We were joined by Jennifer Blank, financial adviser from Ameriprise Financial on how best to manage your personal finances:
4 Cornerstones of Finances:
- Cash & liabilities
- Taxes and Retirement Accounts
Cash & liabilities:
- This is the balance between spending now and saving for the future.
- Finance advisers suggest having 3-6 months of reserve cash flow
- If you have specific goals in mind, then it may be best to talk to a financial adviser
- Make smart decisions i.e. no more then 30-35% on housing.
Tactics for saving money and minimizing your discretion spending:
This includes: lunch and/or coffee spending, non essential clothes, groceries etc.
Cash in pocket is a useful tactic you can use where you give yourself a certain amount of money in cash to spend on discretionary items.
Credit cards: minimize your spending: don’t overspend and pay off the balance every month. It is never good to have a balance IF you are paying interest on it.
How many is too many credit cards? Over time its okay to open new cards. Credit:Debit ratio is very important when determining your credit rating. Building a good credit history is critical to building a good credit rating. A good sign is if you can continue to pay off higher amounts of a credit line.
NEVER close a credit line as this can negatively impact your credit rating, especially if this has been your dominant credit line.
Is it worth paying off loans? It depends on the interest, if its less than 8%, then save the money or use it for other things. If higher, then pay it off.
Should you pay off a credit card preferential to saving? Depends on your interest rate… If it is high then you would be better of paying them off.
Do you have policies in place should something happen to you or your livelihood? You need to plan for the unexpected. Use your workplace benefits if you have any and consider long term disability protection.
Taxes and Retirement Accounts
The Tax control triangle
- After Tax – things you get taxed on: savings, CD, stocks, bonds – can earn interest and dividends and capital gains. Very fluid but high tax rate
- Before tax: IRA, 401k, 403b – tax deferred but fully taxable once you use them and get taxed at ordinary income rates
- After tax (completely tax free): Roth IRA (retirement fund), Roth 401k, 529 (education fund).
401K: Can contribute up to 18,000 a year, a Roth IRA you can only contribute $5500.
How to manage old 401k or 403b? You can do a rollover into a qualified plan or traditional IRA.
Power of compounding interest: Rule of 72:
Divide 72 by your rate of return (ROR) annually and this is the number of years it takes your number to double without adding extra. With a rate of 7.2%, your rate would double in 10 years.
i.e. with a start of $100,000 –
in 10 years, you have $200,000, 20 years $400,000 … 40 years: $1.6 million!!
Thus – it is better to have this in a Roth IRA/Roth 401k to minimize losses to taxes.
Good thing about Roth IRA – after 5 years you can remove the base amount out without penalty or tax repercussions and no limitations on the use. Always nice to be liquid and have assets in the smartest place to hold them.
Are there any restrictions in starting a Roth? You need to make under ~$115,000 and generally only have a standard custodial annual fee, but this depends on the financial institution.
When should I start saving? The sooner the better. Yesterday!
Generally not used to make a lot of money… but because inflation eats into your capital.
Why do people not invest? Most people are afraid of principle risk however the market has never been in the negative for more than a 7 year period…
Everyone’s risk tolerance will be different – so this will influence what you invest in.
Over time: Your risk decreases on your loss of principle whereas your loss of purchasing increases due to inflation. It all depends on your time horizon – if you are in for the long haul, stocks may be a better option rather then cash. Stocks will always fluctuate so you need to practice behavioral economics and not freak out if the market moves a lot as this is normal.
Contact us if you would like Jennifer’s details! She is happy to chat to people about their personal financial situation!
– Tufts PDA