This Week In Your Wallet: Welcome To The Real World
My Facebook feed — as I’m sure many of yours are — is flooded by happy pictures of grads in caps and gowns. Grads and parents. Grads and siblings. Grads solo. It’s a sign of my age. My oldest will graduate from college in a few weeks. I’m thrilled for him and for you if you have a newly-minted grad in the family… or if you are one yourself.
So what do you tell them to get off on the right financial footing? First, get them started building a cash cushion. We’ve talked before about how important it is to have an emergency fund, and the best way — indeed, sometimes the only way for people to succeed — is by automating the saving process. Your child should automatically move at least 10-15% of the money coming in into a separate savings account; if they’re living at home with the goal of using the fund to move out eventually, they should be saving substantially more. Next, sit down and talk about where the rest of their money is going to go. Call it a budget. Call it a spending plan. Call it whatever you want, but figure out how much is going to paying down student debt, transportation, cell phones, etc. so they know how much is left for discretionary expenses. Finally, talk about the opportunity to get into any work-based retirement plans they’re offered and capture matching dollars. For more, check out the Forbes list of things grads should do with their money in the first five years after graduation day.
Yes, Regrets
If you’re looking for evidence about why it’s so important to get off on the right foot, check out this new survey from Bankrate.com. It shows many of us do have regrets when it comes to our finances — 75% of us, in fact. Number one on the list: Not saving for retirement early enough (hint, hint, grads) followed by not saving enough for emergency expenses, taking on credit card debt and excessive student loan debt.
Regret, like guilt, hits me like a somewhat useless emotion. If you’re feeling it, the key is to try to use it for good. That means taking some action that will make your life tomorrow better than it is today. So… jump from reading this to take an action that’ll directly attack whatever it is you’re regretful about, whether it’s increasing your retirement plan contribution by 1-2% of your pay, calling your credit card company and asking for a reduction in your interest rate (then diverting more money each month to make that debt go down faster) or seeing what you can skim from your budget, then diverting that money automatically each month into saving. Envisioning how you’ll feel when you’ve succeeded conquering these milestones can help, too.
Weighing The Costs Of Investing Long-Term
Speaking of the long haul — how would you like another $600,000 for retirement? NerdWallet has a new analysis of how investment fees can eat away at millennials’ savings over time, and suffice it to say that the money adds up. The issue, as the authors explain, is that as account balances grow, so do investment fees (which are based on a consistent percentage of your assets). Every dollar taken out to pay management fees means a dollar not invested for the future. They suggest thinking of it as compound interest — but in reverse.
The key, as you’re choosing investments for your portfolio and making the decision between passive investments (like index funds and ETFs) and actively managed ones (target-date and other mutual funds), take a moment to examine the cost vs. the work involved in each. When you’re investing for retirement, you have to choose a portfolio initially that lines up with your age and risk tolerance, but then you need to keep that portfolio in line as you age, generally by rebalancing once or twice a year. If you’re willing to do that rebalancing work yourself, you can shave fees by selecting passive funds with low fees that will do the trick. (In fact, you can shave a lot of them. “A millennial who puts in the elbow grease to manage her own ETF portfolio will retire $123,000 to $345,000 richer than if she outsources the work, assuming she does a similar job of managing the account and can get the same returns,” write Dayana Yochim and Jonathan Todd, the authors of the report. However, if you know you’ll never rebalance, or would prefer that it be done for you, target date funds or advisors (robo or human) cost more, but are — in my opinion — worth paying to get the job done.
America’s Toughest Trainer Tackles Her Finances
Finally, if you haven’t checked out my new podcast, HerMoney with Jean Chatzky, please give it a listen. This week, I talk to Jillian Michaels about how to build habits that will work for you in both your exercise routine and your financial life, raising money-smart kids and how getting engaged (congrats Jill!) is changing her financial planning. And if you are listening, please leave us a review by clicking “View in iTunes” and then the “Ratings and Reviews” tab.
Have a great week,
Jean
