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The Do’s and Don’ts Of Your Financial Future

13228261_sI am a parent. Many of you are parents. As parents, we want the best for our kids, right? We want them to have a better life than ours. We want them to grow, to learn, and to be successful in all areas of their lives. This brings me to a meeting I recently had with a client of mine, Bob, and his oldest son, Nick. Nick is a nice young man. He is 22 years old, single, and has a good job. Nick reads this column each week and is hungry for financial knowledge, but he feels overwhelmed and does not know where to start planning for his financial future.
 
Each week you and I get together through Cutter Family Finances to discuss important topics within the financial world. I try to take issues from Wall Street and explain how they affect Main Street. Usually, that information is focused on folks either in retirement or on their way to retirement. But after talking to Nick, I realized that there is a demographic that I have ignored for the most part: your kids and mine.
 
I explained to Nick that a lot of what we discuss can make individual investors feel like they don’t have a whole lot of control over their financial future . . . market conditions, tax laws, workplace investment choices . . . many things fall outside of an individual’s control. But I also told Nick that there are many small decisions that people can make that have a huge impact on their financial future. So I want to share with you what Nick and I discussed.
 
First off, don’t simply save whatever is left over each month. I see this all the time with younger folks. The monthly contribution to their savings is simply their paycheck, minus whatever they spent that pay period. But simply saving only what you don’t spend is not a sound financial plan. The exact amount that you should be saving each month depends on your individual circumstances, most importantly your age and retirement goals, but I recommend starting with 7 to 10 percent of your income, and making adjustments from there.
 
Secondly, don’t just “set it and forget it.” If you decide to save 7 percent of your income when you are 30, don’t simply leave it at that 7 percent until the day you retire. You should be adjusting your budget yearly. As we age, our income typically increases and so should the percentage of that income that we save. You should also be adjusting your investment plan. I explained to Nick that “buy and hold” investment strategies that so many folks subscribe to during their accumulation phase of retirement planning have significant flaws as we get close to or are in retirement and move into the distribution phase of planning. So it is important not to simply pick an investment plan and stick with that strategy for decades. As we age, our strategy must adjust in order to preserve capital.
 
Also, don’t spend too much on housing. Nick currently rents and is very anxious to buy a home. While there are so many good reasons to purchase a home, I explained to Nick that many people get into trouble when they spend too much on housing. Don’t overextend. Housing payments should not be more than 28 percent of your gross income.
 
And lastly, don’t forget to take advantage of tax benefits. You should not be giving Uncle Sam any more than you have to! I say this all the time: paying taxes is a certainty, the amount that you have to pay is not. Think about your investment vehicles, think about your contributions, think about how you allocate your income. Making smart decisions with advanced tax planning is one of the easiest ways to keep money from going right down the drain.
 
Now let’s talk about what you should do. First (and you have heard me say this before), pay off your debts, specifically credit card and student loan debt. Outstanding debts can be one of the biggest drains on your financial future. Debt costs money, and the longer you have any, the more expensive it gets. When you prioritize your spending each month, paying down your debts should be at the top of your list.
 
Another must-do is to take advantage of your company’s match. If your company’s retirement plan has a matching program, use it to its fullest! You should be contributing the maximum amount allowed to receive a full match. This is free money, folks. Don’t waste it.
 
Another simple thing you can do, that so many people either miss or delay, is to open a Roth IRA. I explained to Nick that if he opens a Roth IRA, while he would pay tax now on any contributions, all of his earnings will grow tax free and all distributions at retirement are tax free. These investment vehicles are so valuable that the government limits the amount that can be contributed to a Roth IRA. In fact, I told Nick that even if he is already taking advantage of his company’s 401(K) plan, he should be stashing money away in a Roth IRA as well (if he is under the income limits).
 
I told Nick what I tell my kids: the only failures in life are the failures to try. If you don’t have discipline, you better develop it. If you lose your desire, find it fast. If you fall short on your goals, adjust them. But whatever you do, you never give up . . . no matter what. Your financial future depends on it.