Workable Wealth's blog is all about helping Millennials make sense of the complicated world of finance and financial planning.Fee-only financial advisor based in San Diego working locally and virtually across the country helping young families, professional and entrepreneurial women, and military families. Get on the right financial track and start making smart, educated decisions with..
Financial decisions can be a surefire way to completely paralyze us. Even small financial decisions can be intimidating. So, when we’re faced with a major financial decision, the stress compounds. We’re often stuck feeling, well, stuck – and a little trapped.
Does this sound like you?
If you’re facing a major financial decision, you’re not alone. You’re going to face many of these big decisions throughout your life. It’s part of growing both personally and professionally and as you grow, the financial decisions you have to make will likely become more complicated and overwhelming.
Luckily, you can take some of the stress out of these scenarios by running through a list of questions before making a call one way or another. Although this practice won’t completely get rid of the stress you’re feeling, it should make the decision process much more manageable for you and your spouse or partner.
What Qualifies as a “Major” Financial Decision?
First let’s talk about what qualifies as a “major” financial decision. Some money decisions are easy to get hung up on, but don’t have that big of an impact on our lives. To help you eliminate some decision fatigue, set some “money rules” up for you and your spouse or partner. These can include:
How much budgeted, discretionary money you can spend without feeling guilty or checking in with anyone
What your budget is each month
What goals you’re working toward
What general spending guidelines you want to stick to (ex: you want to spend money on experiences, not things, whenever possible)
With these smaller money rules in place, you’ll be able to get through the day-to-day without stressing out too much over financial decisions. However, that doesn’t mean that major decisions won’t come up!
These might be decisions about buying a home or relocating, changing jobs or career paths, whether you want to purchase a new car, what college your kids can afford to attend (and how much you’ll financially support them) – just to name a few. Major financial decisions will have an impact on your immediate future, but they’ll also have a big impact on your long-term goals and the vision you have for your life.
With that being said, let’s dive into what questions you can ask yourself before making a major financial decision.
Is This Decision Within My Means?
Making a major financial decision out of left field usually isn’t a good idea. In other words, don’t quit your job, buy a new house, lease a new car, or move across the country without thinking about it (and budgeting for it) first. Even after you’ve budgeted for life’s major financial decisions, it’s still worth weighing the pros and cons. Your first step should always be to check yourself: Is this decision actually within my means? Or do I want this because it’ll provide instant gratification?
How Will This Decision Impact My Immediate Future?
You make plenty of money decisions every day that impact your immediate future. Buying dinner out with friends might mean one less date night next week. Sending your kids to summer camp might mean that you skip our annual family vacation to the beach before they go back to school. Everything comes with a tradeoff, but major financial decisions will have a bigger impact on your immediate financial future.
For example, if you’re thinking about buying a house, how will that impact your immediate future? Your down payment may lower your total savings, which could be a problem if you haven’t saved enough to cover both your down payment and potential emergencies (like broken water pipes, or having your kids break their arm climbing the tree in your new backyard). Make sure you know what your immediate future will look like if you make this decision, and that you aren’t jeopardizing you or your family’s security as a result.
How Will This Decision Impact My Long-Term Future?
Our small money decisions don’t make or break our long-term. Grabbing a salad for lunch that’s within your budget at a local deli isn’t going to completely derail your debt repayment strategy. Major financial decisions, on the other hand, will. If you choose to start your own business and leave your cushy-but-demoralizing 9-5 job, you’re giving up a lot of financial security in the short-term.
But you could be tapping into a more unlimited stream of income and growth opportunities that lead to more financial growth in the future. Have a very clear idea about how this choice impacts your long-term, regardless of which way you decide to go.
Why Do I Feel Motivated (Or Unmotivated) To Make This Decision?
Knowing the “why” behind your motivations can help you to gain clarity around whether or not this decision is best for you and your family. For example, let’s say you recently applied for (and landed!) a cool new job in your hometown. After living away for years, you’re ready to live near family again as you and your spouse are thinking about having kids and buying a home. Before you take that job, be honest with yourself: Is this opportunity really better than your current situation? Or are you motivated because you’re feeling desperate to move home? The job might actually be an awesome opportunity, in which case, go for it! But if you think you can find another, better opportunity for you and your career, consider continuing to apply and interview for a few more months. Don’t be afraid to take your time.
On the other side of the coin, you may be feeling unmotivated to make a major financial decision. Maybe you don’t want to downsize now that the kids have moved to college, even though there are a lot of cute housing options for you and your spouse in your area, and there are some concrete financial benefits. Are you unmotivated to downsize because moving doesn’t make financial sense? Or is it because you feel attached to the house your kids grew up in?
Remember – there’s no wrong answer! Whether you’re motivated or not, don’t shame yourself for how you feel. Just acknowledge those feelings as you make your decision, and understand how they’re impacting you.
Who Else Will This Decision Impact?
You don’t live in a vacuum. The major financial decisions you make will impact you, but they’ll also impact your partner or spouse, kids, family, friends, coworkers – and more. It can be helpful to think through who your decision will impact, and who needs to be part of a “stakeholders” conversation about your choice. We rarely think of the people in our lives as stakeholders – but that’s who they are! Deciding ahead of time who matters to you when making a financial decision, and bringing them into the conversation, can help to get you out of your own head.
Just remember, not everyone that the decision will impact needs to have a say. If you’re miserable at work, talking to a coworker who you like, but who wants you to stay put to make their own lives easier, is not a stakeholder in your decision. Likewise, your mom, who wants you to leave your miserable job to move your family closer to her, is also not a stakeholder. Both of these people have a vested interest in your choice, but they’re not on your VIP stakeholders list. Your spouse and kids, on the other hand, who may have to relocate or adjust to your new schedule, can be considered stakeholders.
Will This Decision Move Me Toward the Life I Want?
This is the biggest question to ask yourself before making a major financial decision. Think about the life you want for yourself, and for your family. Is this moving you toward that life? Or away from it? Even if a decision seems like it will help in the short term, it may not be a good long-term fit according to your lifestyle goals or values. Don’t be afraid to walk away from new, shiny opportunities if they won’t move the needle toward what you’re working for.
Need some help? Having an impartial third-party walk you through the consequences (good and bad!) of your decision before you take the leap can be a game changer. As a fee-only financial planner, a big part of my job is to act as a sounding board and an objective truth-speaker to help people make empowered decisions about their lives. Want to know more? Let’s talk about how teaming up with a financial planner can help you to start making confident major financial decisions.
Picture this: You’re standing in the kitchen with your partner, avoiding eye contact while a silent and slow tension builds in the air. The mail sits opened on the kitchen table between you. It’s staring at you both, testing you, but neither one of you wants to be the first to acknowledge it. Passively, one of you succumbs to the discomfort and picks up the credit card bill that is sitting on the top of the pile. And it begins…
“How is our credit card bill so high again?”
“Why didn’t you tell me you were going to charge that?”
“You promised you were going to cut back going out to lunch this month.”
What comes next is a series of defensive maneuvers and blame-shifting that eventually leads to some pretty impressive shouting or, for those of you who didn’t grow up in a loud Italian family like me, piercing angry eye stare-downs that basically conveys the same message: I’m really mad about our money and I’m taking it out on you right now.
It Doesn’t Have to Be This Way
What if I told you that money conversations didn’t have to go this way? What if there was a way to stop having the same money arguments over and over again? The truth is, money is a passion-driven subject.
But we don’t have to always jump straight to being angry or frustrated when the money conversations in our relationship aren’t going the way we want them to. Before getting angry with your partner about money, let’s take a step back, breathe, and try a new approach.
Share Your Money Stories
Chances are you’ve developed a view about money long before you met your current partner. This general financial approach that you adhere to comes from countless “money stories” that you’ve heard, seen, or told yourself over the years. Sharing your money stories with your partner can help to break down some of those walls that are blocking healthy communication about your finances. Here are a few you should consider talking about:
How was money handled in your house growing up?
What was your first job, and how did you spend your first paycheck?
What’s your favorite purchase that you’ve made?
What’s the best money advice you’ve ever received?
What is your biggest money mistake?
What’s the smartest thing you’ve ever done with your money?
Sharing your biggest money wins could renew your confidence in your partner, teach you something and create a sense of togetherness. This will help you to approach future money disagreements with a sense of respect for where each other are coming from.
Plus, what your partner shares could inspire you. Maybe they bought an old car and drove it for years, learning how to fix basic problems. Now you know that you have a handyman living at home so there’s no need to buy a brand new sedan. Or perhaps they started their Roth IRA at 18 and have been slowing saving away each year.
Get On the Same Page
Schedule time for both of you to talk uninterrupted about the household finances. I recommend creating an agenda together on what you want to cover and accomplish during your planned talk. This will help you keep your conversation focused and productive.
Review the state of the finances so both of you know exactly what your money situation is. Is debt an issue? Not enough savings? Don’t feel like you’re on track to meet your goals? Having both of you aware and involved will help keep you aligned.
Speaking of goals, you should have specific ones for your money. How much are you trying to save and for what purpose? Are you buying a new home, starting a business, growing your family or simply trying to build your rainy day fund? Target specific amounts you’d like to stash away and assign a time period for building up the savings for each goal.
Discuss roles and responsibilities for managing the finances, such as paying bills, saving, monitoring, etc.
Share what you think is working and what could be working better (or really isn’t working at all).
Agree how you’ll communicate and work together going forward (perhaps preparing ahead of time before coming to meetings / money talks.
You may have this particular conversation a few times before you’re finally on the same page. The real point of this conversation is to lay it all out on the table, explore the finances together and hash out anything that needs to be addressed so that it doesn’t continue to cause arguments in the future.
Stop the Blame Game
Finger pointing won’t get you anywhere when it comes to actually making progress with your money. In my experience, it may be better to avoid “you” comments altogether and opt for the “we,” because your money story includes both of you after all. So rather than saying, “You always spend too much going out to eat during the week.”
A better way to address this particular issue (during your scheduled regular money talks) is to say, “We continue to spend more than we allocated on going out to eat. Are there any ways we can limit or better track these expenses? Or should we cut back on another area instead so it balances out?” Remember, it’s about resolving the finances together, not attacking one another.
Kind, positive affirmations go a long way, especially after a history of arguments and criticisms. Be supportive of each other and give praise when praise is do. Acknowledge the other person for their contributions to household finances. Thank your wife for paying the bills. Praise your husband when he opts to pay more towards the car payment instead of using the discretionary money on himself.
Help make each other feel good and appreciated when it comes to money. It’s not easy and you both deserve affirmations for the effort, intention and commitment you’re putting in to make it a more positive experience for both of you. When you make a choice as a couple to start communicating about money, you’re really choosing to work through and resolve the issues that activated your arguments in the first place.
From here, keep communication open by continuing to schedule time to talk about money. Scheduling is key, because it isn’t a reaction to someone or something. Instead, it’s a commitment you’re both making to stay present with the finances. Maintaining a monthly budget together is a great way to keep each other accountable and engaged in the process.
Proactively planning on how much you’ll save, what you need to cover your regular expenses, and allocating a certain amount of funds for undefined discretionary purchases helps to prevent any surprises on your credit card statement and anyone from being caught off guard.
Need help communicating in a safe space? When you start trying to talk about money as a couple, it can be a challenge. Having a neutral third-party to facilitate the conversation can help. As a financial planner, I help my clients talk about their money all the time.
Although I can’t promise everyone will always agree, I can say that we usually are able to move through conversations together without blaming, finger-pointing, yelling, or even giving each other the stink eye. Having someone there who can help you see both sides of the story and remind you that you’re on the same team is a huge benefit! Want to learn more? Set up a consultation today!
Setting boundaries is a key part of living a happy, healthy life. Boundaries can help you to build stronger and more fulfilling relationships, find rest when you need it, protect yourself emotionally and mentally, and grow your self-awareness.
One area of our lives that we’re not always great about setting boundaries with is our finances. It’s easy to allow others to overstep financial boundaries because talking about money (or saying no to people who ask for it) can be uncomfortable. It can also be easy to ignore our own financial boundaries, and we end up making mistakes with our money that hurt our goals in the long run.
Set Better Money Boundaries With Others
44% of Americans struggle to talk about money. In a world where it often feels like no topic is off limits, we still feel awkward trying to talk about our personal finances with the people around us. Unfortunately, our inability to talk about money makes it challenging to set healthy financial boundaries with family, friends, and colleagues. To start setting better money boundaries with the people in your life, you need to know the types of people who are going to try to undermine your boundaries, create a financial strategy, and start communicating honestly about your goals.
Understand Your Financial Frenemies
You’ve probably heard of “frenemies” before. They’re people who you’re friendly with, even if you dislike them, or have some kind of rivalry going on. In my book, Work Your Wealth, I talk about the six kinds of financial frenemies you might run into:
1. The Entitled Frenemy. “Can you pick up the tab? Just this one time!” 2. The Budget-Buster. “You should buy it – treat yourself!” 3. The One-Upper. “You got a $100 gift card as a holiday gift from work? Nice. I got a $10,000 raise during my annual review.” 4. The Priers. “How much do you make? How much did that cost you?” 5. The Green-Eyed Monster. “Must be nice that you can afford such a big house.” 6. The FOMO Frenemy. “You can spend your money just this once!”
Knowing who these people are and being able to spot them when they start to overstep can help you honor the boundaries you’ve already set for yourself. Get comfortable saying “no” to these people – even if your financial “frenemies” are people who are close to you. Being honest and telling them that you’re uncomfortable with their request, or that you don’t want to discuss finances with them, can save you a lot of future headaches (even if it feels awkward in the moment).
Have a Strategy for Supporting Family or Friends
Do you have family members or friends who consistently ask you for money? Even if you don’t have the money to give, it can be uncomfortable to say no – especially if the person asking is someone close to you. There are a few different ways you can set boundaries in this situation:
1. Look at the money you give as a gift – not a loan. You’ll end up driving yourself crazy wondering when your Aunt Linda is going to pay you back, which will damage your relationship and make you second-guess giving in the first place. 2. Work the expense into your budget. How can you adjust your budget so that you can start putting aside a small amount of money each month in an account earmarked for giving? Remember – a small amount is key. You’re not sacrificing your own goals to support friends and family. You’re finding a way to put a predetermined amount of money aside each month so that it’s there if and when you need it. 3. Make expectations for the future clear. It’s okay to tell someone that you’re happy to give them money now, but that you won’t be able to in the future. Make it clear that your choice to support them right now doesn’t mean that they get to come back to you for money over and over again. 4. When in doubt – say no. You don’t need a reason to say “no” to giving someone else your money. If you need to blame it on your financial planner, do that. Seriously. I always tell my clients to just tell people it’s my fault they’re saying no to something. Just know that you don’t owe anyone an explanation for why you can or can’t support them financially.
Be Honest About Your Goals
The best way to set money boundaries with others is to be clear about what your goals are. When you’re open and honest about what you’re working toward, you’re less likely to feel like you need to justify your financial boundaries. Whether you’re saving up to go on a big trip with your spouse or partner, or are determined to max out your retirement savings this year – let people know!
Goals empower you to set clear and healthy financial boundaries with the people around you. They might even inspire your tribe to start setting some exciting financial goals for themselves!
Set Better Money Boundaries With Yourself
Setting money boundaries with others can be challenging, but setting money boundaries with yourself can be even more difficult.
Your life doesn’t always fit neatly into defined budget categories. When you try to track every dollar and cent that’s spent and hold yourself to an impossible budgeting standard, you’re more likely to burn out and fall off the wagon.
Instead, try following these steps for creating a firm, but flexible, budget that will help you stick to your money boundaries:
1. Know how much money is coming in. 2. Pay yourself first by automating contributions to savings, or for other specific goals – like debt repayment. 3. Know how much money is left after paying yourself. 4. Make sure your fixed expenses are covered with that amount of money. 5. Spend the rest on whatever you want.
In this budget example, you have a few “firm” budgeting boundaries. You know how much you’re paying yourself, you know what fixed expenses need to be covered, and you know what you have left to spend.
When making spending decisions, you know how much you have for the rest of the month. You have the flexibility to spend those funds in any way you choose. This helps give you the freedom to make spending choices that might differ month-to-month, but you’re never sacrificing your financial goals or pushing your own boundaries.
Put Systems in Place to Avoid Getting Off Track
When it comes to setting money boundaries with yourself, automation is your friend. Looking at the budgeting example above, you can automate:
1. Your savings. 2. Your debt repayment. 3. Contributions to other financial goals. 4. Your bills for fixed or recurring expenses.
When money is automatically withdrawn to cover these parts of your budget, you’re automatically setting a boundary for yourself. You’re only able to spend the cash you have left over and you’re living comfortably within your own financial boundaries.
Be Honest With Yourself
It’s not fun to admit when you’ve made a financial mistake. When you ignore your own financial boundaries, you need to be honest with yourself about what’s going on – and why it isn’t healthy. For example, let’s say you’re doing a great job of sticking to your automated budget. You’re saving, covering all of your bills, and happily spending what’s left each month. Then, an opportunity comes up – an incredible last minute trip with your kids. So, you break out the credit card and go for it, even though you know that you’re working toward becoming debt free.
Nobody’s perfect. Everyone makes mistakes. Hiding those mistakes from yourself is only going to enable you to continue making them. When you cross your own boundaries, you need to reflect honestly – and without judgment. Ask yourself these questions:
1. What caused you to overstep the boundary you had set for yourself? 2. How can you get back on course? 3. What additional steps can you take to make sure it doesn’t happen again?
If you can’t be honest about your money boundaries (and when you’ve ignored them) with yourself, you won’t be able to set healthy financial boundaries with others either.
Get Help Setting Financial Boundaries
Setting financial boundaries can be tough work! Working with a financial planner to clarify your goals and set money boundaries that support those goals can help. Your financial planner acts as your accountability partner, coach, sounding board, and strategist. They can help you to create comfortable money boundaries for your own life and help you communicate them clearly to the people around you.
Want to learn more about setting money boundaries? Wondering how a financial planner can help? Contact us today! We’d love to talk about your money boundaries, and how you can start sticking with them.
I’ve been a financial planner for many years, and out of all the questions I receive, this is one of the most common:
When do I need a financial planner?
I love this question, because the truth is that there are so many reasons you may need a financial planner! Typically, people reach out to speak with me (or any fee-only planner, for that matter) because they’ve hit a “big moment” in their life.
It might be that they’re planning for their first baby, or it could be that they’re navigating how to care for an aging parent. However, there are other times that people reach out because they’re just feeling unsure about their money in general, and are looking for a sense of confidence and clarity that comes with working with a professional.
In my 15 years of experience, I’ve found that, while everyone could benefit from working with a financial planner in some capacity, there are typically 9 pretty clear signs that it’s time for you to schedule a consultation.
#1: You’ve Received a Windfall
Have you recently inherited a large sum of money? How about a piece of property, or the family home? Inheritance is such a tricky thing, because there are so many emotions attached to inheriting money from a beloved family member who passed away. It can be tough to know what to do with your sudden wealth. Then there’s the added pressure of wanting to be a good financial steward with the money you’ve inherited – because you want to “do right” by your loved one who made you their benefactor.
Receiving a windfall is a surefire sign that you should speak with a fee-only financial planner. They can help you walk through any tax ramifications you face based on the type of wealth you’ve inherited. They can also help you to create a strategy for your newfound wealth that carries on your loved one’s legacy, while still caring for your financial needs.
#2: You’re Going Through a Big Transition
Having a baby? Gearing up for retirement? Buying a home? Big life transitions are often a sign that you should speak with a financial planner. The bigger the transition, the more true this is! A financial planner can help you to prioritize your financial goals, especially as they adjust during a transitional season of your life.
#3: You Got a Promotion or Pay Raise – Congrats!
Promotions, or even a standard pay raise, might mean a few things for you and your family:
1. You have more cash flow. 2. Your tax bracket may have changed. 3. You may be afforded different benefits, or compensation options (if you’ve been promoted).
Promotions, in particular, can be challenging to go through alone because there are so many different moving parts. You may be excited about the increased pay and responsibility, but feel unsure about next best steps to maximize your wealth. A financial planner can help you navigate your new financial situation, set goals, and take advantage of any new benefits or compensation options you’ve received.
#4: There Aren’t Enough Hours in Your Day
I’ve spoken with many people over the years who love DIY-ing their financial planning, and have been relatively successful. They’ve put together a simple strategy, have paid down debt, built savings, and are generally doing all of the right things. Then, life happens.
They have kids, get promoted at work, launch their own business – and their schedules get busier! When there aren’t enough hours in the day to work on your finances, that’s sometimes all the sign you need to contact a financial planner. They’ll be able to help you free up time in your schedule, craft a unique plan based on your goals and values, and give you the peace of mind you need to keep living your big, exciting life without worrying about your money.
#5: You’re Struggling to Stick to a Strategy
Have you bounced between multiple debt repayment strategies recently? Struggling to stick to your budget or savings plan? Sometimes, when we’re stuck creating a financial plan on our own, we put blinders on. We don’t see the flaws in our strategy, and can’t figure out why we keep falling down over and over again.
Enter: your financial planner! In many cases, your financial planner acts as your accountability partner and coach. They can help you figure out what’s not working about your current strategy, and check in regularly to make sure you stick to your plan moving forward. The accountability-factor is one of the biggest reasons even financial planners have a planner of our own, too. Going it alone is tough work!
#6: You Own Your Own Business
If you’re a business owner, you deal with a lot of financial concerns that traditional W-2 employees don’t have. From putting together a succession plan, to preparing your business to sell, to hiring employees, to planning for your retirement as someone who’s self-employed – you’ve got a lot on your plate.
Having a financial planner who can help you to balance both your personal financial concerns with your professional goals can be a huge help. Some financial planners even act in a “Chief Financial Officer” capacity for their small-business-owner clients.
#7: You’re Unsure About Investing
Investing can feel really intimidating when you’re just getting started. There’s a temptation to commit to an easy, one-size-fits-all solution (like a target date fund) in your workplace 401(k) and then call it a day. But there’s a whole wide world of investing strategy out there that goes beyond your workplace retirement plan, or a cookie-cutter investing solution.
Your financial planner helps you to create a solution that’s unique to your goals. They can walk you through the specifics of rebalancing your portfolio periodically, creating a diversified investment approach, and setting yourself up for long-term success.
A good fee-only financial planner will walk with you through market downturns, and be a sounding board when you’re considering big investment decisions. Their training and experience can help to inform your decisions, and bring an extra layer of confidence to your investing strategy.
#8: You’re Overpaying for Insurance – But Aren’t Sure What to Do About It
A disproportionate percentage of Americans are overpaying for insurance across the board. From auto insurance to homeowners insurance, it’s easy to get sold on the “best” insurance package, even if it means you’re overpaying.
It’s tough to know exactly what coverage is best for you and your family, and many people end up overpaying because they’re afraid of underpaying or not having enough coverage when it counts. Your financial planner can help you estimate what insurance needs you have, and what type of provider can get you the coverage you need – for the best value.
#9: You Want to Feel More Confident About Your Money
Sometimes the biggest sign you need a financial planner is that you don’t feel confident about your money. 30% of Americans are stressed out about money constantly. When I talk to people who are wondering whether they need a financial planner, this is easily the #1 thing they tell me about.
Even if they know that they’re successfully building their wealth and that they’re checking all of the boxes on their financial to-do list, they’re still worried that they’re missing something, or that they’re not doing enough.
Nobody should have to go through life feeling constantly worried about their money. Having a financial planner in your corner can help you feel confident that you’ve checked every box, and that you’re on track to reach your goals.
Additionally, working with a planner who helps you line up your financial plan with your values can totally change your outlook on your wealth. Instead of viewing money as something that controls your life, you’ll start to see it as a tool that can be leveraged to live the life you want to live.
Ready to Get Started?
If you’ve been wondering whether or not you need a financial planner, it can help to talk through your questions and concerns with a fee-only planner. Contact me today. I’m happy to point you in the right direction, or to help you determine whether or not it’s the right time for you to partner up with a planner to start working your wealth.
By the time you’re in your 40’s, you probably feel like you’re in a bit more of a stable place with your finances. Debt, like student loans or a mortgage, may still be something you’re dealing with – but it’s less looming than it was in your 20s or 30s. You’ve probably progressed in your career, have started a family, and have been steadily building your wealth for the past decade or so.
All of these things point to financial progress!
Looking for a clear way to check in on how you’re doing? Calculating your net worth, and tracking it semi-regularly, can help you to see whether your efforts to work your wealth are paying off.
Calculating Your Net Worth
Calculating your net worth is easier than you think. You start by pulling together a list of your assets. This is everything from the cash in your bank accounts, to the value of your car or home, to the value of your investments. Once you have your assets listed, you list your liabilities. In your 40s, your liabilities are likely:
Auto loan (unless you paid for your vehicles in cash!)
Now, you take your total assets, subtract your total liabilities, and voila! You’ve just calculated your net worth.
How Often Should You Check Your Net Worth?
Honestly, your net worth isn’t going to fluctuate a ton week-to-week, or even month-to-month. Sometimes you’ll see a big jump after paying down a loan or knocking out a credit card. We’re usually just looking for slow and steady growth as you work to pay off your liabilities and increase the value of your assets. So, checking your net worth yearly, or as often as once a quarter, can help to give you a good idea of your big-picture.
Why Is Your Net Worth Important?
Your net worth doesn’t necessarily define your financial life. It is, after all, just a number. However, watching how your net worth grows or changes can be a pretty good predictor of your financial progress over the years. For example, if you feel like you and your spouse or partner have been making great progress paying off your mortgage, but your net worth is still steadily declining every quarter, that’s a problem. This could mean that you’re not paying as much toward your mortgage each year as you think, or maybe you’re taking on more debt in other areas of your life – even as you pay your mortgage off. Regardless of the reason, you may be fooling yourself about the progress you’re actually making toward your goal of becoming debt-free.
On the other hand, looking at your net worth may give you a bit of a confidence boost! Many people beat themselves up about their financial decisions, or are worried that they’re not doing enough to grow their wealth. When they see that their net worth is solidly positive and climbing year after year, it’s a relief! In these cases, checking your net worth can be a great way to remind yourself that you truly are making a big effort to grow your wealth and pay down debt. Keep it up!
Knowing your net worth is a great way to track where you are, and what financial trends are happening in your life. More than that, though, checking your net worth can help you to decide what you need to do in order to get where you want to be. This is especially true in your 40s! You still have plenty of time before retirement, which makes now the ideal time to look at your net worth, set goals for growth, and put a strategy in place.
What Should Your Net Worth Be At 40?
Everyone’s financial situation is unique, and your net worth is going to reflect that. There’s no one “right” net worth to work toward when you’re in your 40s. Your net worth goals should be based on your lifestyle goals – not just an arbitrary number you want to grow your wealth to.
That being said, there are a few ways to determine whether you’re “on track” with your net worth.
Rules of Thumb
There are a few rules of thumb that people follow when setting a net worth goal. The first is a catch-all equation:
Ideal Net Worth = [Your Age – 25] x [⅕ x Annual Gross Income]
Let’s look at an example. Let’s say you’re 43 years old, and you make $100,000 a year. Using the above equation your ideal net worth would be $360,000.
$360,000 = [43-25] x [⅕ x $100,000]
Another common rule of thumb when it comes to net worth goals is to have a net worth of 2x your annual salary by the time you’re 40 years old, and 4x your annual salary by the time you turn 50.
Using our example above, if you’re now 43 and your salary is $100,000, you should have a net worth of almost $300,000.
Looking At Your Net Worth History
Although these rules of thumb can be helpful to give you a target ballpark for what your net worth should be, it can also be helpful to look at your net worth history to set future goals. For example, if your goal has been to pay down your debt over the last decade, you may not have been saving as aggressively.
Now that your debt is close to paid off, you’ll be able to put more toward saving for retirement, or for other big-picture goals. Knowing that your debt has taken up a big chunk of your net worth in the past, you’ll be able to set goals for exponential saving and growth now that debt payments aren’t eating up your monthly cash flow.
What Does it Take to be Above Average?
According to the Financial Samurai, the average net worth for a 40 year old in America is approximately $80,000. The above average 40 year old, on the other hand, has a net worth closer to $660,000. That’s a huge gap!
To move yourself into that financially successful, “above average” demographic, you can do a few things:
Watch your spending. Remember – the goal is to grow your wealth, not burn through any cash you have sitting around.
Prioritize debt repayment. Debt can be a net-worth-killer. Prioritizing debt repayment over the next several years, and then focusing on staying out of debt is key.
Negotiate your salary. The more you earn, the more cash flow you’ll have to grow your savings and pay down your liabilities.
Leverage compound interest. Compound interest acts like a rolling snowball for growing your wealth. You start with a small amount, but as you continue to contribute, and your interest grows your contributions, your wealth will start to multiply exponentially. Take advantage of compound interest by focusing on investing consistently, contributing to your workplace retirement account, and finding high-yield savings vehicles for your money.
Working with an Advisor Can Help
Looking for additional ways to grow your net worth? You might be feeling like your finances are a black hole right now. Figuring out how to continue making progress, and grow your net worth, can be time consuming. The worst part is that, all too often, when you’re going it alone, it’s easy to fall off the bandwagon. Even if you create a well-researched, airtight plan for your family to start growing your wealth, it’s easy to get off track.
Working with an advisor can help. A fee-only financial planner can act as your accountability partner, making sure that you’re always working with a money map that balances saving for the future while enjoying your life in the present. They can also help you to develop a strategy for everything from your daily cash flow to your retirement investments. If you’re ready to find a partner who’s on your side in your fight to grow your net worth, reach out! We’d love to talk to you about how financial planning can help.
Compound interest sounds pretty fancy. In the world of financial planning, we often talk about how earning interest on your money – either through a high-yield savings account, or through investing – can be a game changer as you try to grow your wealth. Even though compound interest might seem complicated, or unattainable, the truth is that it’s a benefit that anyone can take advantage of if you start saving now.
How Does Compound Interest Work?
Compound interest is actually more straightforward than most people realize. The best analogy I’ve heard goes like this:
Picture you’re standing at the top of a hill, and you’ve just made a snowball. The snowball is pretty small at first. In fact, it might not even make an impact when you go to throw it at your husband (sorry, Brian!). But what would happen if you took that snowball, and started rolling it down the hill?
With every revolution, the snowball would pick up more snow. The bigger the snowball gets, the more snow it can pick up, and the faster it grows in size. By the time it hits the bottom of the hill, you’ve got a good-sized snowball, even though what you started with was tiny!
Compound interest works this same way. You start with a small investment early on in your career. As the principal investment starts earning interest, it’s able to continue earning more and more interest over time. Basically, you earn interest on your money. Then the interest you earn also earns interest.
By the time you reach retirement, your once-small retirement savings account will have grown significantly. Compound interest is a fantastic way to start working your wealth, and taking advantage of the benefits of saving early – even if you can’t afford to save very much when you’re first getting started.
That being said, compound interest isn’t a one-and-done thing. You can’t put $10,000 in your retirement account one time and expect compound interest to do the rest of the work. Let’s go back to the snowball example for a second. Can you imagine how much bigger your snowball would be if, every few yards down the hill, you stopped and manually packed more snow onto it before sending the snowball on it’s way again? Your snowball would grow so much faster!
The same is true for your retirement savings. Your initial investment, or contribution to your retirement savings account, will grow. Compound interest will work to your advantage. But you’ll be able to grow your nest egg more quickly, and stay on track to reach your retirement goals, if you contribute early and often in your career.
Compound Interest in ActionCase 1:
Imagine our friend Early Eleanor starts saving for retirement at age 25. She invests $100 a month for 10 years, and stops investing at age 35. By age 35, she’s contributed $12,000 to her retirement savings account. Earning an interest rate of 6%, her balance would be $15,996.04 when she stops investing at age 35.
Assuming that her annual return rate continues to be 6%, Early Eleanor would have $91,973.11 by age 65 for retirement.
Now, imagine Early Eleanor hadn’t stopped contributing to her retirement savings account at age 35. Let’s pretend that she kept right on contributing $100 each month for 20 years instead of 10. At age 45, Eleanor would have contributed $24,000. Earning 6% interest, her account balance at age 45 would be $44,463.42.
If the account went untouched, and continued to earn 6% interest, until she retired at age 65, Early Eleanor would have a nest egg of $142,600.21.
Early Eleanor is close friends with Late Lauren. Late Lauren waited till she was 35 to start investing. After talking to Early Eleanor about her investing strategy, Late Lauren decided to contribute $100 each month to her retirement savings account, earning a return of 6%. She contributed for 10 years, until she was 45 years old.
Even though she earned the same interest rate as Eleanor did, Late Lauren’s account would only be worth $56,301.47 at age 65 when she’s ready to retire.
Even if Late Lauren decides to contribute $100 each month at an interest rate of 6% over 20 years, her account will only be worth $79,627.21 when she retires at 65.
No. of Years Contributing $100/Month
Total Amount Saved (with Interest)
Years to Compound (without Additional Contributions)
Balance at Age 65
Money Earned From Interest
Early Eleanor saved the exact same amount as Late Lauren – but her savings earned so much more, because she was able to take advantage of compound interest. Her money earned interest, and her interest earned interest, over several decades. She gave her wealth more time to compound and grow, and was better set up for retirement as a result.
The Takeaway: You can contribute less money earlier in your career, and still end up with more in the bank when you retire. The longer you give your money to take advantage of compound interest, the bigger your nest egg will grow.
What If I Haven’t Started Saving Yet?
You might be thinking:
Okay, I get it. Compound interest rocks if you’re trying to save for retirement, and can start saving early. But I’m already 35 – am I destined to be a Late Lauren?
Of course, if you could have started saving for retirement earlier in your career, you’d have had longer to take advantage of compound interest and grow your savings. But guess what? Life doesn’t always work out that way.
As a financial planner, I’m a big believer in the fact that kicking yourself for your financial mistakes doesn’t get you anywhere. Dwelling on how you could have been more intentional about saving doesn’t help you right now. So, if you’re creeping up on retirement without having saved intentionally yet, don’t beat yourself up. Instead, put together a plan for how much you’ll need when you retire, and start saving consistently toward that goal. Don’t wait – start now! You still have time to take advantage of compound interest!
Other Benefits of Saving Early
Compound interest is, without a doubt, a magical tool for savings. Earning interest, and having your interest earn interest, is one of the best ways to start working your wealth and growing your net worth. Compound interest sets you and your family up for future financial success. However, compound interest isn’t the only benefit of saving early (and often).
Did you know that if you’re willing to start saving now, you’ll give yourself more time to recover if the market dips? Investing isn’t a foolproof sport. Even if you have a strategy that seems airtight, nobody can predict how the market will behave in a given year. If you start investing early in your career, you’re building in a buffer for yourself. You’ll have more time to grow your nest egg, and more time to recover after the fact if your investments spend a period of time underperforming based on your original expectations.
Saving for retirement, or other big goals, can be tough. Putting together a strategy that works for your unique financial situation takes time, and sticking with it can be hard. This is where working with a financial planner can make a big difference. If you’re worried about your retirement savings, or are ready to get started saving to take advantage of compound interest and work your wealth, schedule a call. I’d love to talk to you about how a fee-only planner can help.
Have you ever wondered whether or not you’re doing “okay” financially? One good way to take a health-check of your finances is to review your net worth every once in a while. Although net worth is definitely not the end-all-be-all indicator of financial health, it’s a good baseline to get an idea of where you and your family stand.
How to Calculate Your Net Worth
Your net worth is easier to calculate than you think. Here’s a step-by-step process for calculating your net worth:
1. Total all of your assets. 2. Total all of your liabilities (or debts). 3. Subtract your debts from your assets. 4. That number is your net worth!
There are several calculators out there that can help you pull together the numbers you need, but this one from Kiplinger is really comprehensive.
In general, the assets you should be totaling up are:
The value of your business
Other property you own (including cars, jewelry, antiques, etc.)
Your liabilities might include:
Let’s Look At the Numbers
Now that you know how to calculate your net worth, we can talk about what your net worth should be by age 30. Keep in mind that your situation is unique to you. Even though these average numbers provide you with a good baseline to estimate your own net worth, or financial health, with, they don’t tell your whole story.
According to Listen Money Matters, the average net worth for people in the United States under age 35 is right around $6,676. The Financial Samurai has a similar number – estimating that the average 30-year-old has a net worth of about $7,000.
Does that seem low to you? The truth is that most 30-year-olds are still working to pay off a mountain of student loan debt. On top of that, they may be dealing with a mortgage, auto loans, and consumer debt (like credit cards). The more debt you carry, the lower your total net worth is going to be.
A better indicator of financial health at this age is likely how much you have in savings. By the time you’re 30, you can shoot for having between half of your annual salary, to a full year’s salary saved. That’s not to say that all of your savings needs to be in one place! You can contribute to your workplace retirement account, a Roth IRA, a cash savings account, a money market account, or a traditional investment account to keep growing your savings.
Factors That Are Negatively Impacting Your Net Worth
Your net worth is negatively impacted by two different things:
1. Your debt. 2. Your lack of saving.
If you’re swimming in student loans (and paying the minimum balance), and are only saving a little bit each month, the likelihood that your net worth will improve is pretty low. The best things that you can do to boost your net worth are to knock out your debt and to start saving more.
What You Can Do To Improve Your Net Worth
Ready to really level up your net worth? At age 30, you’ve got a lot going on in your life. You might be getting married, starting a family, growing your career, buying a home – the list goes on and on. The good news is that your 30s are an exciting financial time. You’re likely starting to break out of the constantly-grinding, Ramen-for-dinner phase of your life, and you get to start enjoying your wealth a little bit more as it grows. However, in order to get to that point, you have to start actively working to improve your net worth.
The higher your net worth is, the more opportunities you open up for yourself and your family – financially and otherwise. With less debt to weigh you down, and more savings to protect you against expensive emergencies, you’re able to set up the lifestyle you’ve always envisioned for yourself.
If you’re ready to buckle down and start growing your wealth (and your net worth!), here are a few ways you can get started.
A lot of people feel nervous to start investing. When you’re working hard to pay down your debt, you don’t always have a lot of extra cash flow to start investing with. Luckily, getting started with investing isn’t as intimidating as you might think! When you’re a new investor, define your “why” for investing, and start small. For example, if you want to start investing to build your retirement nest egg, you might start looking for target date funds within your company 401(k) that line up with your retirement timeline.
Investing is as easy (or as complicated) as you want to make it. You don’t have to be a stock picker, hunched over your laptop at all hours of the day, to get started! Looking at your workplace retirement accounts, or Individual Retirement Accounts (IRAs) are both great places to start.
1. Savings (I’m a big fan of separate savings accounts for separate goals). 2. Debt repayment. 3. Everything else.
A few general percentages I like to use are: saving 20% of your after-tax income, using 30% to pay down your debt, and 50% to cover everything else. This general budget system can help you to prioritize savings without feeling overwhelmed by tracking every last penny that you and your family spend each month.
The debt snowball strategy says that you start by paying down your smallest-balance debt first. Then, once that debt is paid off, you roll the monthly payment to your next-biggest debt.
The debt avalanche strategy focuses on interest rate instead of debt balance. You’d start by paying off your highest-interest debt first, then roll the payment from that debt into the debt with the next-lowest interest rate.
Some people like the debt snowball strategy because it’s easier to get momentum on the front-end of your debt repayment. Others prefer the debt avalanche because it saves them money in the long-run by paying off high-interest debt first. Find a system that works best for you and your family, then stick to it!
Set Goals – and Save For Them
A big part of growing your wealth is setting smart and specific goals, then saving for them. That means every time you have a big purchase coming up, whether it’s an expensive vacation or a new-to-you car, that purchase becomes a goal. You set aside money each month until you can afford it – that’s it. The purpose of this exercise is simple: you’re growing your savings, and staying out of debt. This can be tough, especially in today’s instant-gratification world. But the longer you’re able to stay out of consumer debt, the more you’ll be able to grow your net worth!
Ready to Boost Your Net Worth?
Having a clear-cut financial plan can help to put you and your family on the right track. Getting started early while you’re in your 30’s gives you a lot of time to grow your savings, and to use your wealth in a way that supports your values and the lifestyle you want. Your financial plan sets you up for success, not just during retirement – but right now, too! Ready to get started? Reach out!
No, it’s not the same thing as the FYRE movement (the documentary series that’s taking Netflix and Hulu by storm).
FIRE – or Financial Independence, Retire Early – is all about growing your wealth and implementing smart debt repayment and saving strategies to (you guessed it!) become financially independent and retire early.
Many of my Workable Wealth readers are entrepreneurs or are working a side hustle to grow their income and achieve financial independence, and many people wonder whether or not the FIRE movement is right for them. Let’s break down what this movement entails, and what’s important to keep in mind before you pursue FIRE.
The typical retirement age is 63 years old. However, many people in today’s world are able to retire earlier than that because they:
Pay down their debt
Save enough to live comfortably throughout their retirement (even if they retire early)
Minimize expenses in order to extend their savings and enjoy their financial independence without falling back into debt
The FIRE movement is gaining momentum right now, and with good reason. Who doesn’t want to live a financially independent life that leads to early retirement?
Most people who are advocates of the FIRE movement are seeking to accomplish financial independence and early retirement much earlier than the traditional retirement age. In fact, some of them are retiring as early as their 20s-40s. The financial plans that FIRE advocates stick to tend to be pretty strict. After all, if you want to pay off all of your debt and save enough to retire early, you have to be able to buckle down and make every penny count toward your goals. But the end result of all the scrimping and saving would be worth it – right? Well, the answer may not be as clear as you think.
Is FIRE All It’s Cracked Up to Be?
You know the saying:
If it sounds too good to be true, it probably is.
Achieving FIRE is definitely possible, but there are some drawbacks that are worth considering. First and foremost, adhering to an extremely strict budget in order to build a sizable nest egg that will support you for the remainder of your life isn’t easy. For some people, it may not even be feasible. The savings you’d need to support a comfortable lifestyle for you and your family for the next 30-60 years is huge. Sometimes, the amount of income you’re bringing in just isn’t going to cut it if your goal is early retirement.
In other situations, you may have the income to support your FIRE aspirations, but it can still be challenging to stick with the budget required to meet those goals. It’s kind of like crash dieting. You might see results quickly, but it gets harder and harder to stick to your extremely limited diet. Then, when you finally decide that “cheating” on the diet is worthwhile, it can be hard to stop. Instead of snacking on a Girl Scout cookie, you end up eating a whole box – or three.
Budgeting for FIRE can be the same concept. If you set unrealistic financial expectations for yourself, it’s going to be tough to meet them. When you do start to slip away from your budget, or your debt repayment and savings plan, you’re more likely to backslide in an even bigger way than you might have otherwise.
The Untold Side of FIRE
It’s worth noting that FIRE isn’t always as simple as it seems, even for people who seem to have “achieved” FIRE. The push that people make to become financially independent is, inherently, positive. I’ve seen a lot of really fantastic life changes come about because people are interested in becoming financially independent. Financial independence means something different to everyone, but a big part of it is having the freedom and choice to build your ideal life without the responsibilities of debt and a lack of cash flow or savings to stop you from achieving your dreams.
Some FIRE advocates promote the FIRE concept, but don’t share as freely about how they’re choosing to spend their newfound freedom after retiring early. The truth is, retiring from a career isn’t always a healthy option. Many financial planners recommend that you focus on retiring to something – whether that’s a new hobby, an encore career, or a lifelong dream you’re going to fulfill during retirement.
That’s why many individuals and families who have retired early start blogging, podcasting, or building an online business for themselves during their “retirement.” As anyone who has ever built a business knows – that’s still a lot of work! They may not be as fully retired as they seem, but they do have the flexibility to travel, spend time with loved ones, and do work that they’re passionate about or that they find fulfilling.
So, while someone who’s “retired early” because they’ve reached financial independence may not have retired in a traditional sense of the word – they’re still living life on their terms. Which, for many people, is enough to consider this movement for their own lives.
Is FIRE Right For You?
The key to participating in the FIRE movement is to find a balance that works for you. Personally, I feel that the FIRE movement has a lot of positive traits. Pursuing financial independence by becoming debt-free is a fantastic goal to have, and I love that the movement promotes responsible spending and saving habits.
Embracing sacrifices you’ll have to make on the path to financial independence and learning to live below your means are both excellent habits to start forming early on in your financial life – especially if you have big and somewhat expensive goals for your future like retiring early, buying a home, or leaving a legacy for your kids and grandkids in the future.
All of that being said, too often I hear about people who pursue FIRE at the risk of over-limiting themselves in the moment. As with anything in the world of personal finance, over-limiting yourself can push you to overspend or veer off course as you work toward your goal of financial independence. I think it’s best to take the core ideas of FIRE (like repaying your debt, saving wisely, and achieving financial independence), and apply them to your life in a way that works for you.
You don’t need to completely cut back your spending, or restrict you and your family in an uncomfortable way to start working toward financial independence. You can take small steps to pursue saving for your future goals without taking the time (and, sometimes, the money) to enjoy the moment you’re in right now.
As you get started building your financial plan, whether you’re working toward financial independence and early retirement or not, having concrete goals and steps in place to achieve them is key. Ready to get started? Head over to Amazon to pick up my book: Work Your Wealth. Together, we’ll go over the 9 steps you can take right now to start making smart money decisions and living the life you’ve always envisioned for yourself.
I started Workable Wealth because of my desire to make financial planning fun and accessible to the next generation. Over the past five years, Workable Wealth evolved from a company geared toward Millennials into a rapidly growing client family with ages ranging from 25 to 65 and a community focused on education, accountability and celebrations around our financial lives.
2018 was a record year of growth for our Workable Wealth client family and I found myself faced with a decision at the end of the year about how to best strategize around the growth of the company, while still providing the best service and education to clients and our audience.
Creating Workable Wealth and the Work Your Wealth platforms has been an amazing dream that has allowed me to reach thousands of families all around the country with the message of making smart choices with your money. Because of that I’m excited to share this next phase of making an impact:
As of 3/1, Workable Wealth has merged with Abacus Wealth Partners. Along with Ariel and me continuing to serve as Advisors, I’ve also taken on the role of Chief Marketing Officer at Abacus with a goal to help spread the message of “expanding what’s possible with money”.
I’ll be lending my expertise in digital and online marketing to help us expand our online presence, reach new audiences and streamline our messaging across platforms. The Workable Wealth website and Work Your Wealth podcast will continue to operate as personal finance education platforms (so you can expect the same content geared towards smart money choices to be rolled out on our end each week).
Abacus is a fee-only, independent firm with offices in Los Angeles, northern California and Philadelphia. The company manages over $2 billion in client assets and is a change-maker in the financial planning world with a focus on diversity and inclusion, impact investing and making financial planning accessible.
They have no investment minimums and are passionate about offering financial planning as an annual retainer broken into monthly payments to all their clients.
I’ve spent the past two years learning about Abacus and getting to know the company, their core values and their leadership team and I’m incredibly excited about our future here and for the new clients we’ll be able to bring into the Abacus family.
For those that have questions about this move, I also want to give a “real talk” update:
Abacus is an amazing company with a culture that I don’t even know where to begin telling you about. They make money fun, just like I strive to. And they’re not afraid to laugh at themselves or to tackle big issues like using your money as an instrument for growth and for creating an impact. Admittedly, they (we) need a website refresh because what’s there now doesn’t do the company service. That aside, there have been so many times in the recent weeks that I’ve wanted to share openly about the wonderful conversations and initiatives going on at this company, but haven’t been able to (until now). Please know that this incredible group of people is creating REAL change in the world and I can’t wait to be a part of sharing the message behind the work being done.
For those that are concerned about my ability to “cut it” as an entrepreneur (yes, I’ve received some interesting feedback), I also want to share my perspective of this move (and Brian and I will be recording a podcast episode to talk through our decision process as well):
From an entrepreneurial perspective, I’ve built my first company and exchanged it for equity in another company (as I’m now a partner at Abacus) and I own my consulting business, so entrepreneurship still plays an active role in my life.
From a life experience standpoint, this opportunity has given me a breadth of experience and knowledge in managing business valuations and mergers / sales that I can also in turn lend to my clients when they consider going through something similar. In addition, the leadership and impact opportunities with Abacus are significantly larger and aligned with my life vision.
From a creating change in the financial services industry perspective, Abacus has more female financial planners on their team than many firms in existence today. Being able to demonstrate to a group of women what’s possible for the next generation of financial planners and to be an integral part in shaping that future is thrilling!
This move is about knowing what my life vision is for impact and how I could scale on my own versus partnering with others. I never wanted to just become a financial blogger or finance personality. If I create products to educate people, I’ve always wanted to have a way for them to also get the one-on-one advice. I haven’t had the capacity to do that on my own. Now, by partnering with the amazing team at Abacus, I do.
If you’ve been waiting to reach out about working together, now is a great time to jump in. Head here or here to book a call!
About 13% of plan participants max out their 401(k) each year. If you’re one of the 13% – congrats! Maxing out your 401(k) is an amazing accomplishment, and it can help to put you on the path to living the retirement you’ve always imagined.
However, maxing out your 401(k) doesn’t mean you’re done saving! Depending on your retirement goals, you may need to go above and beyond maxing out this account. There are so many different ways for you to save for your future goals (while in some cases also continuing to save money on your taxes). If you have the extra cash flow to maximize some of these strategies, it’s wise to take advantage of them!
What Does Maxing Out Your 401(k) Look Like?
In 2019, the deferral limit to your 401(k) is $19,000. If you’re age 50+, you can add an extra $6,000 in “catch up” contributions. This limit only applies to your money. Any matching contributions made by your employer are icing on the cake.
Remember to check your employer’s policy. In some cases they may stop matching contributions if you hit your $19,000 contribution limit part-way through the year. There’s no reason to leave free money on the table, so make sure that you plan to contribute up to your maximum limit over the course of the full year to keep receiving your employer’s matching contribution.
Backdoor Roth IRA
A backdoor Roth IRA isn’t as complicated as it sounds. To fund a “backdoor” Roth IRA, you start by funding a Traditional IRA. Then, once a year (or every few years) you do a one-time conversion of your contributions from the past year to a Roth IRA.
Let’s look at an example:
You have $6,000 you’d like to contribute to retirement savings, but you don’t meet the income restrictions to open and fund a Roth IRA. So, you open a Traditional IRA, and contribute the $6,000 as a non-deductible contribution. Once the money hits the IRA account, you can convert the $6,000 into a Roth IRA (thus working around the income restrictions) at a future point.
When does a Roth conversion make sense?
Roth conversions are a fantastic way to boost your retirement savings and save money on taxes during retirement. You can stagger when you do a Roth conversion depending on what tax bracket you’re in that year, or whether you have the extra cash flow to pay the income taxes on the amount you’re converting to a Roth IRA.
It’s also worth noting that a Roth IRA can be used for more than just retirement income. After the funds have been in the account for five years or more, you can withdraw them without penalty for specific expenses, like a first home purchase, or education expenses. This gives you the opportunity to go through the Roth conversion process with the intention of saving for retirement, but also allows you to have some flexibility with how you spend that money down the road.
Contribute to a 529 Plan
When you know that you’re on track to achieve your retirement savings goals, you can shift your focus to other financial milestones you’re working toward. For a lot of young parents, being able to help their kids pay for college is a big priority.
Contributing to a 529 Plan for your kids helps to set them up for future success, and encourages generational wealth. 529 Plan contributions also grow tax-free – which means you’re able to save now without paying exorbitant taxes later when you withdraw the funds for qualified educational purposes. You can use the tools and calculators here to crunch numbers on what to set aside for future college expenses.
If you still have additional cash flow and want to take advantage of the growth that come with investing, you could consider opening a standard investing account. Although contributions to these accounts aren’t pre-tax, they’re still a good way to grow your savings and diversify your portfolio.
Investing accounts don’t have to be retirement-specific. A traditional investment account allows you the flexibility to access your money before retirement, while still incorporating a wide range of investment options into your strategy.
When clients have maxed out their employer-sponsored retirement plans, we typically begin to weigh options of contributing to after-tax investment accounts versus doing non-deductible IRA contributions. Investing in an after-tax account gives you the flexibility to access the funds at an earlier age (pre 59 ½) than if you have the age-restrictions around retirement accounts.
Fund Your HSA
Your HSA (Health Savings Account) is an excellent way to continue saving for medical expenses in retirement without sacrificing the flexibility to use the funds now. Contributions to an HSA are all pre-tax, which helps to lower your taxable income. When you use your HSA on a qualifying medical expense, you aren’t taxed on any capital gains the funds have earned in your account over the years.
But how can you use your HSA for retirement expenses?
The funds in your HSA rollover year to year. There’s no urgency to spend them now, and you don’t have a deadline to use them by. Even if you’ve started your HSA through your employer, you are the sole owner.
So, if you should change jobs, you get to take your HSA with you. However, if you do run into a medical emergency now, you can still use the funds in your HSA to cover the expenses. The flexibility your HSA gives you is reason enough to consider funding one for you and your family, and the fact that you can continue to use the funds for growing medical expenses in retirement is an added bonus!
Does your company allow you to buy into stock options or RSUs? If you’ve already maximized your other retirement savings options, you might look into leveraging the stock options your company offers to their employees. These stock options can help you to boost your income using long-term capital gains strategies. Because many stock options are discounted for employees, you may even be able to use them as a way to get more exposure to the stock market for relatively low upfront cost.
Before diving head first into stock options or RSUs (restricted stock units – another form of employee stock option or compensation), make sure that you understand exactly when they’ll vest, when you can exercise them, and what you can expect from a tax perspective. Stock options can be a really good way to grow your wealth quickly, but the taxes you owe on them, and the upfront cost need to be planned for. This is especially true if your employer hasn’t discounted the options enough to make them a good deal for you and your family’s unique financial situation.
Build a Plan That Meets Your Goals
It’s easy to get stuck in the constant cycle of focusing only on retirement saving. After all, most of the financial planning articles out there push two main savings “goals” that everyone should be working toward:
1. Emergencies. 2. Retirement.
Beyond that, there’s not a ton of information out there on what to do after you check both of those boxes.
Saving for retirement is fantastic, and it’s a goal that a lot of people should be taking more seriously. But if you’re on track to have more than enough saved for retirement, it’s worth figuring out how saving can positively impact your life right now.
When you build a savings plan, don’t just save for the sake of saving. Squirreling money away without goals can be a recipe for burn out. You wind up not achieving your short-term goals, or living the life you want to live, because you’re so focused on the future.
As you build savings goals beyond maxing out your 401(k), it can be helpful to work backward. Start by outlining what you want to achieve through savings, then start outlining the steps you’ll take to reach those goals. Your goals might be long-term: like saving for your child’s education expenses, or buying a rental property. They might also be short-term: like purchasing your first family home in the next few years, or saving so that you can buy a new-to-you vehicle using cash.
Maxing out your 401(k) is really only the kick-off point. You’re entering a world of exciting saving options that are going to benefit you for the rest of your life!
Want help? Schedule a call today – I’d love to talk to you about how to organize a savings plan that sets you up for success right now and in the future.