Let’s talk about financial planning in real time.
Lately I’ve been telling a lot of our younger clients (and not-so-young clients) they are trying to do too much with their money.
That’s right — too much.
Poor things. So many newer investors — of all ages — have had it beaten into their heads to save for retirement, and to start saving right away. “But it’s so hard to save!” they say. Yes indeed.
Financial planning in real time is very difficult, meaning it’s tough for folks to save when they are trying to also pay down student loans, multiple car loans, and credit cards at the same time. And how about saving for a home?
Years back, I’d be really encouraged to see young clients maxing out their retirement plan contributions for a few years in a row.
Then they would dismantle their entire plan in one afternoon. Which was usually the day they found a house they wanted to buy, but had little or nothing saved. A lot of folks do it this way (even I did that — nearly thirty years ago). And as I learned way back, that is a lousy plan. It’s the opposite of financial planning in real time.
Sure, 401k accounts and deferred compensation plans are a “forced” way to save (the money comes out of your check immediately). But when comes time to tap into this money, you are borrowing the funds. And whenever you hear the word “borrow” your mind should automatically think of the word “payments.” Because (as stunning as this may seem to some) you are taking a loan from your retirement plan and need to pay it back.
Despite what (nearly all) financial planners tell you: “start saving saving money for retirement right away” is not “blanket advice for all” in 2016.
Let’s delve into this: have you ever stared at your paycheck — the top line — and wondered, “where the heck does all THAT go?”
If you have, then I’ll say: “Welcome to America. Land of the indebted.”
Collectively as a nation, we truly stink at paying ourselves, in other words rewarding ourselves for our work, for our efforts. We front-load everything:
Get the 2017 car now. Just make the payments.
Get the 110″ big screen TV, just make the payments.
Get the Tony Robbins self-help series. Just make three easy payments. Plus shipping and handling.
As Gary Vaynerchuk learned from his father, “When you borrow money it’s the worst day of your life.” More people need to her this quote and also accept it as a belief. We are swamped with advertisements telling us we can “live a better life” when make a credit card balance transfer, or get more credit, or get a new card — with points!
You don’t have a better life — you become a slave to paying off that debt. A big reason why so many people dread Mondays and celebrate Fridays. Many feel they are working simply to make the payments.
But let’s take this one step further. One of the worst things I hear in my practice is: “I’m just going to take this lump sum — one time — and get rid of all those credit cards, and pay off these other debts.” This is a bad move.
In my experience, many of those same folks will be back in the very same hole in three or four years (or sooner). “Oh well, we had this emergency and needed money.” Or “this was a once-in-a-lifetime chance” to “take a trip” or “to buy that car” or “to fill in the blank with what I want (not what I need).”
I’ve seen it happen over and over and over in my career. Taking a lump sum amount out of the nest egg, or from your investments (or worse, taking a lump sum from your retirement account!), to clean up a debt bomb hardly ever works. Please speak with someone who knows a little about you and also knows about your situation before taking this step. At the very least, speak with someone you (financially) admire, and ask them HOW they got there. Or speak with a financial planner who can help you manage your finances.
We are driven by our goals. Your brain will learn more by paying off a debt in small, steady chunks. There are TONS of posts scattered all over the web about how redeeming it will FEEL accomplishing a project like this. It is FAR more rewarding to start chipping away at a debt immediately, in aggressive (but manageable) steps, then to pay it off “bailout style” in one lump sum. I am convinced this approach works and can be rewarding, primarily because I have done this (in the past) and shared this with others who have successfully followed this path.
Then, once the big debts are cleared, start saving — again, in aggressive (but manageable) chunks. It will be far more rewarding to see the loans disappear in time and then see the savings rise. We are driven by goals.
Retirement may be years and years (or even decades) away for some savers. It’s easy to get sucked into the belief you need to “sock away everything you’ve got” toward a very far-away goal (retirement) when there are other lifetime milestones approaching sooner.
Dig out of those holes instead.
Get a savings account.
Build a nest egg for emergencies.
Then invest.
That’s financial planning in real time:
Get out of debt. Aggressively.
Then, save money. Aggressively.