Episode 119: Are You Better or Worse off Financially in 2020?
Are You Better or Worse off Financially In 2020?
One of the fun parts of being a financial planner is getting to field and answer questions from clients and readers all around the country. In these Work Your Wealth episodes I’ll be taking time to address and answer questions I’ve come across from readers and clients throughout my career. Today I’m answering the above question.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
Why the end of the year is my favorite time of year for clients
Questions I consistently receive as the year is closing out
A way to gauge if you are better or worse off financially this year
First step in measuring your financial progress
The measurement to use when evaluating your financial health
How to calculate your net worth
A good way to evaluate your debt situation for the year
The check you should be doing on your debt every January
Why you should review your spending throughout the year
How your savings goals play into your financial health
Different savings vehicles you can utilize to grow your net worth
A few things you should consider when talking about your retirement savings
The role a change in income can play in figuring out if you’re financially better off this year
How “lifestyle creep” could potentially hurt your financial health
It’s easy to get ahead of yourself. When spotting an issue, you might jump into problem-solving mode without even thinking. Say someone is renovating an old house and decides their first step is to paint the front door. This plan doesn’t make sense and is not smart because it’s not prudent to do the finishing touches without addressing the larger structural issues first.
You can apply the same idea to your finances.
There may be many changes you want to make with your money. Maybe you want to invest more, or double down on your retirement savings, or ensure next year you get that dream vacation.
But before you buy non-refundable airline tickets or dump a hefty chunk into your portfolio, you need to see how these changes fit into your existing plan and how to accommodate them.
The starting point? Your goals. Many people struggle with goal setting, so we’re going to walk you through a technique that helps you create more intentional goals today: SMART goals.
What Are SMART Goals?
The SMART acronym dominates the business landscape and can be applied to nearly any type of goal you set – from personal to financial and more.
The SMART strategy brings clarity, purpose, vision, and intention into your goal regime. Instead of simply stating a goal, SMART goals ask you to dig deeper and make a plan for achieving it. What do each of these items mean and how do they work in practice? Glad you asked.
Specific goals cut through vague notions and provide tangible, concrete conclusions. The more specific the goal, the more actionable it can be. Specific goals clarify your true objective, which enhances the rest of your plan’s construction.
For example, instead of saying you want to invest, say you want to invest at least $50 a month in your brokerage account for the rest of this year.
Not only should you make your goals specific, you should also have a plan to gauge their success. Measurable goals help you set milestones and track your progress along the way.
If you’re investing at least $50 a month, you will clearly be able to see if you’re following through. A solid way to ensure your savings stay on track is to automate them. That way, you’ll meet your benchmarks and can always add more as needed.
If you’re juggling a full-time job, mortgage bills, raising children, etc. it’s important to set goals you can actually accomplish. Money might be tight right now, especially during the pandemic, so you might not be able to add an extra $200 to your portfolio each month. But you might reasonably be able to do $50!
You want to accomplish the goals you set for yourself, but you can’t do it with an unrealistic vision. Know where you are and set goals that push you but don’t impose on other aspects of your life.
Your goals should have purpose. Goals without purpose lack meaning and don’t get done. If you aren’t setting goals that will expand your life, it’s time to change your process.
Relevant goals also help you prioritize short-term, more annual goals. While it’s always wise to apply consistency to long-term goals, you don’t want to ignore short-term ones.
Perhaps you have a goal to replenish your emergency fund. That’s incredibly relevant and can support you should something unexpected happen. You might commit to funneling $50 into a highly liquid, safe account until the number is where you need it.
Time-bound goals provide a deadline for your goals. So if you invest $50 a month for 6 months then increase your contributions by another $50 for 6 months (and so on), the time frame helps keep you accountable and encourage progress.
As you can see, all of these ideas play off each other. Even though each is separate, they come together to create a more well-rounded solution.
Let’s compare a traditional goal example and a SMART one. Take a retirement savings goal from an early-career professional:
Example #1: Increase retirement savings.
Example #2: Increase 401(k) contributions to 10% and supplement savings by opening an IRA with automating contributions (about 5%) for the rest of the year.
It’s probably easy to see why the second example is the SMART goal. It’s specific by designating which accounts to target and what salary percentage to contribute. It’s measurable by taking advantage of compound savings and automating contributions. It’s attainable because this person received a salary increase and can proportionally allocate their resources. It’s relevant to their retirement savings journey and time-bound for the year they set.
This exercise encourages you to think critically about what you want and the work it takes to achieve it. SMART goals don’t just show you the reward, they also build the path.
Should Your Goals Come First?
While there are different schools of thought, our team believes your financial goals should come before creating the plan.
Your goals can then chart the course for structuring your finances in a way that’s unique to you. Someone who wants to retire early, for example, will need a different savings plan than someone who wants to wait until they’re 70.
Once you know what you’re working toward, you can take it step-by-step. So before changing your financial plan, check on your goals and ask yourself:
Will this change bring you closer to achieving one or more of your goals?
Will the action harm or hinder your progress?
Do you need to change your plan to best meet your needs?
Make Your Goals SMART-er
While SMART goals prioritize detail, it doesn’t mean you should ignore the big picture. Your biggest dreams, goals, and aspirations are important and can set the stage for creating more focused SMART goals.
Want to buy a vacation house? That is an amazing goal, but you must know the actionable steps to reach it. Do you need to allocate more money for this goal? What is your ideal timeline? Is this goal impeding other top priorities like retirement or education costs?
In addition to creating SMART goals, amplify them further by:
Understanding the big picture and where your goals fit in
Distinguish between short- and long-term goals
Establish clear priorities
Use your values as a guide
Revise and revisit as needed
Your goals don’t stand still. Be sure you make intentional updates that best reflect your needs, both now and in the future.
The Bottom Line
Your goals set the foundation for the rest of your financial plan. Why not make them even better through clarity and purpose with SMART goals? By digging deeper into your goals, you’ll make changes that make sense for the future you want to create.
Remember: a crumbling exterior with a cute front door won’t do you any good, just like applying changes to your money without a solid support plan won’t lead to success. Ready to revamp your goal setting? We would love to talk with you.
Episode 118: The 5 Big Financial Planning Concerns You're Forgetting as an Entrepreneur with Ariel Ward
Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of 2019, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
The most common financial planning concern seen with entrepreneurs
The retirement plan options available to small business owners
Items to be aware of if utilizing a SEP IRA
Some of the numbers associated with an individual 401(k)
The best plan to start with if you have employees
How much you should be saving into your retirement account
The type of insurance a small business owner/entrepreneur should consider
How a disability policy works and why you need it
If you’re thinking group policy, here are some options as a small business owner
Why you should have life insurance and who you are protecting
The type of life insurance policy you should get
What a keyman insurance policy will do for your business
Reasons you should have a business continuity plan
The two big ticket items we see people and business owners drag their feet on
Why you should have professional liability insurance
The benefits of utilizing a financial planner through all these decisions
In our last post, we kicked off our two part series of addressing the money tasks you’re avoiding and the steps you can take to make progress. Today, we’re covering four additional areas that you can make headway in your financial life.
4. Open an IRA
How many times have you sat down at the dinner table and said to your spouse, “After we eat, let’s open an IRA.” Yeah, probably never. When you actively contribute to your workplace retirement account, invest in a separate portfolio, and funnel money into your savings account, it can be difficult to open – let alone manage – another account.
IRAs are a great addition to your retirement savings journey. They afford more flexibility and control over your investment options, fees, and providers making it an excellent complement to an existing 401(k).
Traditional IRAs operate similarly to your workplace plan. Contributions are pre-tax, investments grow tax-free, and distributions are taxed as ordinary income. To add more tax-efficiency into your retirement planning, it’s also good to consider investing in a Roth IRA.
You fund a Roth IRA with after-tax dollars, the money grows tax-free, and qualified distributions remain tax-free in retirement. This tax-advantage is hugely beneficial for retirees to keep their tax bill at bay. While that might not be your top priority right now, it will pay off later on. You will probably make more money as you advance in your career, which increases your tax liability. By paying taxes in a lower tax bracket now, you end up saving money in the long run by not paying them later.
Roth IRAs do carry income thresholds. In 2020, those making over $139,000 (if filing single) or $206,000 (if married filing jointly) aren’t eligible to make direct contributions. If you want to fund a Roth, it must be done with a conversion from your traditional 401(k) account. Conversions have important tax responsibilities, so consult your tax advisor before initiating.
5. Establish a 529 Plan
When it comes to saving for your child’s education, the earlier the better. A 529 plan can be the impetus of your savings journey. 529 plans are tax-advantaged savings plans for education costs. While contributions are after-tax, gains grow tax-free and remain tax-free for qualified educational expenses like tuition, fees, books, and supplies.
529 plans differ from state to state, and many allow non-residents to establish an account. Be sure to shop around for plans with reasonable fees, investment options, and contribution limits.
Many families use this vehicle to plan for college costs, but 529 plans can also be used for K-12 expenses. The SECURE Act also instituted a provision letting account holders withdraw up to $10,000 tax-free dollars for student loan repayment.
Adding another investment account to your arsenal requires careful planning and attention. Think about the following:
How much can you reasonably expect to save now?
Do you plan on using the funds for K-12, college, or both?
Are you sacrificing your retirement savings to fund the 529?
Knowing how much you can save and how you intend to spend the money can help you make a reasonable plan. Remember, there is no loan for retirement. Saving for education is a wonderful gift, but it should only be done after your retirement accounts are funded.
6. Ask for the Raise You Deserve
There are few conversations more uncomfortable than asking your boss for a raise. It may be especially difficult during COVID-19 where many businesses have made budget, staff, and other office cuts. But the work you do is incredibly valuable, and if you’re overdue for a raise, now is the time to ask for it.
A raise can help you accelerate your financial plan, giving you additional resources to pay down debt, save for retirement, and fund long-term (or short-term) savings goals. Before knocking on your boss’s door (or sending a Zoom invite), be sure you have prepared the following:
Comparable salary for your position and experience at your company and its competitors.
Concrete accomplishments you’ve made while in your role.
Positive feedback from team members, stakeholders, or supporting business units.
Your desired salary increase. Our tip is to start a little higher to give room for negotiation.
It’s also wise to alert your boss to the nature of your conversation before the meeting, that way you’ll both be ready to discuss your request. Send an email saying you’d like to set up a meeting to discuss your compensation, for example.
7. Revisit Your Goals
Financial planning is too often seen as a one and done task. But financial wellness takes time, engagement, and sometimes even revisions to get right and progress forward. We encourage you to look at your financial goals today. Notice how they may have changed, especially this year, and also how they haven’t. Ask yourself:
What progress has been made on each of your goals? Celebrate your accomplishments – even small milestones – to help boost motivation and inspire progress.
Are there any intentional changes you need to make? Perhaps extending the timeline on short-term goals to accommodate any losses and fluctuations this year?
Let your goals inspire the progress you wish to see in your financial life. Returning to your goals can be enlightening and provide the motivation you need to stay the course.
We discussed many financial housekeeping items today. If you have any questions or need help moving forward on any of these, please reach out to our team. We love helping people prioritize and take control of their financial life.
Episode 117: Living a Financially Intentional Life with Naseema McElroy
Naseema is the founder of Financially Intentional, a platform about personal finance and living life intentionally. She discusses how taking control of her finances has enabled her to overcome bankruptcy, divorce, and break the cycle of living paycheck to paycheck. She shares her lessons along her path to help others benefit from the freedoms of financial independence.
Outside of encouraging people to get their financial act together, Naseema is a mother and Labor and Delivery Nurse. Though making six figures for years, she struggled with money. Finally realizing she couldn’t out-earn her financial ignorance, she knew she had to make some changes. By shifting her mindset around money, being consistent and intentional, She has paid off $1 million in debt and grew a six-figure net worth in three years without living in deprivation.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
How Naseema made a move from nursing to finance
The misconception many people have about finances
Where to start in order to become more financially intentional
Steps to set yourself up for financial success
How Nassema paid off $1,000,000 in debt
The asset she sold to push her back on track financially
Steps you can take to improve your financial life
The flexibility Naseema was able to create by getting her finances in order
How to keep yourself committed to your financial goals
What it looks like to anti-budget
How to keep your financial life in balance
The importance of building a good team around you to continue to drive your passion
How to make legacy building second nature in your life
The benefit of having a financial planner as an accountability partner