Memorial Day is past us and with the summer officially on -- wedding season is upon us. And I have been thinking about happy young couples -- and how best to send them well on their way.
I've put together a two-part "Rules for a Financially Happy Marriage", based on my observation with clients and friends. I'm grateful for those who have shared Part 1 with the young couples in their lives, and I hope that this week's (final) installment will be equally useful.
Last week we discussed the importance of budgeting, and putting away regular savings, along with a few basic strategies for these things.
Here we delve more deeply into savings, with some very specific strategies for how to go about that. Along with some advice on a few other "real world" financial concerns along the way.
Again, I'm not a financial advisor, per se -- but we routinely deal with clients and families who have done very well to create something they are able to pass along to future generations. I'd like for that to also be you.
Let me know your thoughts!
Tony Khait, CPA, PFS's
"Real World" Personal Strategy Note
Khait, CPA, PFS's Rules For a Financially-Happy Marriage (Part 2 of 2)
So let's dive right in, shall we?
First, look carefully at your company's benefits plan. Disability insurance is probably the most neglected insurance. Consider signing up through a work plan. More employers are implementing flexible savings accounts, which allow you to pay for various medical and other specific types of expenses with pretax dollars. They are typically coupled with a high-deductible health insurance plan. If you are young and healthy, these provide you with disaster insurance as well as health-care insurance savings. If your employer has one, put the maximum away annually, and invest it if possible.
The new healthcare legislation may throw some wrenches into these works in the future, but for now, this is a wise step.
All the pundits say, "Save as much as you can," which is fine advice, but not specific enough. So allow me to provide more specifics as to how you can and should accomplish just that.
You need to take a substantial chunk of change out of your discretionary money each month, some before it even makes it to your checking account (examples follow below), and the rest (which will necessarily be the majority of your regular savings) after you deposit it. For the amount, I encourage aiming for as much as half your take-home pay. This may seem excessive at first, but remember, you are trying to grow rich, not live rich.
Live simply and you will have peace of mind.
As your first priority, get the benefit from your company's 401(k), which usually amounts to contributing 5% of your salary, while your employer matches with another 4%. This is the portion I mentioned as being deducted before you ever see a paycheck. If your employer has a flexible savings account (FSA) program, the money you contribute to that will also come out before your collect your paycheck.
After these deductions, you probably have the remainder of your paycheck deposited automatically into your checking account. You should then automate a transfer out of your checking account into an investment account, to meet many of your long-term financial goals. Money in your investment account will appreciate. Always keep your goals in mind, and stay on track.
For example, make a list of all the big-ticket items you will need to pay for over the next several years. You need to pay your annual car insurance payment. So transfer the appropriate monthly amount for this to your investment account, to save up for the annual payment. You should be saving for your next car. Transfer the appropriate monthly amount needed to afford the eventual cost of it, into your investment account. All of these significant purchases may comprise around 10% of your take-home pay.
You should be fully funding your Roth IRA while you are young and in a relatively low tax bracket. Put this money into your investment account, and then transfer it once a year to a Roth IRA account.
Save 5% of your take-home pay in a taxable account allocated for your retirement. This is after fully funding your 401(k) match and your Roth IRA. There are times in life when you will need taxable savings, and you should be saving and investing 5% of your take-home pay.
Save and invest 10% of your take-home pay for charitable giving. As your investments earn money for you, you will give appreciated assets to the charity and replace the same dollar amount from your take-home pay. Donating appreciated assets provides an additional 15% tax savings.
Finally, as a margin of safety, save and invest 10% of your take-home pay to help cover the cost of unknown unknowns. If your first response to this suggestion is to ask, "Like what?" the answer is "Exactly." Most people who run up credit card debt keep their regular spending within 100% of their take-home pay until some unexpected expense causes them to deficit spend. You can't anticipate unknown unknowns, so the best you can do is set aside some money to cover them when they arise.
All of these expenses can easily comprise half of your take-home pay. Even if you've landed a good-paying job straight out of school, don't spend over half of your take-home pay on daily expenses. Transfer half of your pay directly to an investment account and let it start growing. Cash in the bank is the best financial security. Cash doubling in an investment account is the best financial future. By the time you need money from your investment account for some of those long-range purchases, ideally it will have already started earning a nice return.
Allow me to summarize, and reassert just once more: Saving and investing should be automatic. You won't miss what you don't see. Have as much as half of your take-home pay transferred out of your checking account and into an investment account each month.
Live simply. Avoid buying items you have to store, repair and maintain. Produce twice what you consume. Be generous. Avoid liabilities you have to pay each month. Invest in assets that pay you instead. Do these things, and you will have a peace of mind that your contemporaries may never find.
I do hope that if one marriage is served and preserved because of these ideas, that they will be passed along.
Tony Khait, CPA, PFS