For Our Clients

Educational Resources

By Debbie Placke, Vice President and Manager, Financial Planning Strategies and Marketing

Print This Post Print This Post

As we were ringing in 2020, who could have imagined what the following months could hold. In February, as news about the virus began, the economy started to spiral. There have been about 47 million unemployment claims since the beginning of the pandemic. That means that millions of Americans are now searching for financial solutions to keep them above water. In addition to the pandemic and subsequent unemployment spike, stock market volatility has increased, and by all accounts we are likely in a recession. Achieving financial freedom is a journey that takes you through a lot of changes in the environment, as well as various crises and events. Everyone is at a different stage in their life, so there are no clear-cut investment solutions that will work for everyone.  Although we have hit many bumps in the road over the last 20 or so years, we have found that we can recover and prosper. These three steps can help simplify your journey and help you achieve peace of mind no matter what stage of life you are living.

Step 1 – Lay the Groundwork and Create a Roadmap

As with all journeys, there will be a starting point and a destination. The path along the way is the journey. Think of this as a road map. As you set out, you will want to prepare your mind (the vehicle) and set your goals. Assess where you are today, whether you are just beginning with nothing saved or nearing retirement with half of the path in your rearview mirror. Just as if you were preparing for a cross country road trip – you would make sure the car is ready with oil changed, tires checked, gas tank full – you will want to be mentally prepared with realistic goals and expectations. Create a budget. Surely you have heard this advice a hundred times and it seems so simple, but it will truly help ease tensions along your journey. Look at your income and expenses and really evaluate your choices. Debt is a heavy burden to carry on this trip, so calculate ways to pay down debt while you proceed on your path. Arrive at a place where your expenses can be met, and there is excess to cover unexpected expenses or savings. A Benjamin F. Edwards Advisor can help you with some tools to do a deep dive into your spending habits.

Step 2 – Put the Plan in Motion and Start Driving

As you proceed through your journey, remember that this is not a short jaunt but more of a cross country trip. You may have to stop along the way for a reset or maintenance. You may hit bad weather or road closures and have to reroute. It’s ok, life will always have a few bumps in the road. Stay in tune with investment performance. Setting your investments on autopilot is not an investment strategy. It will be important to recheck your risk tolerance throughout and rebalance your portfolio as needed. This may sound overwhelming but having an investment professional working with you can relieve a lot of the worry and stress that you run into along the way.

The beginning of your journey should be geared toward laying the groundwork. Use your budget to start paying down debt and saving into an emergency fund. You will want to be prepared for the unexpected life events that happen to everyone. Your emergency fund should cover three to six months of expenses. This may sound daunting, but take it one step at a time, and don’t try to speed through the intersections along the way. It will be more unnerving if the unexpected pops up and you aren’t prepared.

Step 3 – Re-evaluate Often to Make Sure You are Still Heading in the Right Direction

Your goals are not going to hit all at one time. Each milestone requires different types of planning and investing. Some of your destinations will require shorter trips while others may have to last your lifetime.

Some short-term goals may be buying a home or taking a big vacation. Instead of immediately going into debt to fund these goals, make a plan to fit them into your budget, and don’t get ahead of yourself. Take it slow and avoid overspending and accumulating debt.

Do you have goals of providing education funding for you children? This is a shorter-term goal and has options for saving into a 529 Savings Plan or an Education Savings Account (ESA). Like a Roth IRA, your education accounts grow tax-free which means you won’t pay taxes on the money when it is used to cover qualified education costs. The great thing about saving ahead for education expenses is that you and your children can avoid student debt, so you are helping them begin their path to financial freedom as well.

If you haven’t reached retirement, this is probably your biggest and most important goal. There are a lot of tax-advantaged savings vehicles to choose from. If your employer offers a 401(k) or other retirement savings plan, consider fully engaging in that as they may offer investment matches or other incentives which will help you accumulate for your retirement needs. Start saving early. If you are just starting out, don’t be fooled into thinking that you have plenty of time to start saving for retirement. If you start your path spending above your means you will struggle on your journey down the way.

Here is an example of the benefits of beginning to save early

Consider two hypothetical savers, Sam and Sally.

Sam starts putting away $6,000 per year into a retirement account with an estimated 6% rate of return starting at age 25 and continues investing until his retirement at age 65. Sally starts saving $6,000 per year at age 35 – just 10 years after Sam – and continues investing until her retirement, also at 65.

At retirement, Sam has contributed $246,000, while Sally has contributed $186,000 which is just $60,000 less than Sam. At that time, Sam has accumulated almost twice as much as Sally – he has $1,049,703 in his retirement account while Sally has just over half that, with $539,339 in her account. The extra years of compounding returns can make a big difference in the end.

Here is a trajectory of both of those accounts.

Following these three steps will help you have a peaceful journey. Remember the journey to financial freedom isn’t just about spending and saving. It is most important to achieve peace of mind. That is true freedom.

July 2, 2020 |