By Ruth Mahoney, President, Capital Region, KeyBank
Earlier this month I attended a women’s leadership breakfast. The theme of the event was “Take a Walk in her Shoes,” and the message was that when women come together, we are better able to support each other through challenges so we can find our way to success.
It was and is an empowering message, and a message I strongly believe in, regardless of gender. We are at our best when we empathize with and support one another toward achieving goals. But as I listened, I also realized just how unique each of our stories are—that as similar as what we may experience may be, we all travel our own personal path through life on our own timeline. It’s what shapes us and makes us different.
From a financial standpoint, this has important implications. While most of us share similar values, needs and wants—to be financially well and ultimately thrive—and we all pass through similar life stages, how and when we pass through them vary greatly. This makes our relationship with money unique. Financial plans and budgets should account for this level of personalization.
Your lifestyle shapes your needs
A sound financial plan will account for your lifestyle as much as your life stage. Do you want to buy a house? Launch a business? Start a family? Travel the world? Retire early?
Understanding your goals and values will help you prioritize how you spend and save. It will also help you determine what matters most to you so you can set a budget that is realistic. For example, many people dream of retiring early. But what happens if you value recharging your batteries by taking a nice vacation with your family? The average cost for a family of four is around $4,500. Is it in the budget?
Life stages can define your lifestyle
One of the first “life stage” decisions a person makes is deciding what they will do after high school. Whether graduates decide to enlist in the armed services, get a job or enroll in a two- or four-year college, this is a major decision, and there is much to consider. For starters, according to College Board, college graduates earn about 66 percent more during a 40-year working life than the typical high school graduate. For those who do go to college, the decision to attend a two- or four-year, public versus private college will deeply influence the cost of their education. Then there is financial aid, as well as grants and scholarships.
If you’re a recent college graduate, career choice will largely shape your lifestyle. Engineering and computer science careers are higher earning than social work. So it is important to consider how your earning power will influence your ability to repay student loan debt, save money and meet your monthly expenses. It is also important to remember that retirement planning is a marathon, not a sprint. Anyone, regardless of career path, can meet their retirement goals, provided their goals are grounded in realism, they start investing early and they commit to executing a plan.
Another common life stage milestone is marriage. The average wedding in 2018 cost more than $30,000. Today, some couples are deciding they don’t want to spend that amount—or even a portion of that amount. Instead, they are putting that money into savings or retirement accounts.
Then there is housing? According to Trulia, in nearly all U.S. markets homeownership is cheaper than renting, assuming a traditional 30-year fixed mortgage with a 20 percent down payment. Here are some things to consider if you’re thinking about buying a house:
- Saving for a down payment
- Closing costs and taxes
- Repairs and maintenance
- Reputation of the community and school district
- Building equity
If you’re a renter, you don’t have the worries of repairs and maintenance, but you’re also not building equity and gaining value from your payments. You will also be limited by the types of home improvements you can make.
The final major life stage to plan for is retirement. The earlier you invest, the more your money will earn. For example, assuming a five percent rate of return, $10,000 invested by a 20-year old will grow to over $70,000 by age 60. That same amount invested by a 40-year old will only grow to $36,000.
If you’re closer to retirement age, it’s not too late to get your retirement plan on track. You can do this by maximizing your savings opportunities (tax laws are now in your favor), avoiding new debt, creating sustainable income and considering long-term care insurance and other risk management strategies.
Budget for lifestyle
Executing your financial plan is about following a budget. But your budget needs to reflect your reality, or you won’t be able to stick with it. So track all of your expenses and income for a month. More important, honestly assess your spending. Then think about your lifestyle, as well as your short- and long-term goals. Does your current spending support these goals? If not, it’s time to reevaluate your priorities and build a better plan. Remember, it’s your plan—your shoes to walk in. The more it reflects who you are and what you value, the more successful it will be.
About the author: Ruth Mahoney is president of KeyBank’s Capital Region. She can be reached at either 518-257-8619 or [email protected]
7 golden rules of personal finance
You have probably heard the adage that if you don’t know where you’re going, any road will get you there. If you’re an adventurer, this may work. However, if you’re trying to boost your financial wellness, it’s not a good approach. Instead, to get on track, try following these seven golden rules of personal finance.
- Always pay yourself. The simplest way to make money is to save money. Set up your savings account for bi-weekly or monthly automatic deposits. Every dollar you don’t save today is a dollar you have to re-earn tomorrow.
- Keep good company. When it comes to how you manage your finances, surrounding yourself with people who share your values and understand your goals will make it much easier for you to build wealth. This applies to both personal and professional relationships.
- Establish a retirement plan. Consider a Roth IRA. Contributions to a Roth IRA are made from your after tax income, so when you are finally eligible to withdraw you won’t be required to pay federal income tax on it. If you are employed, contribute to your 401k, 403b or 457b account.
- Create an emergency fund. Save for the things you want and always spend with a plan. This is easy to do if you set up a savings account and have automatic deposits made on a regular basis. Build up to a six-month emergency fund.
- Spend less than you earn. It’s really simple. If you are in the red at the end of the month, either earn more or spend less. Before you make a purchase, ask yourself: Do I want it or need it? How often will I use it? Can I afford it? Is there a cheaper alternative?
- Define your goals. Coordinate your investment portfolio with a long-term financial plan. Identifying your life goals and aligning them to your investment portfolio can help serve as the benchmark for evaluating portfolio performance over time.
- Manage risk. As your wealth increases, so does the potential for risks. Such risks include unexpected death, health issues, accidents or disability. Is your family prepared for these types of risks? An effective risk management strategy geared toward income replacement often involves life and/or disability insurance.
Life happens fast, and there are a lot of shifting variables. However, if you keep your approach to financial wellness simple and remember that managing your personal finances is about earning money and not losing it, you’ll be well on your way to financial freedom.