15 Feb 10 Helpful Financial Planning Tips
At T&T Capital Management, we have clients of all ages with varying financial circumstances. There is no cookie-cutter financial plan that works for everybody, but I did think it would be helpful to create a short list of tips that I’ve learned over the years:
1. The sooner you begin investing, the better. Nothing is more powerful financially than the benefits of compound interest. As we live longer lives than our predecessors, the opportunity cost of waiting to get your money into investments is greater than it has ever been. If you have a child, we can set you up with college investment accounts where their investment gains grow tax free. Everybody should take advantage of the tax benefits of retirement accounts, but since your contributions are limited, the earlier you start the more impactful it will be.
2. The biggest difference between retirees that have enough money at retirement and those that don’t, is definitely not income earned during their careers. Many of the most well-prepared retiree clients that we have were incredibly diligent about investing regularly via monthly additions to their accounts, or contributions to 401k programs. I know that it is a major challenge to raise a family and pay for all the costs of living, but if you can find that extra $250 a month or so to add to your account on a recurring basis, the benefits are extraordinary. You are able to keep buying into stocks on a consistent basis, and because we use a value investing methodology, you can rest assured that you won’t be buying things in excess of intrinsic value. If you really become goal-oriented about how much you save and invest, it becomes fun to see your life become less cluttered with garbage you don’t need. I’ve seen it in my own life where I’m very careful about what I spend money on. If I can save an extra $10-20 a month by using another internet provider, I’ll gladly do it as I know that money adds up over time. If you don’t need cable, cut the cord and enjoy the savings. My biggest regret was not being more disciplined in my 20’s to really focus on saving instead of spending so much on frivolous things. It is never too late to continue improving in your spending and investment discipline.
3. Buying used cars can save you a tremendous amount of money on very large transactions. Many of us started off with a used car when we first started driving and were fine with it, but then as we accumulate more assets we feel compelled to buy a new one. As soon as that car goes off the lot, it gets depreciated by about 12%. Often people can save a considerable amount of money by buying the car they want that is just a year or two old. While that might not be as attractive as driving that shiny new car off of the lot, it is a heck of a lot better than scrambling to pay your bills in retirement. Nobody cares if your car was new or old when you bought it except maybe you.
4. Avoid maintaining credit card balances. This is a huge issue for people all over the country. Credit card interest rates are often between 18-23%. That is a rate of return that compares favorably to Warren Buffett’s career investment results, so it is a great deal for the banks but a bad one for you. Make it a priority to pay off any balances as soon as is possible. If this is an issue, give me a call and we can make a plan to deal with it, but large credit card balances create a path to financial hell. Personally, I pay for just about everything on a Citi Costco card with good rewards, but I use automatic payments so I’m never running a balance. The rewards definitely outweigh the annual fees, particularly if you shop at Costco anyways.
5. Educate your kids on student loans. When I was preparing for college, I knew that I wasn’t going to be able to afford an out of state school and my parents weren’t interested in paying for them or any school to be honest. I took loans out and went to UC Santa Barbara, which was in-state and was a very great choice for me. I knew absolutely nothing about student loans, so I just signed whatever they handed me. Many kids are growing up and they think as long as something can be financed, that it will not be a problem paying it off as they get into the workforce. They will go to an out-of-state school and incur $200K in debt, on a career where they realistically won’t be able to pay that off for 30 years or so, if ever. That is not prudent financially and it is a huge problem in America today. Interest rates on student loans are in the high single-digits and that can add up real fast. As graduates realize that life is a struggle in combination with a massive amount of debt before they even have an income, it can become very disheartening. Educate your kids and be frank with them. If staying in state works and is financially feasible, there is nothing wrong with that. They might begrudge you for it initially, but in the long-term, they will thank you.
6. Don’t payoff your mortgage too early. Believe me, I really dislike having any debt whatsoever but there is a difference between types of debt. Mortgage financing in today’s era of record-low interest rates is extremely cheap capital. If you are paying 4% on a 30-year mortgage, you can have that money invested in the market where historically returns have been far greater. That creates a massive wealth effect for you. In addition, mortgage interest is tax deductible, which reduces your true interest cost. It is admirable when people strive to be debt-free by the time they are 45 or whatever the goal may be, but it is not necessarily financially prudent. Everyone’s situation is different but when you do the math, even assuming conservative assumptions, it is rarely a good move to pay off the mortgage early.
7. Many retirees find themselves having to work till later in life than they initially anticipated, so if you are in your 40’s or 50’s and feel like you are behind the curve, it is good to plan accordingly. Perhaps you have a job that you can easily stay at until you are 70 instead of quitting at 60 or 65. Maybe it means planning to work part time upon retirement from your full career to generate additional income. That might not sound attractive to you if you are younger, but we find that a lot of retirees seek additional activity after the first year or so of being retired. It is vital to keep your mind engaged in things that interest you and this is a great way to do it.
8. Be patient with your investments. By definition, investing is a long-term endeavor. When you buy a security, you generally should be willing to hold for 3-5 years to let the investment play out. That is how the big money is made and it is why the most successful investors are those that are willing to take a long-term approach. Investing is best when it is most business-like. If you own a successful jewelry store, you don’t sell it just because the stock market dropped 15% in 2 weeks. Why would you sell your investments just because of a short-term change in prices? Create an investment plan or use a manager that you trust and let that process unfold. Don’t panic when things look bad in markets and don’t get too excited just because the market has been going up. Stay disciplined and measured. You usually want to do just about the opposite of what the consensus is telling you to do. Buy when people think you are crazy and sell when everyone thinks they can print money. Since we deal with individual securities instead of buying indexes or funds, this is really in essence what we are doing, as there are always certain out of favor areas of the market that we can take advantage of. When you combine this value discipline with aggressive savings and dollar-cost averaging, we are very confident you can meet your financial goals. Remember that no investor outperforms every year. The goal is to maximize risk-adjusted returns over the long-term and avoid permanent losses of capital.
9. Be careful with real estate and insurance. It is not uncommon to want to invest in rental properties and become a mini real estate tycoon. There are some people that do this very well, but most don’t. When you stack on layers of debt, you really are making a huge leveraged bet on the real estate, which has generally done worse than the overall stock market. Fortunes can be made with leverage but is also the easiest way to blow yourself up financially. Rental properties often require a lot more work than newbie landlords realize. Also, you should compare the return potential on real estate versus that of what can be earned through publicly traded real estate vehicles such as REITS. Just about everybody needs life insurance but you really need to work with somebody you trust and compare the pros and cons. Whole life policies have benefits in that you are guaranteed insurance, but they are very expensive, so it can create a significant opportunity cost. Term insurance is cheap but as you get older, your rates are sure to go up, or you may not even be insurable. At TTCM, we can be a great resource to help you go over the best options as a 3rd party resource that doesn’t sell insurance. We also can introduce you with insurance agents that we trust that can help you meet any insurance needs you may have, if you are looking for someone that you can trust in that area.
10. Don’t go too crazy hoarding cash for emergency reserves. We believe it is prudent to keep 6 months to a maximum of 1-year of expenses as a cash reserve if possible. Going too far beyond that is usually counterproductive. Nearly all of our investments are highly liquid, so in an emergency we can generate cash, but it might cost you potential investment returns of course. If you keep $100K in savings earning 1%, and that $100K could have been invested in the market at a 10% return, the opportunity cost is $9K. By year-5, the opportunity cost is roughly $42K in this simplistic example.