The Top Five Financial Tips From VestCred’s Senior Wealth Expert
It’s no mystery that we’re living in uncertain times. With COVID-19 and its impacts changing the economic outlook, almost daily, taking care of your financial health is a priority. That’s why we asked our Senior Wealth Expert, Dave Wasserman, to give us his most crucial financial tips.
TIP 1 – Make Saving A Habit
Not saving and saving are both habits! If you’re not in the habit of doing one, you are doing the other, whether consciously or not. It’s that simple. There’s good news, though. Creating a “saving” habit is simple and much easier than you think. There are two parts to saving:
- Proving to yourself that you can
- Doing it
Psychologists tell us that certain tricks help us create any habit. First, promise someone else you’re going to do it and have that person ask you how it’s going. It’s much easier to break a promise to ourselves than one we make to someone else. Second, start small… really small. Success builds on success. Maybe the amount should be a dollar a day, or a dollar a week. When developing a new “saving” habit, the amount you choose matters much less than your follow-through. Here are two links to a “habit” coaching master: one quick and one more in-depth.
Tip 2 – Pay Yourself First
We all have bills to pay! We need to keep a roof over our heads, the lights on, the cell phone working, and to eat. These and other things are “HAVE TO” expenses. We get it. And we hear you loud and clear – “You can’t save because there’s no money left.” If at the beginning of every month, $5 were magically removed from your bank account, somehow, all of those bills would still get paid, and you would even do all of the activities you usually would. Why? Because for the most part, we all tend to spend what we have. If we “magically” remove a small amount upfront from the accounts we use to spend on everything, we “pay” ourselves first. Everyone can do it, although the amount you choose will depend on your situation.
There are three tricks:
- Automat3 the process (to create that “magic” disappearing act) so we can’t sabotage it.
- Choose an initial amount so small we won’t notice that it’s gone.
- Send the money somewhere we can access it if we need to, but with a small delay (maybe 1 to 3 days).
That delay is just enough to overcome impulse buying.
How do we do it? Open up a free checking or saving account with an online bank (no fees!). Then set up an auto-pay at your current bank from your checking account to the new account. Finally, in small increments, over time, increase the amount you “magically” take out of your account until you notice a change in your lifestyle. You’ll be shocked at how much you can save when you pay yourself first. At the end of every three months, if you have not tapped into the “pay-yourself-first” account, transfer the money into longer-term savings for higher return rates.
Here’s a resource to find an online bank.
TIP 3 – Create A One-Month Emergency Fund
We’ve all heard this a thousand times – we need an emergency fund. But saving is hard! And how much do you need? Conventional wisdom says we should have three months of expenses saved to handle emergencies. Where did this number come from? No one really knows. Does empirical evidence back it? Not that we know of. But two economists, Jorge Sabat, and Emily Gallagher teamed up to give us an answer. Their study tells us that $2,500 should be in our emergency fund based on empirical evidence. This amount will let you handle the most unexpected expenses that come your way according to the research.
For many, this will mean they need only one month of income in their emergency fund, which is more achievable. Of course, having $2,500 in a “rainy day” fund won’t cover all things that come your way. And, depending on your personal situation, an adequate fund may require a higher amount.
Over time, you’ll want to increase the amount in your emergency fund to keep up with inflation and increases in the cost of living. But for now, to get started, don’t worry about those things. Focus on saving $2,500 in your emergency fund to keep yourself safe and create peace of mind. How do you save $2,500? We outline a process that we call “Pay Yourself First’, which makes it possible for virtually everyone to save over time. It’s essential to start, no matter how long it takes you to achieve your goal. Rome wasn’t built in a day, so cut yourself some slack and resolve to begin your emergency fund.
One piece of advice: keep your emergency fund in a separate savings account at the same bank where you keep your checking account, but a savings account with NO check writing privileges and NO debit card. You don’t want to spend this money on impulse buying accidentally.
TIP 4 – Don’t Tap Retirement Savings
Saving for retirement is essential. And hard. We all have lots of demands on limited resources. So tapping into retirement savings when it’s already hard to save hurts our future selves and should only be done as a last resort. Do not think of your retirement account as your emergency fund. Instead, pretend it doesn’t exist. If you don’t have an actual emergency fund, you need to start one. Until your emergency fund is where it needs to be, get creative about finding ways around drawing down your retirement savings for anything other than retirement.
Remember, when you get to retirement, if you haven’t saved enough one of two things will happen: (1) your lifestyle will suffer or (2) you will run out of money. And who will you turn to if either one of these happens? What does “getting creative mean?” Sometimes, it means asking if you can extend payments rather than pay a bill in full upfront. Medical providers often accept such arrangements, and you may be surprised by how many others will do so if you ask. Embarrassing? Perhaps, but many people are understanding and willing to help when asked.
Why is it so important to leave your retirement savings alone? Compound interest. When you invest for retirement, your savings grows in two ways. First, the account grows every time you add to it. But, more importantly, the interest earned on each of your contributions also grows. You earn interest on your interest. Then, you earn interest on the growth of your interest again. You earn interest on all previous interest earned! And this keeps happening. This is compounding. And it has a powerful effect. It turns out that beginning to save earlier matters more than saving a larger amount later and will lead to having much more in retirement.
See chart 2 in an article by Business Insider to visualize this easily. To fully benefit from compounding, you must leave the money in your retirement account alone. Create a separate emergency fund and treat your retirement account as if it did not exist.
TIP 5 – Maximize After-Tax Income
Financial advisors focus on telling us to maximize how much we save for retirement. In other words, to maximize our accumulation before retirement. Intuitively, this makes sense. The more we accumulate, the more we’ll have in retirement, and the better off we’ll be. So our advisors and we use “accumulation” as the measuring stick to compare and evaluate different retirement plans. But, as it turns out, this is not the best measuring stick. How much we accumulate before retirement matters less than how much we get to keep after taxes. What we keep after-tax is what we live on – it’s what determines our lifestyle in retirement. If we can somehow accumulate more and save more, that’s the best of all possible worlds. But of the two, KEEPING MORE, matters more. If you accumulate less but have more after-tax retirement income, you’ll be better off in retirement. So, evaluating retirement plans based on which one is more likely to maximize AFTER-TAX retirement income may be the better approach. As you evaluate how to invest in retirement savings, consider which plans will maximize your retirement income. Ideally, you should focus on this at the beginning of your career as you start saving for retirement. No matter where you are in relation to retirement, adopting this approach will improve your retirement income.
Financial advisors focus on telling us to maximize how much we save for retirement. In other words, to maximize our accumulation before retirement. Intuitively, this makes sense. The more we accumulate, the more we’ll have in retirement, and the better off we’ll be. So our advisors and we use “accumulation” as the measuring stick to compare and evaluate different retirement plans. But, as it turns out, this is not the best measuring stick. How much we accumulate before retirement matters less than how much we get to keep after taxes. What we keep after-tax is what we live on – it’s what determines our lifestyle in retirement. If we can somehow accumulate more and keep more, that’s the best of all possible worlds. But of the two, KEEPING MORE, matters more. If you accumulate less but have more after-tax retirement income, you’ll be better off in retirement. So, evaluating retirement plans based on which one is more likely to maximize AFTER-TAX retirement income may be the better approach. As you evaluate how to invest for retirement, consider which plans will maximize your after-tax retirement income. Ideally, you should focus on this at the beginning of your career as you start saving for retirement. No matter where you are concerning retirement, adopting this approach will improve your retirement income.
