Milestones

Milestones: Financial Literacy Advice for May

By Juli Erhart-Graves, Certified Financial Planner practitioner at Worley Financial Group, Inc.

As our lives change, we face new challenges and rewards. Financially, there are different issues to address as we enter each new phase or work through each new struggle. By taking some basic steps during each milestone, we make preparations to take care of ourselves and our loved ones.

Graduation/First “Real” Job   

It’s funny how life seems to work backwards sometimes. Just when we likely making the lowest salary in our lives, we have the greatest need for a chunk of money as we set out on our own to furnish an apartment, begin student loan repayment and purchase a wardrobe suitable for our new job. In our older years when we aren’t faced with these kinds of expenses we are making the money to afford them.

Two things stand out as the most important things to remember at this stage in your life. First, use credit wisely. It will be tempting to use the seemingly endless credit card offers to fund new furniture, pots and pans, and even towels for the bathroom. However, the credit card debt and credit history you build now will be with you for many, many years. If building your credit history is a concern, your bank account and one major credit card are all you need at this time. Don’t bounce checks and don’t charge anything you can’t pay off when you get the bill. I recommend using cash flow/budgeting software to keep your checkbook register.

Second, pay yourself first. With your first real job comes the opportunity to build a solid savings and investing foundation. One place to start is building a savings account earmarked for emergency reserves. The goal for the account could be three to six months of your living expenses. In addition, participate in your company’s retirement plan as soon as you are eligible. Begin by contributing the amount the company will match. For example, some companies will match 50% up to 6%. Therefore, when you contribute 6% of your salary the company will make a matching contribution of 3%. If your company does not offer a retirement plan, other alternatives to consider are an Individual Retirement Account (IRA), Roth IRA, or building a non-retirement investment account.

Purchasing Your First Home   

The process of purchasing your first home can be scary, and the responsibility that comes with owning a home can be overwhelming. However, there are steps you can take to prepare for this new phase in your life.

First, scour your credit reports. This is one of those times when your past is going to determine your future. The contents of your credit report play a vital role in the house-buying process. The interest rate and other mortgage terms will be based on how you have managed your finances up to that point in your life. Pull your credit reports and credit scores from the three major reporting bureaus (Equifax, Experian and Transunion). Verify each report is accurate, taking steps to correct any errors.

Next, determine your mortgage needs. There are many different types of mortgages available today. Each can serve its purpose in the right situation, but without proper perspective on your needs you can end up paying more than you should or having to refinance when rates are higher. Ask yourself: How long do I plan to live in the house? Are my earnings expected to change dramatically in the near future? How much can I afford each month for a house payment, taxes, insurance and general home maintenance? Your mortgage should factor in the answers to these questions. Be sure to shop around for a lender or mortgage broker that will be the best fit for you.

Finally, purchase within your means. General upkeep, like mowing the lawn and cleaning the carpets, will be a financial commitment in addition to unexpected home repairs. If the word “stretch” comes up while discussing purchasing a particular home (usually accompanied by a worried look), chances are you need to look for a lower priced home.

In addition, review your disability insurance coverage when you purchase a home. This insurance provides income if you become disabled due to medical illness or injury and can no longer work. A great number of foreclosures occur when the homeowner is unable to make payments because of a disability. Long-term disability insurance is sometimes available through your employer. If not, seek a personal policy.

Marriage      

There may be areas in our financial lives couples neglect to discuss prior to marriage. One may know the other has an established 401k plan, student loans or credit card debt, but what about the spending and savings habits that lead to the financial situation they are in. Our spending and savings habits will affect our marriage so it makes sense to discuss the direction of your new financial life together.

What will be your savings goals? Will you combine your bank accounts or keep them separate? How will you handle debt brought to the marriage and debt incurred during the marriage? Who will pay the monthly bills? How do you handle a marriage when one is a saver while the other is a spender? Different or unhealthy views of money could be a continued source of conflict in a marriage.

To build a financially happy, healthy marriage, develop a plan preferably prior to the vows “for richer or poorer.” Sit down with your spouse-to-be and discuss your views of money. Establish reasonable financial goals together, both saving and spending, that both can agree on.

Update your beneficiaries on all life insurance and retirement plans. You will likely want to name your spouse as the primary beneficiary when you are married.

Don’t forget to consider life, health and disability insurance and estate planning as part of your discussion. These are areas where problems can create disasters in a marriage.

The Birth of a Child    

Preparing for the birth of a child is such an exciting time in life. However, after the baby is born you are likely to find financial issues, along with many other areas of your grown-up life, will get pushed to the back-burner while you care for your newborn. Therefore, use the time during pregnancy to make decisions about the addition to your family.

Your life insurance needs will change when you become a parent. At that time you become responsible for the financial upbringing of your child. When determining your need, consider the income level of your spouse, the family’s debt, the child’s education and the need for childcare until an appropriate age.

This is a good time to review your disability insurance coverage. Your ability to work and earn income is likely vital to your family’s financial well-being, especially in a single income household.

Examine your medical insurance coverage. If both you and your spouse have coverage through an employer, review the costs and benefits to determine the plan which will best fit your needs.

Discuss your financial expectations with your spouse. Hopefully this was done prior to marriage, but if not, take the time to do it now. Establish financial goals. Discuss the life you want for your child and the opportunities you want to provide (for example, summer camp, music lessons and college). Keep in mind the greatest gift you can give your child is your financial security.

Your budget will change with the addition to your family. Some expenses will decrease (like entertainment and vacation) while others increase. Evaluate your spending habits to determine how the increased expenses will be absorbed. It is easy to get carried away when making purchases for your child. Consider setting a budget amount (both before and after the baby’s arrival) which can be spent for baby without jeopardizing your financial security.

Another way to care for your family is to establish an estate plan. Execute a will to name who will raise your child should you die before your child is of legal age. Your will should also contain instruction on how your child’s inheritance should be managed for his or her benefit. Don’t forget to update your beneficiary designations on life insurance and retirement accounts to reflect your plan.

Retirement      

Retirement is something that some people financially prepare for over an entire working lifetime. And for most, that will be the amount of time needed.  Many of the financial preparations for retirement, like saving, investing appropriately, and verifying wages are properly recorded with Social Security Administration, should be done throughout your working life. But there are steps to take in the years leading up to retirement to help ensure you live comfortably.

If you don’t already do so, track your cash flow for at least a year or two to get a true picture of your spending. This will be important to determine the amount of retirement income needed.

Do the math by comparing your retirement income need, as determined from the cash flow analysis, with your estimated retirement income from Social Security, pensions and portfolio withdrawals. You should research sustainable portfolio withdrawal rates based on your life expectancy and portfolio allocation.

The ideal is to retire with no debt. Once all savings and debt payments are removed from your cash flow, you will likely find you can live on a fraction of your pre-retirement earnings.

Don’t forget taxes. Income tax will be due on withdrawals from retirement accounts. Therefore, as during pre-retirement, income taxes can continue to be one of your biggest expenses in retirement. Consider building a portfolio outside of retirement accounts which can provide funds without income tax consequences (although capital gains taxes may apply).

Death       

The death of a loved one or spouse brings many financial issues and decisions for the survivor. It will be hard to become fully informed during this time of grief so don’t rush into decisions that can be made later.

First of all, gather important documents like the will, insurance policies, property deeds and titles and military papers. Keep these in a centralized location for frequent reference.

Identify the financial assets and obligations of the deceased. Gather statements for bank and brokerage accounts, IRAs, retirement plans, pensions, life insurance, mortgages, auto loans and any other assets or liabilities. You may find creating an asset and liability summary listing helpful. This can be done by itemizing each account with its account number and value or amount owed. For each asset, contact the company for their requirement to transfer the account to the beneficiary.

The surviving spouse or children of the deceased may be eligible for government death benefits. Contact the Social Security Administration, or go to www.ssa.gov, to research and apply for benefits. Military veterans may receive benefits for the memorial service and burial. Go to the Veterans Administration web site (www.va.gov) for more information.

If the loved one was still working, contact the employer about insurance and other employee benefits. Uninterrupted health insurance will be important for a surviving family but company policies will differ on this issue. In addition, other employee benefits may exist, like stock options, that may expire shortly after death.

Seek professional tax, financial and legal advice. Contact an attorney to provide help in settling the estate under the administration of the executor of the will. Tax and financial professionals can provide valuable guidance for preserving assets for beneficiaries and making appropriate financial decisions when given alternatives.

Hopefully we can make our lives a little easier by spending time planning as we enter into each new era in our lives. Without this planning, however, positive outcomes are less likely.

This commentary is for informational purposes only and should not be used as the primary basis for an investment decision. Consult your advisor. Investment Advisory Services offered through Worley Financial Group, Inc., a Registered Investment Adviser.

Juli Erhart-Graves is a CERTIFIED FINANCIAL PLANNER™ practitioner at Worley Financial Group, Inc. Juli’s fee-only practice provides financial planning and investment advisory services to middle-income individuals, couples and families. For more information, visit www.worleyfinancialgroup.com