressful time for your family.

Don’t give up

As I said earlier, just getting started with your “financial life” when you’re already over thirty, and even more so when you’re getting towards fifty, can be an extremely stressful situation.  If you’re determined, educate yourself, and stick to your guns it is most likely that you will be capable of putting together a plan that will still have you retiring by the time you’re fifty five to sixty years old.  Depending on your debt load, you may have to work until you’re a bit older or take on a second job in the meantime, but in the end it’ll pay off in financial freedom during your retirement years, allowing you to truly enjoy them.  Don’t let yourself be discouraged by the path in front of you, just take one step at a time and do what needs to be done and you’ll find that things will start falling into place more and more often as you proceed towards your goal.

The third, and final part of this series of posts will be discussing financial planning for individuals who are only getting started when they are fifty years or older.  It’s going to be a bit more involved and in my opinion the hardest challenge to tackle, but where there’s a will there’s a way, and one can realistically save enough for their retirement in under ten years if they are dedicated to doing so and are over fifty (some fun new options come into play).  Until then, I wish everyone the best of luck on their financial path.

In the past I reminded everyone to be aware of their financial future, but I didn’t really go into how to actually plan for it.  I’ve dealt with this topic quite a few times personally while informally counseling people of various ages, from 14 to 57 on how to effectively plan for their future, and most importantly educate themselves on the topic.  One of the main points with any financial plan I help to lay out is to rule out Social Security as a viable source of income after 55/59.  Perhaps I’m a cynic for doing so, but regardless of what happens with the Social Security system in the future, it means that if you end up being able to collect on it, it’s just more money above what you already have coming in (hopefully enough to support you already) and will just make life easier and perhaps a bit more fun for you in your retirement years.

So I’m going to do my best in offering my advice for the various age groups over a series of posts to help educate them in how to best plan for their financial future.  The reason I am splitting this into age groups, three for the purpose of these posts, is because while some of the fundamentals stay the same, the process is very different depending on at what age you really become ‘financially aware’ and start planning (though all the previous posts should apply to the later).  In this post I’ll be focusing on the simplest demographic, individuals under thirty who are starting out with their financial lives and are motivated to prepare for their future from the beginning.  I won’t be touching on budgeting in general, as the topic is covered ad nauseum elsewhere and sort of just comes along with financial responsibility.

Step One - Educate Yourself

While you already are beginning to do so by reading this, I am not the best source of information for this and you really need to pick up some books on financial planning so that you understand all of the basics.  The ‘right’ books vary for each individual, and there are millions out there, I suggest simply browsing the isles at your local Barnes & Nobles or on Amazon and finding something that looks right for you and will keep your attention while reading it.  Doing so will teach you important basics such as the different between a Traditional and a Roth IRA, how to calculate the true APY of an investment product given the tax rate you’ll be paying on the dividends, etc.  The point is, even if you plan on using a financial planner to manage your assets, it’s your responsibility in this day and age to be aware of all of the aspects of what they are doing with your money so that you can be aware of how your money is really working for you.

Step Two - Pay off your Debt

Here’s another obvious one, but one that still needs attention.  You need to get rid of all of your irresponsible debt (and yes, I believe there is such a thing as responsible debt, see here) before you are able to start building wealth and preparing for your financial future.  I personally recommend the snowball method, starting by paying off the highest APR debt you have and working your way down, increasing the payments towards the next debt with each previous paid off until you’re done.  Student loan debt is a touchy subject in this area, but one that I do believe in including in your payoff and not carrying them, regardless of the interest rate.

This is likely the single most important aspect of financial responsibility these days.  When you have no revolving or installment debt hanging over your head (other than your mortgage and such, if it applies), you can really start making credit products work in your favor and turn them into an effective, responsible consumer tool.  In the end, your will power and ability to control your spending will dictate the decision of whether or not you should be using them at all.  Educate yourself on the topic, but when doing so, do your best to get multiple viewpoints and decide which mix of methods will work right for yourself (Please don’t blindly rely on Dave Ramsey for this one), there are numerous blogs dedicated to this topic as well, including Master Your Card that can teach you to responsibly utilize your credit.

Step Three - Start Saving

After debts are paid off, people tend to want to jump right into investment vehicles with their excess income and think that they are really ’saving’, they aren’t, they’re investing, just like the name implies.  They share similar attributes in the ability to earn you dividends on your money, but the main issue is that savings should be at least semi-liquid and accessible with no chance at losing value while those qualifications do not apply towards investments.

I suggest opening a minimum of two High Yield Savings accounts (I use and recommend ING Direct, but basically by high yield, I am not referring to the 0.15 APY savings account attached to your checking account at your local bank), an emergency fund as well as a discretionary spending fund.  The first account to build up should be your emergency fund, which I recommend being equal to a minimum of three to six months of your total monthly take home income, this account should only be accessed in the case of an emergency and only when your discretionary savings account is tapped out  (ie, you lose your job, you have a health emergency, etc).  After you’ve finished building up your emergency fund, you can move on in your financial plan.  The second account, the discretionary spending account, should be used to sock away all savings and excess money not to be immediately paid out in your checking account, this is the account that the money for that spiffy new television should be coming out of, don’t be scared to have a lot of activity in it (though hopefully the majority of it is incoming activity).  A discretionary savings account, if you really do sock away your excess money into it, also helps to curb impulse buying and encourages responsible consumer behavior.

Step Four - Invest, Invest, Invest

Now for the fun part, and the part you need to really educate yourself on before you start, investments.  Once you have an emergency fund built up, while a portion of your excess income should be going into your discretionary savings account, I recommend the majority of it be put into investment vehicles for long term growth.  Open a brokerage account so that a portion of your investments are somewhat liquid and you can have some ‘fun’ with them, as well as an IRA to prepare for your retirement and do your best to max out your contribution every year (the choice between a traditional and a Roth is a personal one and you should educate yourself on the difference and decide which is best for you).  If your employer offers a 401k or similar retirement investment plan that makes sense, definitely take advantage of it, especially up to any amount they will match your contribution (if any).

Keep a watchful eye on all of your investments, don’t be afraid to redirect (or to weather a storm, on that same thought) and adequately diversify and you’ll see your wealth grow exponentially over the years.  Investing can be a lot of fun and I really do recommend you manage your own portfolio, providing you have educated yourself properly; but if you don’t have the time then you shouldn’t be afraid to find a licensed individual to handle them for you, just make sure you find someone that’s right for you and keep them accountable, making sure that they are focused on your goals.

Wrapping it up and Keeping it up

If you follow the above steps, you’ll have a good start on preparing for your financial future.  The main issue at this point is to keep up the motivation in saving/investing, staying out of debt, and controlling your spending.  If you have a spouse, share the financial planning with them and include them in it so that you can keep each other accountable.  Remember that this is only a starting point and ultimately you should adapt a plan that is specifically appropriate for your situation.  In the end, the only person you should rely on for your financial future is yourself and you should be confident in providing for it if you budget properly and follow the above steps, regardless of your income.

Good luck on building your financial future, and if you’re in the thirty to fifty year old demographic, I’ll be addressing some unique issues regarding your options in the next post in this series.