Build Strong Financial Habits - CJ Miller, CFP®, RMA®
When CJ got his first job after graduating college, having steady income was a huge sense of relief. It also led to the biggest financial lesson he has learned, which is to build strong money habits early. After growing up paycheck-to-paycheck and supporting himself through college, having disposable income was foreign to him. His primary method of budgeting in the past had been to make sure his checking account was never overdrawn. Unfortunately, when he started making more than he needed to live on, this method did not develop great savings or budgeting habits.
A few months into his working career, he found himself spending most his income on restaurants, bars, weekend trips, and an assortment of other items he didn’t need. Although it was a lot of fun in the short run, CJ was in for a rude awakening 6 months after graduating when he had to start making monthly student loan payments. That bill quickly became the second biggest in his monthly budget, and he had no idea where he could cut spending because he wasn’t tracking where his money was going.
After several months of financial helplessness, he realized he had to change his habits. Working as a financial planner, CJ preached to his clients to make a budget, but had not ever made one himself. He started there, tracking in Excel every dollar he spent by category and sub-category. Secondly, he began saving 10% of his net income each paycheck in addition to his 401(k) contributions. Staying disciplined and living by these habits quickly eliminated his financial stress, but a lot of money was wasted by not starting sooner. Building strong spending/savings habits early is integral to building wealth, and the earlier you start, the easier it is. Just because you can spend money doesn’t mean you should spend money.
Understand the Trade-Off Between Investment Returns and Interest Rates - Joseph Stemmle, CFP®
In his senior year of high school, Joey purchased a brand-new car for his part-time job and to get around town with friends. The loan was at 2%, his monthly payment was about $300 per month, and it was a 5-year loan. He began putting almost every extra dollar he had towards paying down his auto loan since he was taught at an early age that debt should be paid down as soon as possible. Most months, he was putting at least double the amount towards the auto loan.
Entering the first semester of junior year, Joey learned an important lesson on time value of money (TMV) while sitting in his Financial Management class at Virginia Commonwealth University (VCU). Time Value of Money is the concept that a dollar today is worth more than the same dollar in the future due to the potential earning capacity. His professor let the class know that a good rule of thumb to consider is what your interest rate is vs. the potential rate of return in the market. With a long enough time horizon for your investment and a low enough interest rate, the professor mentioned you could be better suited investing your money for other goals.
While paying down the car aggressively, Joey was also putting $100 per month towards a Roth IRA. Looking back at that 5-year loan period, the S&P 500 returned 26.46% in 2009, 15.0% in 2010, 2.11% in 2011, 16.00% in 2012 and 32.39% in 2013. Hindsight being 20/20, he would have been better off investing his extra cash, instead of putting it towards the loan at 2%. In other words, his “return” on his money was locked in at 2%.
Fast forward a few years after college and Joey purchased his first home with a 30-year mortgage in the low 3% range. Because he learned that important lesson in his class, instead of making extra payments towards his mortgage, he is investing more into his 401(k), Roth IRA, and a Health Savings Account to help accomplish other personal finance goals. His assumption is that investing would provide a higher rate of return than the low 3% over a 30-year period. According to Investopedia, the average annual return since adopting 500 stocks in 1957 in the S&P 500 is 8% as of 2018.
Weighing whether you should pay down debt more aggressively or invest your money can depend on your goals, time horizon, risk tolerance, asset allocation, and other various factors. If you have a shorter time horizon such as 6 months or high interest debt like a credit card at 22%, you could potentially benefit from paying down the debt more aggressively.
Establish an Emergency Fund ASAP - Haley Tolitsky, CFP®
Haley encountered a real-world experience in financial planning 101 when she moved to the North Carolina coast from Michigan in 2018. She arrived ready to begin her financial planning career, only to be greeted by Hurricane Florence two days after and had to evacuate eight hours to the Great Smoky Mountains for a week. Amongst the stress of traveling with two pets, worrying about her new home being damaged, and uncertainty surrounding starting her new job, Haley realized just how important it is to have an emergency savings fund.
By having money saved, she was able to cover travel costs, a week of hotel stays, and even a few tourist activities during this time. Without having an emergency fund, she would have built-up credit card debt and have been even more stressed. Instead, this experience was just a minor bump in the road, and she was able to return home safely with a memorable story to share.
A solid emergency fund should consist of at least 3-6 months of living expenses in a high-yield savings account. If the idea of saving that much is overwhelming, start with a small goal of building up one month of living expenses at a time. Set-up automatic contributions from your paycheck directly to your emergency fund account, and do not touch those funds unless a true emergency arises, such as job loss, medical emergencies, or natural disasters.
About the authors: CJ Miller, CFP®, RMA®; Joseph Stemmle, CFP®; and Haley Tolitsky, CFP®
CJ Miller, CFP®, RMA®, is a financial planner with Sensible Money in Scottsdale, Arizona. He is a member of the FPA of Greater Phoenix Board of Directors.
Joseph Stemmle, CFP®, is a financial advisor with Riverstone Wealth Advisory Group in Midlothian, VA. He is the 2021 FPA NexGen President and 2021 FPA Central VA President.
Haley Tolitsky, CFP® is a financial planner with Cooke Capital in Wilmington, NC. She is the Communications Director for FPA of the Triangle and is the FPA NexGen PR Coordinator-Elect.
Financial advisory services offered through Acorn Financial Services, Inc. (AFAS), a Registered Investment Adviser. Securities offered through The Strategic Financial Alliance, Inc. (SFA), a registered Broker/Dealer. Haley Tolitsky is a Registered Representative of SFA and Investment Advisor Representative with AFAS. Cooke Capital is otherwise unaffiliated with AFAS and SFA. Supervising office (703) 293-3100.