The Facet Wealth Investment Philosophy: Young Professionals
By Brent Weiss, CFP®, ChFC® and Jamie Dunn, CFP®
You’ve launched your career. You’re finally in a position to start making all of the major financial decisions for yourself.
What’s the best way to get started? How do you balance paying off student loans and the credit card debt from those late night GrubHub orders? How should you start saving for a car, your retirement, maybe even a home?
Most importantly, what are the steps you should take now to help ensure a bright financial future?
The good news is that time is on your side. By starting early, you have time to take advantage of compound interest. If any of your financial moves don’t work as well as you’d predicted, you have time to recover. Starting a financial plan early is one of the best financial moves you can make.
It starts with your plan
Your financial plan will be the foundation of everything you do with your money: paying off debt, saving, and investing. It should also include a budget, so you know how much of your income to allocate to each of your priorities.
Although everyone’s situation is different, one place to start is the 20/30/50 rule:
20% should be saved (towards goals or retirement) or put towards paying down debt
30% should be the maximum you spend on housing
50% should be spent on everything else
Savings should include:
- Investing for long-term goals, typically more than 3-5 years down the road. Retirement is a long-term investment goal, as is paying for your children’s college (assuming college is more than 3-5 years in the future). Choose investments with long-term growth potential, such as stocks, bonds, and exchange-traded funds (ETFs).
- Saving for short-term goals, such building your emergency fund or buying a car or a house. Any financial goal with a timeline of five years or less calls for CDs, money market funds or high-yield savings accounts. For medical expenses, if your employer offers a Health Savings Account (HSA), there are significant tax advantages.
If you’re in the position of also having to pay down debt, in many cases it makes sense to pay down debt and save simultaneously. This is especially true if you don’t have an emergency fund; you don’t want to focus 100% on paying debts and not have the safety net of emergency cash. (Be sure to keep your emergency funds separate from your checking account, so you’re not tempted to dip into them for your day-to-day expenses.)
If your employer offers a retirement plan such as a 401(k) or 403(b) plan with matching funds, take maximum advantage of that if you can. An employer match is “free money” that can make a significant difference over the years, and you want to get as much of it as possible.
Managing debt
There are two ways to approach paying down debt.
From a purely mathematical perspective, paying off debt with the highest interest rates (credit cards, personal loans, vehicle loans) makes the most sense. Financial planners call this the avalanche method, and it’s the most effective way to eliminate problem debt.
However, there’s a psychological benefit to paying off smaller debts. If you have several loans, such as student loans, credit card balances, and an auto loan, it can feel good to pay off the smallest balance in its entirety and cross it off your list. Financial planners call this the snowball method: the psychological lift of seeing a zero balance where there was once debt can motivate you to work hard to pay off other debt.
There’s no single answer that’s best for everyone, which is why it makes sense to work with a financial planner to set your financial priorities.
For debts with lower interest rates, such as student loans and mortgages, there’s another avenue to explore. With historically low interest rates, it may make sense to refinance a mortgage or auto loan. A lower rate can mean a lower monthly payment or shortening the term while keeping the payment close to what you’re paying now. In the case of, say, refinancing a 30-year mortgage to a 15-year loan, you can save tens of thousands of dollars in interest. It’s best to discuss these options with your planner to understand what would make the most sense for your situation.
For student loans, lower interest rates may mean it may make sense to consolidate your loans (if you have more than one) for a payment lower than your combined payments now. Again, check with your financial planner to see which option is best for you.
Invest early and often
If your investment goals are long-term, such as retirement, there are three simple rules:
- Start investing now, if you haven’t already
- Invest regularly, ideally with every paycheck
- It’s okay to start small and build over time
Work with your planner to decide which retirement accounts, such as IRAs, Roth IRAs, and other options, align best with your goals. Once you’ve made that decision, we recommend following these five principles:
1. It starts with a plan
A personalized financial plan for your life is the foundation of any investment strategy.
2. Markets work
Markets are efficient, so we aim to have you participate in market returns, and not to try to beat them. Asset allocation and broad market exposure drive long-term returns.
3. Portfolio design matters
We construct investment portfolios with three factors in mind: low costs, tax efficiency, and a deep understanding of how certain market factors and risks drive portfolio returns.
4. A long-term view
Time in the market—not timing of the market—leads to long-term investment success.
5. Discipline drives success
The markets have historically rewarded investors that remain disciplined to their plan, your planner is your partner in remaining disciplined.
Trying to time the market or make a killing on a hot stock is rarely a recipe for success. In fact, the Dalbar Quantitative Analysis of Investor Behavior showed that over 20 years (1996-2015), market timers averaged about half of the S&P 500’s annual return, 4.67% vs the index’s 8.19%. Other studies have drawn similar conclusions.
Needless to say, this high-level overview can only scratch the surface of a lifelong financial strategy. We highly recommend working with your financial planner to build and manage a comprehensive financial plan that includes saving, investing, debt management, insurance, and estate planning. The time to start is now.
Interested in learning more about early investing and how to prepare for a financially sound future? Check out out lunch & learn here.