5 Steps To Prepare for Financial Success

5 Steps To Prepare for Financial Success

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln

If you’re looking to set yourself up for long term financial success, you must take the time to put systems in place to quickly grow your net worth. Preparation is essential so that you can take advantage of your hard-earned money! To make the process easier, here are 5 steps to prepare for financial success:

 

1: Automate Your Financial Life

 

Take the time to establish a high yield savings account separate from your everyday checking. Look into establishing retirement accounts such as Roth, Traditional, and SEP( if self-employed) IRAs, even if you’re not quite ready to start utilizing them. Keep in mind you can still utilize IRAs in addition to your employer-sponsored retirement plan.

Long term you should strive to take advantage of all tax-deferred accounts (individual goals permitting) before moving on to taxable investing. By having the appropriate accounts in place (with bank links etc.) you can make it easy on yourself to make investment contributions in an efficient and timely manner. You can also work on simultaneously building up your cash reserve (anywhere from 3-12 months living expenses depending on the individual) so that you can invest with confidence later. Logistics is half the battle with taking action, so make it easy on yourself!

 

2: Pay Down Debt Strategically

 

In line with automating your financial life, take the time to review your debt (such as student loans). As a crucial no brainer, make sure you are allocating your debt repayment to the highest interest debt first. There are different ways to approach paying down debt, such as the debt snowball repayment method. While the specific strategy can vary depending on the individual, the most important thing is you have SOME kind of a plan and are making a conscious effort. The worst thing you can do is avoid looking at it because of the temporary stress involved.

 

3: Use a Credit Card Like you Would a Debit Card and Build Credit

 

Credit cards are useful as an intermediary between you and the vendor, especially in cases of fraudulent activity. It’s easier to correct fraudulent charges with a credit card versus a debit card (since it’s technically not your money), which is why you should not use your debit card for daily purchases. You can also earn rewards for purchases you would otherwise make anyways, so it makes sense to take advantage of credit cards! Credit cards are also a secondary cash reserve (hopefully to your actual cash reserve) which can be used for TRUE EMERGENCIES.

Paying off your credit cards on time along with having larger lines of credit (and not utilizing greater than 30% of them) will help build your credit score (fairly quickly too). Having a good credit score is especially useful when you are looking to qualify for a mortgage. With all of this being said, you should treat your credit card like your debit card. This means not spending more money than you’ve budgeted (or have in the bank, circumstance permitting). If you’re paying off your credit card monthly (which you should to avoid the outrageous interest rates), then it’s essentially a debit card with added benefits.

 

4: Budgeting: Start With Your Necessary Fixed Expenses and Figure out how Much you Have Left

 

It’s crucial that you at least KNOW what you’re spending. Consider using an online aggregation tool to track your total outflow. You cannot modify your budget if you don’t know what you’re spending. When building out your budget, start by looking at unavoidable fixed expenses you have to pay. From there you can determine what your variable discretionary expenses are. When you have a realistic analysis with yourself of what you are taking home for income (on an after-tax basis) less your outflow, you can figure out what your wiggle room looks like. If this is an area you struggle with, consider working with a financial coach such as Savings Academy.

 

5: Always Take Advantage of Free Money Even if you Have Limited Cash Flow

 

Does your employer offer a match on your 401(k) if you contribute a certain percentage of your salary? If so, you should contribute enough to at least receive the full match (even if your cash flow is tight). Free money is the best money. An employer match is essentially a 100% risk-free return (dependent on the match amount). That is hard to find!

Additional free money can come in the form of stock purchase plans where your company allows you to buy its stock at a substantial discount (and then immediately sell at the end of the purchasing period). Taking advantage of a stock purchase plan is not as straight forward as a 401(k) match, but cash flow permitting it can be a great source of “free money”.

 

As always, to learn more about our financial planning and investing philosophy, be sure to check out the DO MORE WITH YOUR MONEY podcast, available on Apple PodcastsSpotify, and SoundCloud.

 

Lastly, be sure to connect with me on Twitter:

Why I Respect BUT Dislike the Latte Factor

Why I Respect BUT Dislike the Latte Factor

Earlier this year CNBC published an article titled, Suze Orman: If you waste money on coffee, it’s like ‘peeing $1 million down the drain’

Here is a quick excerpt from the article:

“Let’s say you spend around $100 on coffee each month. If you were to put that $100 into a Roth IRA instead, after 40 years the money would have grown to around $1 million with a 12 percent rate of return. Even with a seven percent rate of return, you’d still have around $250,000.”

“You need to think about it as: You are peeing $1 million down the drain as you are drinking that coffee,” Orman says. “Do you really want to do that? No.”

What Suze Orman is referencing here is known as the ‘Latte Factor’ made famous by New York Times bestselling author David Bach.

Being cognizant of the small purchases in life and how they can lead to wasting substantial sums of money is IMPORTANT. Especially for someone just starting their personal finance journey and looking to build a solid foundation. However, to achieve meaningful wealth I don’t believe the “latte factor” is ultimately going to move the needle (unfortunately).

The major purchases in life such as a car, home, and education have opportunity costs that are worth a lifetime of latte purchases. So while I respect the principles of the latte factor, I don’t like the hyperbolic examples used by personal finance ‘gurus’ to draw attention to unrealistic examples.

More specifically, I REALLY don’t like the example used by Suze Orman in this article. A 12% annualized return is well above the long term average for US stocks and would be extremely unlikely to be achieved even by professional money managers. As you can see, the rate of return (over a 40 year time period) has a MASSIVE impact on the ending dollar amount.

The ending dollar value also doesn’t account for inflation! When you use realistic numbers that account for REAL returns after inflation, this example quickly loses its ‘clickbait’ appeal.

If foregoing coffee purchases aren’t going to move the needle, what will? 

Again, assuming you are aware of and respect the latte factor, here are some things that have an opportunity cost that surpasses a LIFETIME worth of latte purchases:

  • Failing to plan for tax efficiency within your income and investments
  • Not maximizing lucrative employer stock compensation (such as options and purchase plans)
  • Failing to take advantage of 401(k) matches
  • For business owners – failing to reduce taxable income via retirement plans and available deductions
  • Overextending yourself on a home (residence) and/or viewing it primarily as an investment
  • Taking out student loans for education without a reasonable return on investment
  • Not discussing finances with your partner, which can ultimately lead to divorce

To really benefit from compounding interest with REALISTIC rates of return it requires a high savings rate. The ‘easiest way’ to achieve a high savings rate is by increasing your income. Foregoing the $5 latte will give you a great foundation, but will not ultimately move the needle (like increasing income will).

Don’t ever sell yourself short! Your earning potential is usually much higher than you think. Be cognizant of the small purchases but focus on getting the big-ticket decisions right.

Tune in to the DO MORE WITH YOUR MONEY podcast below to get my complete thoughts!

Available on Spotify, Apple Podcasts, Sticher and SoundCloud

AND make sure to connect with me on Instagram, Twitter, and LinkedIn

“Young, Successful…and Drowning in Debt”

“Young, Successful…and Drowning in Debt”

“On the surface, plenty of Boston millennials are earning, spending, and having a blast. But beneath the veneer of $17 margaritas and shopping trips around the Seaport, many are living with debt – and lots of it. Is buying the good life on loan the new normal? Or is it plunging a generation into an early midlife crisis?”

A friend recently sent me over this clip from Boston Magazine, which obviously resonated with me!

Here are my takeaways:

There’s no question many young professionals are living beyond their means. To act like this is something new, however, would be extremely hypocritical since most of our older generations are ALSO woefully unprepared for financial independence (retirement). Young people living for today and not worrying about the future (shocker).

There’s also no question that Instagram culture is influencing our ‘keeping up with the Joneses mentality’. It’s HARD to forgo indulging when you are constantly bombarded with pictures and videos of your peers ‘having the time of their lives’. But, like most things in life and personal finance – there is a balance!

Should a young person not be allowed to go out to dinner with friends because they have student loans? Should every last dollar of disposable income be put towards debt repayment or growing your net worth? If you have that level of discipline and want to sacrifice to get ahead, I applaud you. I’m more in the camp of living for today while still planning for tomorrow. As long as you have an adequate savings rate (which includes debt repayment) and are not leaving free money on the table via lucrative employer benefits (such as equity compensation, employer matches, etc.), I see nothing wrong with ALSO enjoying yourself in the present.

One thing I will suggest and strongly advocate for is making tradeoffs when it comes to location and where you live. You don’t have to live in the Seaport to experience the Seaport. What’s the point of living in the Seaport to pay $2,500 for a studio apartment when that leaves you no disposable income for the experiences you REALLY enjoy ( going out to dinner with friends, etc.).

I always advocate friends, family, clients, etc. to think hard where their money is used to derive happiness. I’ve found for most, it’s the ability to have the flexibility to share experiences with others. Think about what tradeoffs you can make to give yourself that flexibility.

Lastly, let’s all agree to not let flexing on the gram influence OUR spending decisions. Personal finance decisions are PERSONAL, we don’t know someone else’s balance sheet and cash flow, so it’s best to focus on our own.

Options for High Earners after Maxing Retirement Accounts

Options for High Earners after Maxing Retirement Accounts

You’re doing everything right — living below your means, have a sufficient cash reserve, and are taking advantage of your tax-deferred retirement accounts to the full extent. So what’s next when you still have discretionary cash flow left over?

First of all, this is a good problem to have and you should congratulate yourself for not falling victim to lifestyle creep!

When deciding on how to allocate additional cash flow towards a worthwhile goal, consider the following:

  1. Is there a shorter-term goal you have outside of investing for financial freedom (retirement)?
  2. Do you have a business idea you’d like to pursue? Investing in yourself is often the best return on investment.
  3. Real Estate – consider adding a rental property to your portfolio for income generation.
  4. Taxable Investing – keep it simple by continuing to build up your investment portfolio with tax-efficient investing.
  5. Enjoy life in the present more — travel more, go out to dinner more and invest in experiences!

From an investment standpoint, continuing to do more of the same is often a great option! Sometimes, as our net worth and incomes rise, we believe adding complexity to our investments is a natural form of progression.

This is not the case!

If you’re looking to use your money to enjoy life more in the present, consider what your money dials are.

Think about the things in your life that you can outsource, because you:

  1. Don’t enjoy doing them.
  2. Want to free up your time for things you do enjoy.
  3. Want increased convenience.

Time is our most valuable commodity, freeing it up is a form of wealth on its own!

Roth Conversion Planning Opportunities

Roth Conversion Planning Opportunities


I’ve written previously about the benefits of Roth accounts, due to their flexibility before retirement, and tax diversification benefits later on in retirement. With the implementation of the new tax reform, there are additional planning opportunities for individuals to convert existing pre-tax retirement money into after-tax Roth money.

An overlooked aspect of the tax reform is that the personal income tax rates for individuals are set to “sunset” in 2025, meaning they are set to revert to the previous higher rates. This is contrary to the corporate tax rate, which is set to remain at the new lower rate indefinitely. Therefore, Roth conversions are essential “on-sale” for the next 7 years, while the personal income tax rates remain at the lower level.

In the past, to be able to convert from a Traditional to a Roth IRA your income needed to be under $100,000. The IRS rules have since changed, and there is no longer an income cap in place. With the cap removed, high-income earners can now convert as long as they pay the appropriate tax on the conversion. There is no 10% early withdrawal penalty if the funds move from a Traditional IRA to a Roth IRA within a 60-day window.

If you’re someone with little to no after-tax retirement savings, I would strongly consider converting some pre-tax retirement money into a Roth IRA. The downside is that you’ll have a tax liability in the year of the conversion. This tax can be withheld from the converted amount, but if your savings and cash flow permit, it’s best to pay the tax separately so that you can maximize the amount that’s moved into the Roth IRA.

Another potential downside and caveat to keep in mind with Roth money is the risk of changes to tax legislation. With the rise in national debt, some speculate congress may one day come after Roth IRA’s as a potential source of tax revenue. I HIGHLY doubt any changes would affect existing Roth money, as any attempt to essentially double tax money without grandfathering prior contributions would be political suicide. However, I can envision congress eliminating future Roth contributions, which makes taking advantage of conversions/contributions today even more worthwhile.  

Whether you’re looking to take advantage of the temporary lower personal tax rates, or just expect to be in a low tax bracket for the coming year, consider the benefits of converting Traditional IRA money to a Roth IRA. For individuals who are planning a work sabbatical, or are transitioning into retirement, you may be able to convert substantial pre-tax money with little to no tax liability. Make sure to consult a tax professional when evaluating your situation.


Additional Info:


Although the Tax Cuts and Jobs Act made Roth Conversions more attractive because of the lower income tax rates, they also removed the ability to recharacterize the conversion, meaning if you do the conversion you cannot undo it.

Some reasons you would want to undo the conversion or “recharacterize”, would be if you ended up in a higher tax bracket than expected, or the converted amount dropped in value because of market performance, and you, therefore, were paying taxes on a higher amount than you had converted.

So if you do consider a Roth conversion in 2018 and moving forward, it’s best to either wait until the end of the calendar year so that you have a better idea of your tax situation, or if you’re worried about poor market timing, make multiple conversions throughout the year to essentially “dollar-cost average” your conversions.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities

5 Steps to Understanding and Improving Your Financial Situation

5 Steps to Understanding and Improving Your Financial Situation

1. Determine your monthly cash flow

This means understanding what your true after-tax income is and what your fixed expenses are. Fixed expenses may include liabilities, such as mortgages or student loans. It’s important to know how much disposable income you have. Only once you know what your disposable income is can you allocate it in the most efficient manner. For you, that may mean paying down additional debt, setting aside money for a cash reserve, or increasing investment contributions for a particular goal. If you want to better understand your complete financial picture, I highly recommend the app Mint. Especially if you pay everything with a credit card it’s very easy to track a budget on Mint. If you do use Mint, don’t worry about itemizing every single transaction as much as keeping track of your entire outflow.

2. Automate savings and bill paying

It’s honestly amazing how little you need to invest these days and the costs associating with doing so. There are so many options for automated savings into diversified investment portfolios there’s really no excuse not to at least start something. Even if it’s $100 a month, you want to have the option readily available so that you can increase contributions at any moment. If you don’t take the time to establish these accounts, it’s less likely you’ll make the contributions once your cash flow permits. For fixed expenses use auto payment so that you can focus on what’s left over for discretionary spending.

3. Develop a cash reserve

I’ve wrote about this previously, and yes it’s still lame (but needs to be said)! Having 3-6 months’ (or more depending on circumstances) worth of living expenses is essential to allowing yourself the flexibility to invest the way you want to. The opportunity cost of holding that money in cash is negligible and worth it. There will always be times in life where unexpected lump-sum expenses arise. Credit cards should be seen as a secondary reserve for true emergencies.

3. Focus on improving net worth 

Paying down debt also increases your net worth. As long as you are increasing your net worth in some way, you’re moving in the right direction. In the long run, your net worth is much more important than your income. If you save and invest properly, your net worth will have the potential to fluctuate more in a single week than what you currently make in a year. It’s not what you make, it’s what you save. Again, the app Mint is a great way to track your net worth. Mint even allows for the tracking of real estate (via zillow) and vehicles (via Kelley Blue Book).

4. Use your credit card like you would your debit card

Credit cards serve a couple purposes. They serve as an intermediary to protect you from fraudulent charges (since it’s technically not your money). They provide rewards, such as cash back or travel miles. Lastly, they provide cash flow support in true emergencies. Otherwise, it’s best to treat them as you would your debit card, meaning you spend only what you have in your actual bank account so that you can pay it off in full each month.

5. Live for today while planning for tomorrow


Don’t live your life worrying about every dollar you spend. Focus on the big expenses and let automation be your friend. Understand the trade off between what really makes you happy and the extra stuff that you don’t really need. I’ve never been a fan of worrying about tracking every little expense. If going out to Starbucks with your friends for a $5 latte makes you happy, then do it. Financing a $50,000 BMW on the other hand will set you back. Focus on the major expenses in life and keep perspective on the small ones.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities