We asked the members of the Financial Planning Association of Massachusetts to share their best financial planning advice. From frugality to 401(k)s, here are some tips that will help you reach financial stability. Next
Financial stability is not a race
“When saving for the future, we as investors should think of ourselves not as ‘investors’ but rather as real people with real lives who have real financial goals. The constant quest to ‘outperform’ a benchmark like the S&P 500 should not be thought of as a financial goal. Seeking to constantly beat a benchmark can easily cause great damage to portfolio values and can actually undermine the important financial and life goals that are critical in our lives. To paraphrase Nick Murray (speaker, author, and financial professional), the dominant determinant of the real life returns real people actually get isn’t investment performance, it’s investor behavior. We should stop chasing returns and instead focus our energy and effort on building a portfolio that is connected to what our money is actually for, who it is for and when it will be needed. We as individuals should be setting a personal benchmark for our investments. This benchmark should be connected to our lives and not the S&P 500. We shouldn’t take on more risk than we need to be successful. We should focus on real life goals like retirement, education or whatever else may be important that we need money for. We should save regularly and invest with discipline. If we do this good things will begin to happen.”—Bob Lepson Next
Newsflash: This time isn’t different
“Concerning what advice I’d give someone if I could only give one piece of advice:
“Most people have had some exposure to the foundation principles of money management: spend substantially less than you earn; invest for future needs; diversify your holdings; don’t try to time the markets; and so on. But although most investors generally acknowledge these time-tested ideas, they are frequently tempted to ignore them. This temptation comes from the persistent delusion that something about current event ‘X’ means they should make an exception this time around. It matters not whether ‘X’ is news about Iran/ North Korea/ the Middle East, budget deficits/ low interest rates/ high unemployment, Y2K/ the Mayan calendar/ the record high DJIA, or some other thing. People wrongly believe that X supplies an excuse to time the market this time, or to abandon diversification for a portfolio of all cash (or real estate, gold, or small cap stocks) this time. They believe this time is different. Succumbing to this temptation almost always bleeds the patient. Today’s particular combination of current events may indeed be unique. But the ever changing details don’t change the foundational truths of money management. When it comes to deciding what to do, this time is never different.”—John F. Harrison
Don’t be afraid of ‘the talk’
“If I could give out one piece of financial advice, it would be to not be afraid to talk about money. Do you know that issues around money are one of the top causes for divorce? Most individuals have a tendency to create a lot of stress around money and not addressing concerns or getting answers to questions creates a lot of unnecessary stress. Money is a tool, it is a means to an end. Understanding and viewing it as a tool, and not a basis for judgment could potentially alleviate a lot of problems. It isn’t how much you have or earn, it is what you do with what you earn that matters. Having thoughtful conversations about how money works, and understanding the value of a dollar will go a long way. Teach your children how to handle money. Help them understand things like cash flow, net worth, balance sheets, good credit, responsible borrowing, etc. I’ve believed for a long time that money management should be taught in schools as a course, as part of a math program. ‘Fiscal fitness’ is as important (if not more) as physical fitness.
“Think back to where you first learned about money. Who did you learn from? Did you grow up hearing a lot of arguments about it, or was it a non subject? Were you taught things like ‘money doesn’t grow on trees,’ or ‘if you talk about money it means you are greedy.’ Give some thought to your relationship with money and where you are today. Don’t bury your head in the sand by avoiding the subject. If you have questions about your net worth, cash flow and credit rating seek the help of a trusted adviser.”—Therese R. Nicklas
Debt isn’t always bad
“Americans (and the government) are in serious debt. How should one think about debt? What is debt?
“Debt is spending future income today by borrowing money for which you are penalized by paying interest to the lender. That’s right—you are spending future income today. The lender now has a claim on your future wages. In ancient times the collateral for debt would often be family land or members of the family who were then enslaved to pay off the loan. Debt is slavery. The creditors own you (your future wages).
“But not all debt is equal.
“Bad debt is when you give in to the temptation to run up a credit card to buy a nonnecessity which your can’t afford with your current income. For example, that great pair of shoes you had to have or that awesome new video game. Many people are hardwired to think about today and can’t envision the future consequences of their foolish monetary decisions.
“Good debt is when you prudently consider taking on debt to buy a house, a car, or other large purchase. A good rule of thumb for considering whether you can afford a mortgage payment is about 30 percent of your gross monthly income. Many businesses need a line of credit so they can finance their inventory or make payroll.
“Be thoughtful about taking on debt. Do you earn enough to pay back the debt in the time required? Understand the terms of the loan. What is the interest rate? How long do I have to pay it back?
“We all can be impulsive at times but ask yourself if this purchase is a ‘need or a want’ when you are about to pull out that credit card.”—John F. McAvoy
Stop spending so much
“One very important piece of advice that every planner should impart to their clients is to rein in spending, increase saving, and ‘live beneath your means.’ Four very simple tips to reduce the likelihood of that paycheck burning a hole in your pocket: Reduce your taxable income and save money at the same time by contributing to a 401(k) plan, automatically withdraw a set dollar amount weekly from your checking account and invest it in your favorite mutual fund, pay off all of that high interest credit card debt, and reduce your mortgage interest bill by increasing your monthly payment amount or making additional principal payments.”—Thomas H. Fletcher Next
Know what you’re up against
“The number one comment we hear from those who complete our education programs is, ‘I wish I understood these concepts 30 years ago.’ The concepts to which our pre-retiree students are referring are:
“The basics of inflation, the magic of compounding, investment taxation, tax deferral, and the associated options to defer taxes
“The more common concepts of investments including consistent contributions, diversified portfolios, risk versus returns, rebalancing and avoiding market timing
“The mundane concepts of insurance coverage and what risks you must transfer
“Finally, the minimum estate planning tools everyone should have, and if necessary, the more advanced estate planning concepts that avoid estate taxes.
“My favorite quote from one of my business school professors is, “Failure to plan is planning to fail.” Assuming you have a goal to retire at a certain age with a defined cash flow, you should have a basic understanding of all the pieces of the puzzle referenced above and each should be considered as part of your plan.
“So in the end, you should start early, and have a clear plan to get where you want to be in retirement.”—Steve Doucette
You are the most important thing
“Your mind is a valuable asset and your most powerful wealth creation tool. The more you develop it, the greater your potential to increase your wealth. Investing in yourself means allocating time, money and resources wealth. Investing in yourself means allocating time, money and resources the following, and many more:
“Formal Education – Degree or professional programs that propel you forward in your career.
“Informal Education – Financial and economic knowledge that enable you to recognize business opportunities and take advantage of them.
“Networking – A strong network connects you to other people, resources and opportunities.
“As with any prudent investment strategy, you should have a plan for investing in yourself. The plan doesn’t need to be intricate, but should provide a framework that allows you to visualize where you want to get to in your professional and personal life, and how you can invest your time, money and resources to get there. And be prepared to constantly reshape your plan.
“Push yourself out of your comfort zone every now and then to continually grow, and never stop learning and investing in yourself.”—Erik Almon Next
Don’t be stupid
“Stop paying the idiot tax! We have complicated lives and so often we are running from one thing to the next that we rely on convenience purchase to get us through the day. We purchase coffee on the run or grab a take out lunch rather than making these items at home. We buy single serving items rather than buying the bigger size and dividing up the portions. Just think about the purchase of a single bottle of water, which will run you at least a dollar but a case of 24 bottles, might cost you about $4. Just think if you drank your water from the tap for a few pennies. Slow down a bit and be a bit more thoughtful of your future purchase and you can save yourself some real money.
“Pay yourself first! Too many people think they will put away money at the end of the month, when in reality most people will spend whatever is there. However, if you decided to set aside money each pay period to a savings or brokerage account you will quickly accumulate a nice sum to fund your future goals.”—William Harris
Track your net worth quarterly
“Considering the constant bombardment of consumption pressures it’s no wonder people find it hard to get on track towards achieving financial security. No matter your financial goals, being in a position to visualize your progress at any given time and reflect on that progress provides valuable insight into the health of your financial activities.
“Each quarter, log the value of each asset and debt in Microsoft Excel. Subtotal assets and debts and add a line chart that shows the totals for assets, liabilities and net worth. Are assets increasing and debts decreasing? If not, why? What behaviors are causing debts to increase? Is it an investing problem, saving problem, income problem or spending problem? It’s not how much you have but the direction in which you are heading that matters.
“Many headlines today tell the tale of markets that have recovered from the great recession but that individuals are still behind. Is this really because of the investments or the behaviors? Knowing exactly where you have been and the direction you are going will help you avoid the emotional mistakes associated with the markets (reducing savings when markets go down or taking on too much risk when you don’t have too). Seek a CFP® for advice on changing trajectories.
“Making a habit of this will help to instill the personal awareness to live below, not above your means and help you visualize when it might be appropriate to reward yourself for a job well done.”—William Dion
Save -- it’s worth it
“I would set a goal to save a minimum of 10 percent of gross income each year. If you do this as you start your first job, you greatly increase your ability to become financially independent at retirement time. You continue to save 10 percent as your career progresses and your income increases. This works great for people who do not want to set a budget or track their spending. While setting a budget is ideal for many reasons, you should at least set a minmum savings target and stick to it and 10 percent is a reasonable and healthy expectation for everyone.”—Peter T. Jaworski Next
Is it time to hit or stay?
“Like the words in the song from ‘The Gambler,’ ‘You got to know when to hold ’em, know when to fold ’em,’ there are times to take some risk financially and steps to make sure you are well protected.
“After a difficult decade for stocks culminating in the 2008 financial crisis, many people still avoid stocks despite the recent recovery. For those in their 50s, 60s, even 70s, money may need to last 30 to 50 years. Inflation can erode the purchasing power if all is in low-yielding safe accounts. Implement an appropriate asset allocation that provides a buffer during market downturns AND opportunity for growth.
“It is never pleasant to think about ‘what if’ something bad happens, yet we are not invincible.
Life insurance—If someone is dependent on your income, then life insurance is needed.
“Disability Insurance – this is too often overlooked when signing up for employee benefits and too often needed.
Long-Term Care Insurance – no one likes the idea of going to a nursing home, yet many long-term care policies have home health benefits keep you away from a nursing home.
“Learning to effectively balance risk and protection can contribute financial success in life!”—Jeanne Gibson Sullivan
Know what you have
“The one piece of financial advice that I would give to everyone, is to ‘Pay attention to your finances.’ Know what you own, what you owe, how much you bring in and where you spend it. So often, I hear clients tell me that they don’t know where their money goes or they don’t pay attention to their investment accounts. This is your financial life and the decisions, or lack of decisions, you make today may have some very real consequences on the choices you have in the future. You can delegate your responsibilities or ignore them all together, but at the end of the day, you are still the one in the driver seat.”—Jessie L. Foster Next
Treat yourself as an investment, not investor
“Generally we are good at selecting the right mutual funds for long term retirement savings. Unfortunately, our timing is typically lousy. Inherent behavioral biases such as halo effect, reference bias and overconfidence conspire against us. As a group we are excellent at buying high and selling low, the opposite of a good long term saving strategy. The costs can be staggering. Instead:
“Take a balanced approach to risk and return that suits your goals, investing experience and composure
“Create a diversified mix of funds that complement each other
“Set intervals, maybe once per year, when you stack your holdings from best to worst. Sell a little of your best performer. Buy a little of your worst performer.
“You are now selling high and buying low. A much better plan.”—Jason Lilly
Every part is important
“Don’t think that your portfolio ‘is’ your financial plan. Selecting and managing your investable assets is one of six major components to a well-executed financial plan. Pay equal attention to cash flow management, risk management, income tax planning, retirement planning, estate planning and any other moving parts to your life that involve the commitment of financial resources or that may become impacted by markets, taxes or personal circumstances such as marital status or health.”—John P. Napolitano Next
It’s never too early to start a 401(k)
“If we could predict the future, we would always be ready for anything that life throws our way, right?
“The truth is that even for what we do know, many of us are not ready. We do know that most of us should probably contribute more to our retirement plans, that we should save for the college fund; and that we should purchase long term care insurance. Yet we don’t do it.
“We do know that the sooner we contribute to a retirement plan, the more there will be when we need it. We do know that the more we contribute to the college fund, the easier the burden when our son or daughter goes to college. We do know that the longer we delay buying long term care insurance, the more likely we won’t be able to.
“The reason is simple: We are overwhelmed. We are overwhelmed by all the things we know we need to do, and all the other things we need to spend on. We don’t know how to prioritize them.
“Yet, imagine that we were to take a minute to prioritize all these very important issues, that we were to realize the benefits of planning sooner, and the penalties for delaying, then surely we would get back on track, wouldn’t we? Plan sooner.”—Chris Chen
Spend less than you earn
“If people would always spend less than they earn, they would have no financial worries. The problem is that we live in a consumption society where many companies have become experts at convincing consumers to part with their money today instead of saving for future needs. Saving and investing for the future has the potential to:
“Avoid a cash flow crunch when big, unexpected bills arrive
“Have adequate funds for long term goals such as college funding and retirement
“Have adequate funds for short term needs such as covering emergencies, unexpected health care costs, or loss of a loved one
“Perhaps the biggest benefit of spending less than you earn is that you will have peace of mind. You will have more confidence that you can meet and recover from life’s many and unexpected expenses. You will not fear financial ruin. You will have many more life choices than those who do not follow this approach.
“The hard part, of course, is doing it. It is very tempting to spend money today, especially when goals are far off or when you feel as though life is fleeting and tentative.
“For most of us, the penalty for spending more than we earn is severe. But until the day of reckoning arrives — when it is usually too late — it is too easy to put off.”—Lyman H. Jackson
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