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How To Make Financial Decisions When You Aren’t A Billionaire And You Aren’t Living Paycheck To Paycheck

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How To Make Financial Decisions When You Aren’t A Billionaire And You Aren’t Living Paycheck To Paycheck


Personal finance is hard. Investments, mortgages, taxes, insurance—there are so many things to consider. Once you open your first basic checking savings account after graduation, things can get infinitely more complicated.

Personal financial management weighs heavily on many Americans, putting them under severe stress. The American Psychological Association surveys Americans’ stress levels every year, and this year’s results found that financial stress is at its highest level since 2015.

Most financial planning clients (71%) report experiencing financial anxiety at least half the time (Source: MQ Research Alliance and Kansas State University Personal Financial Planning Program.)

All income levels feel these pressures. I saw this tweet a while ago, which perfectly describes the problem:

It’s the headspace most Americans have: You’re happy to have options, but those options can be overwhelming. Also, getting a full picture of the situation is crucial if you want to be confident that you will achieve your financial goals.

You may already know the basics of budgeting or have a setback when getting your first mortgage, but would you say you have a solid understanding of how to manage your money so that you can meet all your needs confidently and effectively short- and long-term needs? financial goals?

Where to go for financial advice

For many young families, couples and those making major financial decisions for the first time, a trusted mentor is the first place to seek advice. This is usually a parent or close friend.

Asking family and friends what to do with your finances is that unless your parents are certified financial planners, they may not be qualified to give you advice even if you think they are successful. Also, your friends and family will most likely not have a complete picture of your financial situation.

Most Americans are uncomfortable with complete financial transparency, and therefore don’t take the full picture into account when offering any advice.

Another favorite place to seek financial advice? the Internet. As a certified financial planner turned financial blogger, I provide a wealth of financial advice online. My goal is always to start a conversation because talking and thinking about our finances is the first step.

That said, unless I have a one-on-one meeting with you, the advice isn’t specifically tailored to you. Personal finance articles have to be broad enough to speak to anyone and everyone.

A third option is to consult a financial advisor or financial planner, however, for many, this option is too expensive. Many companies charge more than 1% of assets under management (AUM) – which can end up costing you thousands of dollars over time due to the nature of compound growth.

Also, financial planners usually have minimum requirements for working with them. This could be as high as a million dollars or more. Logically, the best financial planners are those who can be picky and establish high minimums.

For some people, especially those with complex financial situations, a financial planner or team of financial experts can provide benefits that far exceed their costs. “In the ultra-high net worth sector, sound financial strategies designed to weather financial and market cycles, grow and preserve wealth for future generations take a significant amount of time to develop and execute – requiring close coordination with tax, legal, accounting and investment advisors.

In many cases, the team needs to be formed first and then managed,” said Thomas Callahan, CFP and Director, Boston Family Advisors LLC. “The process requires patience, care and conviction. There are many potential points of failure, which is why many lack a financial strategy or the strategy is not ideal. ”

Finally, many tech companies have recognized the need for personal finance tools. New software, some even free, can help you create a financial plan. The challenge is that many people will give you a map that you don’t know how to read. The plan is just that, the plan.

If you don’t understand the roadmap or don’t know how to act, your situation will never change.

Getting Started: Learn the basics.

Before delving into mature financial planning, I used to work with my clients to make sure they understood these five key principles:

Invest early and often.

Investing can be difficult to develop into a habit, especially with rising news stories about inflation and the cost of living almost everywhere. However, thanks to the power of compound interest, even a small early investment can pay off hugely.

Time in the market trumps everything.

The sooner you can put your hard-earned money into an investment account and work for you, the better. Is there a pay raise? Congratulations!

Give yourself something modest in the short term, then deposit most of the extra dollars from each paycheck.

If your employer has a 401(k) match, at least contribute to the match.

This is free money!

Don’t worry about market timing.

Trying to time the market is foolish at best and financially damaging at worst. Humans are emotional investors. It is almost impossible for us to buy low and sell high. Instead, aim to buy “young” and sell “old.”

If you can spend time in the market, you don’t have to worry about market timing.

Make sure your money is invested in the market.

Money designed to make money, such as your retirement savings, should not be held in savings or money market accounts. If you do, your money will lose value because it can’t keep up with inflation.

Unfortunately, surprisingly, a 401(k) will invest in a money market account rather than the market, so make sure you invest your assets where you want to.

Pay off your high-interest debt.

While the definition of “high-interest debt” varies, it’s not advisable to consider anything like credit card debt or personal loans. If you’re saddled with high-interest debt, you’re spending your money on interest and fees.

Beyond the Basics: Next Level Financial Planning

There are things everyone should do, and then there are a lot of decisions that come down to personal factors and preferences, like how much you can save and spend, your risk tolerance and your goals.

To start drawing your financial plan, with or without support, you need to be familiar with these concepts.

Balance short- and long-term goals with retirement planning.

Retirement isn’t your only financial goal. College funding, mortgages, and even purchases like a car require planning. A good financial strategy balances your short-term and long-term goals.

For example, if you want to buy a home within the next two years, you should probably reduce your savings for retirement during that time. Or, if you want to retire before age 59, you’ll need to save outside of a 401(k) because those funds are unavailable and penalty-free until age 59.5.

Invest in a diversified portfolio.

Gone are the days of researching the market and picking stocks. Exchange-traded funds (ETFs) are an excellent way to diversify at a lower cost than other investment vehicles, including mutual funds.

Save on college costs in 529.

529s are just one example of tax-advantaged accounts, but they are an important one. University is expensive. You know it, your kids know it, and the government knows it. You want to save money on your child’s education in a smart way with whatever tools you have. That being said, be careful not to over-fund the account, as funds can only be used for specific expenses.

Develop a tax strategy.

All in all, everyone likes to save money, especially when it comes to taxes. Tax-advantaged accounts, not just 529s, are great resources and should totally be used.

Set aside an emergency fund.

Not all money should be put into an investment account. You should also have cash savings at your disposal when unplanned emergency expenses arise – they will.

A good financial plan is a holistic plan

Good financial planning is not just about retirement, it should consider the number and timing of all your goals and see how they interact. For example, aggressively paying off your mortgage could leave you in a cash-starved situation.

Then, if the worst happens — say you lose your job and can’t pay your mortgage any more — you don’t have the ability to get that cash back without selling your home. You can mitigate this risk by looking at your entire financial situation.

Additionally, your plan should cover your entire financial portfolio, including your mortgage, taxes, and insurance. This is where personalization and customization are key.

You may be buying a home, saving for retirement, considering college for your kids—all of these factors play a role in deciding how best to save and invest.

Understanding how these factors interact has traditionally been difficult without the help of a financial planner, but the advent of new tools allows everyone to understand their impact.

“We easily understand the trade-offs of each financial decision,” Lucky co-founder Seth Burstein said. “We look at the main factors that affect your financial situation – such as your savings rate, mortgage, tax-advantaged account and brokerage account – and how they interact to affect your chances of reaching your goals.”

Conclusion: So where should I go for financial advice?

To recap, personal finance is hard, but unless they’re a personal finance expert, it’s not a good idea to turn to friends and family. The Internet has a huge amount of resources. Remember to check that they are written by someone qualified to advise and keep the target audience in mind.

I like Ericka Young of Tailor-Made Budgets for general personal finance information, and of course I provide extensive information on various personal finance topics on my website (GoodFinancialCents.com).

If you’re interested in investing in a financial planner, I recommend checking their credentials and asking a few key questions before getting started.

How do you get paid? You should know how your financial professionals are paid and if they earn commissions from the investments they sell. Are you a trustee? A financial advisor as a trustee must put your interests first when developing a financial plan. Do you hold any certificates? Does your advisor hold the Certified Financial Planner (CFP) designation or other professional certification such as a Certified Public Accountant (CPA) or Chartered Financial Analyst (CFA CFA)? Professional certification can show that financial advisors have gone the extra mile to remain educated and informed in their area of ​​expertise. Do you have expertise? What services do you provide? Remember, you want someone to have a complete picture of your financial situation. Some financial planners may only focus on retirement planning, while others focus on minimizing taxes. Make sure to work with professionals who specialize in working with people just like you.

Fintech is changing rapidly and there are some great options. Betterment is good for asset management, and some of their premium plans allow you to speak to a financial planner. Personal Capital is another powerful option that provides a complete picture of your complete financial situation.

Another option, fortunately, looks at your entire financial portfolio (including savings, mortgages, and taxes) to provide step-by-step guidance on how to achieve your goals.

That said, you can choose based on your retirement planning needs.

While financial planning can feel complicated and overwhelming at first, the most important thing is to take the first step. The route you take will always change over time as you grow in maturity and comfort.

So pick an option and get started right away.

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