LACK OF FINANCIAL LITERACY IN AMERICA’S SCHOOLS

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“According to Money, the average millennial household “owes $14,800 in student loans.” Writer Kerri Anne Renzulli explains that while debt averages vary across each generation, people of all ages are demonstrating a greater comfort with debt. As everyone becomes more comfortable with financing and credit, there is a greater risk that accumulated debt will never be paid off in full.

‘Younger people are taking on debt at a higher rate and paying it off at a lower rate,’ says Lucia Dunn, an economics professor at Ohio State University who has studied consumer debt. ‘When they reach age 75, the debt picture for them will look a lot different than what we currently see. When you project out these trends, it is not so optimistic.’

The country should take a proactive approach in preventing debt from spiraling further. Requiring personal finance in high schools with the goal of establishing financial literacy in young people before they become independent is a logical first step.” (Read entire article here https://www.nola.com/interact/2018/11/should_high_schools_be_require.html)

Last week, I had the privilege of volunteering as part of Leadership Montgomery at Finance Park at Thomas Edison High School in Montgomery County. Growing up, I was involved with Junior Achievement in high school and jumped at the opportunity to be included in this experience with some 7th graders from Briggs Chaney Middle School. As part of this program, I spoke to the students about managing debt, establishing credit, the benefit of low interest rates on your monthly payments, and the idea of “wants vs. needs.”   In today’s world, many adults still struggle with these concepts and even many Wharton students lack a basic financial education.(https://www.cnbc.com/2019/04/26/even-mba-students-could-use-some-basic-money-lessons.html). It is extremely important that we start basic financial education at an early age so that our children have the financial wisdom necessary to become successful adults.

 

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Teaching Children Financial Responsibility: Start Early

close up of family hands with piggy bank

Would it surprise you to know that students graduating from high school enter college with little to no knowledge about their finances, how to budget, or save for their futures? The problem has become so severe that 40% of these students wind up going into debt in order to fund their social lives and 70% of these students wind up damaging their credit ratings shortly after college graduation.

Unfortunately, it seems as though this debt will not be going away anytime soon.  The average student loan debt for the class of 2016 increased by 6% from the previous year and the financial literacy rate in the U.S. has not improved over the past three years. While college enrollment and the number of college graduates has continued to increase, financial literacy lags among these young people at record lows. Where does this disconnect come from?

Few states offer personal finance or economics courses and even fewer states test students on the financial knowledge they have acquired. It therefore comes as no surprise that American students (and we can infer American adults) have one of the lowest levels of financial literacy when compared to other countries.  While the number of student loans has increased,

  • 44% of Americans don’t have enough cash to cover a $400 emergency
  • 43% of student loan borrowers are not making payments
  • 38% of U.S. households have credit card debt
  • 33% of American adults have $0 saved for retirement

Why does it matter? How is it affecting the economy?

Students are graduating with loans they can’t afford to pay back and with minimal financial knowledge in planning for their futures. According to Student Loan Hero, Americans have over $1.48 trillion in student loan debt, which is more than double the total U.S. credit card debt of $620 billion. This debt is becoming a major barrier to home ownership. 43% of student loan borrowers are not making payments and most of these individuals do not have any savings. A lack of sound financial knowledge will affect the economy as these millennials enter the labor force burdened with student loans.

As parents, we play a vital role in educating our children about the importance of personal finances.  In the Sherman household, we are teaching our children the importance of finances on a daily basis. Our 4 year old son is learning about savings by doing chores in return for an allowance, which he saves in his piggy bank. He is learning to save and spend his money wisely.

Parents can begin educating their children at home in order to increase the financial literacy of their kids. By demonstrating wise financial habits, parents can serve as role models for their kids. Talking in an age appropriate way to your children about the dangers of debt and the importance of saving a portion of any money they earn instills financial values and lessons your child can use throughout life.  You may find that using an allowance is a way that you can teach your kids about saving and spending appropriately. Since it has been shown that kids who manage their own money have been found to demonstrate better financial habits in the future, giving your kids the opportunity to spend and save their own allowance or money earned is a good way to prepare them for later on. Even a simple trip to the store can be used as an opportunity to start the conversation about the danger of credit cards and how they should only be used in an emergency.  Educating your kids at an early age will enable them to better learn and practice sound financial habits while under your watchful eye and cause them to be less likely to make irrational decisions once they are out on their own.

This issue is not only affecting students and young adults.  Many professionals with advanced degrees have spent countless hours studying and researching information in their particular field.  Despite all of the hours spent earning their degrees, many of these people have never taken a single course in financial education and are surprisingly not prepared to deal with the important financial decisions affecting their futures.  As a result, many extremely smart and successful people are making critical financial errors which can negatively impact the amount of money they have saved upon retirement.

Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement.  They were then asked to make financial decisions about whether to spend their money today or save that money for the future. In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images.  Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their spending/saving behavior changed dramatically because “saving is like a choice between spending money today or giving it to a stranger years from now.”

The benefits of educating your children about the importance of personal finances are undeniable, and you’ll be able to set them up for a promising future and help them prepare for retirement. Visit us online for more information about how we can help improve your financial life.

5 More Financial Mistakes to Avoid in Your 20s and 30s

Young Father Building Financial Foundation

You’ve made the commitment to start “adult-ing,” a very important first step. Don’t start to build from the roof down, though: make sure that you’re laying a strong financial foundation.

In our last post we talked about 8 Financial Mistakes to Avoid in Your 20s and 30s. Here are five more money mistakes to watch out for:

1. Going on a Financial Blind Date With Your Significant Other: Not Having the Money Talk First

Talking about money isn’t romantic and can be downright uncomfortable. That’s why many couples go into marriage—a financial partnership—without knowing exactly who they are partnering with. Discussing personal finances, debt, goals, spending patterns and how you make financial decisions with your partner before marriage, or soon thereafter, is critical to your short- and long-term financial health. (For related reading, see: Don’t Let Financial Differences Lead to Divorce.)

2. Living la Vida Loca: Splurging on the Wedding or a Baby

Important milestones like a wedding, a first child or even your first house are exciting and make precious memories that last a lifetime. But be careful not to let them put you in debt or divert you from a financial plan that allows you to make other great memories down the road. Know what you can afford, get creative within your budget, and make sure you’re investing in your partner’s and children’s future as well. The kids won’t mind—or even remember—that you didn’t buy them that top-of-the-line stroller. What they’ll remember is your smile and their favorite red ball. #Priceless

3. Not Buckling Your Seat Belt: Neglecting Insurance

It’s tempting to skimp on insurance once you’ve covered your basic health and homeowner’s policies, but that’s a big mistake many young adults make. Insurance is an uncomfortable topic—and the options can be very confusing—so covering yourself with health, life, car, home, disability and long-term disability insurance often gets put on the back burner. Cover yourself adequately now so that when the unexpected happens, it’s not a financial disaster. (For related reading, see: Introduction to Insurance.)

4. Going for the Gold: Taking a Job for the Pay

While a great offer is always tempting, make sure that any job you take is something that will advance you in the direction you want to go. Don’t take a job just because the money is great, although that’s important too. If you do, you could get stuck in a job you don’t love with nowhere to go. Take a job that is going to move you closer to the job you want—and the even-higher salary you want—in a couple of years.

5. Putting Too Many Eggs in the Wrong Basket: Not Prioritizing Savings

Maxing out your 401(k) or IRA is smart, but don’t forget to save for other major purchases that may be coming up sooner than you think, like buying a new home, having children, or continuing your education. Multiple savings accounts can be a great way to keep your eye on multiple baskets! Be careful, too, not to prioritize your children’s education over saving for your own retirement. Student loans are less expensive than the kind of loans your kids would have to take out to support you if you haven’t set enough savings aside to support your own retirement.

Enjoy this special time, living your life to the fullest. If you make sure you’re also making smart financial choices, you’ll really enjoy your 20s and 30s, knowing that you’re building a solid future.

 

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions, please Contact Us.

 

8 Financial Mistakes to Avoid in Your 20s and 30s

8 financial mistakes to avoid in your 20s and 30s

Your 20s and 30s are an exciting time. You’re starting to build the life you envision for yourself, or perhaps you’re still seeking out new experiences to learn more about yourself and your goals.

These are years when we expect to learn and grow by exploring jobs and careers, cultural experiences, social experiences and other educational opportunities. But too many of us forget to explore and master one of the most critical parts of building the future we want: financial literacy and financial planning.

The result is that many people enjoy their 20s and make important life changes in their 30s (or vice versa) without understanding how best to support their career and personal goals with a rock-solid financial plan. You could end up flying high, but forget to build a safety net!

Here are some key mistakes to avoid as you’re getting started:

1. Letting the Chips Fall Where They May: No Budget

A first job—or second, or third—is a great feeling. You’re earning money and it’s yours to spend. And too often, we spend it until it’s gone. While a budget may sound restrictive, it actually gives you more freedom because it keeps you from overspending in areas you don’t care about so you have the money you need for what’s important. A budget helps you understand where to splurge—on quality that lasts longer, for instance—and where it’s best to economize, such as buying a used car instead of a new one.

2. Keeping Too Low of a Profile: No Credit Rating

Many people just starting out have low credit ratings, or worse, no credit rating at all (if you’ve always used your parents credit cards, for instance). With a low credit score, your costs will be higher for things like insurance, car financing and mortgage rates. Building good credit now, by getting your own credit card and paying it diligently, or even getting a credit-building loan, will establish a good rating that will help you down the road.

3. Putting It off Until Tomorrow: Living on Credit Cards

Credit cards can be a godsend, particularly the ones with loyalty points. But those points pale in value beside the damage that finance charges can do. Do treat your credit cards like a smart way to keep track of your spending, but don’t spend more than you actually have. Paying credit cards off in full each month not only keeps you within your budget and keeps you from accruing finance charges, it also helps you build a great credit rating for when you do need to borrow money. (For related reading, see: 10 Reasons to Use Your Credit Card.)

4. Living on Perks Instead of Salary: Not Paying Yourself First

We’ve all been to that job interview where they say that the salary is low but they have a great exercise room, volleyball team and popcorn machine. That popcorn won’t pay the rent and it won’t pay a down payment when you find that great condo. Create a savings plan and pay yourself first before you splurge on lifestyle perks like vacations and expensive shoes. That plan should include saving for short-term goals, saving for an emergency fund, and starting to save for retirement. While retirement may seem a long way off, the earlier you start, the more you harness the power of compound interest. Make sure your budget includes saving and contributing, on a regular basis no matter how small the amount, to an IRA or 401(k) before you start spending.

5. Living on the Edge: No Emergency Fund

While it’s hard to imagine needing emergency funds when you’re young and just starting out, you never know what the future can bring. Crises like Hurricane Sandy and the 2008 crash left a lot of people struggling without a safety net, but even something as simple as a pet’s sudden illness can present a huge challenge when you’re on a tight budget. Try to start contributing to an emergency fund that you keep in highly liquid funds for when the unexpected happens. (For related reading, see: Building an Emergency Fund.)

6. Playing the Odds: No Health Insurance

Many young people who are in peak health think that they can skip—or skimp—on health insurance. While you may indeed be fit and healthy, that doesn’t protect you from potential sports injuries, appendicitis, bouts with the flu or—perish the thought—a car accident. High medical bills are the biggest cause of personal bankruptcy. Get the best coverage you can afford: you’ll be amazed how quickly it pays for itself.

7. Going With the Flow: Not Setting Financial Goals

“If you do not change direction, you may end up where you’re heading,” goes the famous quote attributed to Lao Tzu. That means it’s a good idea to think about where you’d like to be—in a year, in five years, in 20 years—and make sure that’s the path you’re on. Simple goals like “I want to save $20.00 a week,” or more elaborate ones, like “I’d like to work for myself from a house on the beach,” all begin with awareness and taking the first small steps. Set a few goals; you can always change them later, but if you don’t, you’re drifting without being mindful of where the currents are taking you.

8. Taking Your Eye off the Ball: Using a Non-Fiduciary Advisor or Commission-Based Investment Site

It’s never too late to become financially literate. The internet is full of great tips (like these) and sites that can help you organize your finances, and it provides access to a range of advisories. Having a financial advisor guide you is an excellent idea but blindly trusting just anyone can be dangerous. Many non-fiduciary advisors are compensated by the financial products they recommend, products that may not be the best ones for you. Make sure the advisor you consult is a fiduciary, i.e. someone who is legally obligated to only recommend options that are in your best interest.

Be sure to check out our next post: 5 More Financial Mistakes to Avoid. You’ll enjoy your 20s and 30s even more knowing that you’re also building a solid future.

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions, please Contact Us.

Don’t let Financial Differences Lead to Divorce

Divorce

Financial differences rank among the leading causes of divorce among couples, both young and old. The statistics are alarming, but perhaps not surprising. How we handle money is not usually a topic of that comes up while we are dating. As a result most couples don’t discuss financial compatibility before saying “I do”. When the honeymoon is over, though, and the bills start rolling in, couples often experience a reality check. While love is grand, it can’t pay the bills so it may not take long before fights erupt over different money habits.

Part of the problem is that it is simply uncomfortable to talk about money. Whether we like it or not, we tend to tie our own feelings of self-worth to money matters. It’s not uncommon to see how much money we make as a direct reflection of how much we are contributing to the relationship. These feelings can become further complicated if there have been financial missteps along the way. While avoiding conversations about money can allow us live in a blissful state of denial for a while, the long-term consequences can be life-altering.

The good news is that it is never too late to make meaningful changes and save a marriage that is threatened by financial discord.

According to financial planners who work with couples, money conflicts fall under five main categories:

  • Differences in spending and saving habits
  • Disagreements about who should control the money
  • Differences in priorities
  • Dishonesty about debt and habits
  • Differences in risk profiles

Whether you are experiencing frustration around one of these issues or all five, there are ways to build better financial health as a couple and avoid relationship problems.

Effective Communication Leads to Greater Financial Success

Effective communication can make a world of difference when it comes to financial matters. Establishing trust, which is cultivated through honest communication, is key. Trust is built when each partner commits to openly expressing their feelings about money and listening to what the other partner has to say. This includes being willing to reveal financial failures, knowing that your partner will be forgiving and withhold judgment.

Be Willing to Compromise

Although it is easier said than done, another key to resolving money issues is compromise. The first step is for both partners to sit down and agree on a common set of financial goals and what steps they will take to meet those mutual goals. Establishing a family budget – and committing to it – is critical. That budget should include some freedom for spending on things that are important to both partners, regardless of who is earning more money.

Be Patient

As you begin the process of rehabilitating your financial health and establishing clear lines of communication with your partner, remember to be patient. Keep in mind that spending habits are deeply ingrained in each of us. Both you and your partner have been influenced by your parents’ habits and your approach to money has been formed over a lifetime of experiences.

Enlist the Help of a Financial Planner

Whether you need help mediating tough conversations or you want expert advice on how to establish a budget that will help you meet your financial goals, don’t try to go it alone. Work with a financial advisor who can offer helpful insights and steer you in the right direction. With the right help, you can get back on track financially and strengthen your relationship. If you are to the point where money issues are creating such a strain on your marriage that you are considering divorce, outside intervention from an experienced financial advisor can be critically important in finding solutions that work for both of you.

Avoid Conflict

Often couples will argue about whether they should give or loan money to family members. While each case is different, and very personal, it is generally a good idea to try to avoid making these kinds of loans. Once that first loan is made, you have set a precedent and you are more than likely to receive follow-up request for additional money. While it can be difficult to say no to friends and family, it is always in your financial best interest to avoid these types of transactions.

A Happy Ending

Even in the best marriages, there are bound to be differences over finances, but those disagreements don’t have to drive a wedge between you and your partner, or worse, lead to divorce. If you actively work to establish trust through open and honest communication and recognize when it is time to seek outside help from a fee-only fiduciary financial advisor, you are taking important steps to letting your financial life be a solid foundation for your marriage – and not the wall between you.

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This post originally appeared on Investopedia.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions, please Contact Us.

10 Important Things To Discuss Before Marriage

7thingsbeforemarriage

10 Things to Discuss Before the Big Day

You are excited, in love, and planning the wedding of your dreams. Probably the only money questions on your mind are the down payments for the caterers and the florists!

Yet – whether your wedding reflects a minimalist sensibility or is a no-holds-barred extravaganza – it’s better to have a good understanding of each other’s finances before the “I Do’s”. This is a time when procrastination could cost you a bundle, even if neither one of you currently have a lot of assets.

Getting married is more than just substituting the word “ours” for “yours” and “mine”.  It’s combining your finances, histories, dreams, aspirations, possessions – even your music – and making all of that “ours too. Since a significant part of those dreams and aspirations involve money, having multiple financial conversations before marriage (or right after, if you’re newlyweds!) can help you start married life on a firmer footing, with regard to financial goals.

Here are a few conversations that will get your marriage off to a smoother financial start:

1) Views on money. How we feel about money is often very emotional and very personal. Our family’s views on money can have a big impact on the way we see finances. In some families money may not be talked about. In others, one partner may hide money or spending from the other. While we might not consciously have these same behaviors, our upbringing will have an impact on how we feel about money and how we save, spend, and budget.

The best way to address unconscious – and sometimes conflicting – money behaviors is to start by recognizing how you each feel about money. Then you can take a practical approach and implement the best strategies from the past and incorporate them into your new relationship. This will also give you a chance to address any not-so-beneficial attitudes and behaviors and work to consciously change them.

2) Spending/Saving Habits. Chances are the two of you don’t spend and save money the same way. The interesting thing about spending and saving habits is that they give insight into priorities, both financial and otherwise because we tend to spend money on things we feel are most important and scoff at spending on things we see as unimportant.  Some people value saving more than anything and could be considered “tightwads”. Other people have a “live for today” attitude and spend whatever they have available, saving nothing or little for later. Most of us find ourselves somewhere in the middle.

Not agreeing on spending priorities can lead to serious conflicts down the line. While there is no right and wrong answer regarding priorities and habits, it’s valuable to know and understand each other’s habits earlier rather than later.

3) Divvying Up the Bills. This is an important conversation about how you will manage your money together. Will you have separate or joint accounts? Who will be responsible for paying the bills and investing for long term goals? A realistic understanding both of your current incomes and current debts is important so you can create a realistic budget based on your combined income and expenses.

4) Credit History. No one likes to talk about credit ratings because they highlight past mistakes and spending habits. Yet it’s essential to know and discuss your credit histories. This can help you talk about past money mistakes, current debt loads, and how to address any issues that are lurking. Having this conversation now will also help if you’re planning to borrow money for a large purchase, such as a home or car; credit history will effect how much you’ll pay in interest for loans, as well as how much it will cost for things like insurance. Many companies even pull credit for potential job applicants. When it comes to credit, it’s best not to have surprises down the road, so have the conversation now.

5) Risk Tolerance and Financial Goals. Couples often have very strong – and differing – feelings about risk and money that are deeply rooted in past experiences.  Your family may have gone through periods of unemployment, for instance, or  you may have grown up taking financial security for granted. One of your parents may have owned a business and you saw it go bankrupt,  so you might be very conservative with your money and not want to take unnecessary chances. Or perhaps they invested in a business that was a huge success.

Everyone brings a different level of comfort when it comes to risk tolerance and it’s important to understand your partner’s because it has an impact on spending and savings habits – everything from where you invest to how much money you want to set aside. Money provides a level of security that can be very powerful and risk tolerance is directly linked to that feeling of security.

6) Ongoing Financial Obligations. If this is a second marriage, are there child support or alimony payments that need to be considered in the budget process? If so, how much and how long will the obligations need to be fulfilled. Caring for elderly parents might also be a long term expense you will be facing as a couple.

7) Net Worth. When it’s a first marriage, often neither partner has much in the way of assets, but if one partner has more than the other, are you going to want a pre-nuptial agreement? When discussing net worth it is valuable to discuss not only current net worth, but also aspiring net worth. What household income level are you both hoping to achieve. Will reaching those aspirations include additional education? Will it mean switching jobs several times early in your career? Will it mean working 80 hours a week for decades? As a couple, understanding financial expectations and future net worth aspirations will help you plan a life together that will meet both of your needs, financially and emotionally.

8) Family Plans. The family size you hope to have will also have a big impact on your financial needs. Children, as wonderful as they are, are very expensive to raise. Do you both want to have children and, if so, one child or several children? Discussions about how the children will be raised and educated are also valuable from a financial perspective. Will one of you stay home to raise the children? Will you pay for day care? How far apart should the children be? Each of these answers will have a significant financial impact to the family budget.

9) Combining Physical and Financial Assets. Particularly with couples getting married later, both partners will have accumulated possessions that now need to be combined. This can be as simple as which sofa and bedroom set to keep, or more complicated when multiple homes, retirement accounts, and other investments are brought into the mix. Discussing whether property, accounts, and debt should be left in individual names or held jointly is also an important conversation to have.

10) Wills, Trusts, and Life Insurance. When you’re getting married, you don’t really want to think about death. Yet wills, trusts, and life insurance need to be updated soon after you say, “I Do.” This is true especially if you have assets or children. The process of obtaining a will or trust is fairly straightforward; it’s the discussions that lead up to it that provide the most value. Both of you should have a good understanding of what you have and what you want to happen, should the unthinkable occur.

Financial advisors can be a real asset, when it comes to pre-marital financial discussions. They can help you determine when it is best to hold assets jointly or separately. Assistance with budgeting and planning for long term goals will help you create a strong financial plan. Advisors can also guide you in building a strategy for reaching financial milestones.

So, if you’re getting married (or just got married), congratulations! And while these discussions may not be the most romantic ones you’re having, they do have the ability to bring you closer together. Planning together and sharing your dreams will give you better insight into the mind and heart of the person you’ve fallen in love with and allow you to become stronger partners when it comes to reaching your goals as a couple, emotional as well as financial.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Should You Start to Save… or Pay Down Debt?

Pay Down Debt

Millennials have an entrepreneurial spirit and tend to have a lot on their plates. Being able to juggle several balls in the air and multi-task is par for the course for this generation. So why do Millennials often struggle with how to prioritize between saving for the future and paying down debt?

Many Millennials still have college loans to pay off or have acquired credit card debt while taking home minimal starting salaries. And advice about how to get started is confusing: some financial professionals recommend having at least one month of income saved prior to starting to pay down your debt, while others recommend up to 8 months of savings. That’s a daunting prospect when you’re young and living from paycheck to paycheck!

Because of the power of compounding interest, the 20s and 30s are your prime savings years. Not taking advantage of the opportunity to save now may end up costing you later. So how can you start to build your savings and pay down debt, while still maintaining a reasonable quality of life?

The good news is that – because they’re used to a struggling economy – Millennials have become very resourceful when it comes to finances. Here are several factors to consider when you’re deciding how much you can – or even if you can – allocate for both.

Three Questions to consider about saving vs. debt:

What is my monthly incoming & outgoing cash flow? Hopefully it’s not negative! If it is, though, try to find daily and household expenses that can be trimmed or eliminated (that venti caramel latte? An expensive cable package?) If it’s positive, determine if there’s enough left over to pay credit card minimums while allocating a portion, however small, toward a saving plan.

What is the interest rate on my debt? Debt with an interest rate of higher than 5% is a priority to pay down, otherwise you’re spending your hard-earned cash on borrowing costs. Can you roll over your debt to a lower-interest or zero-interest credit card? If not, create an action plan to pay off high-interest debt first. If you have debt with interest rates that are lower than 5%, consider contributing to a 401K or a Roth IRA. The same way interest compounds with your debts, it also grows with your savings, so the sooner you take action, the more you will gain over time.

What is my stress level regarding debt? If the stress of having debt is overwhelming, then make paying the debt before contributing to your savings a priority. If your debt seems manageable, start getting in the habit of making monthly contributions to a savings plan.

Remember, no two people, and no two financial plans, are alike. Whether you can contribute to a savings plan and pay down debt simultaneously depends on you and your unique situation. Talking to a financial advisor can help put you on a path that is right for you. The important thing is to create a goal and a plan!

Learn more about our Budgeting and Savings planning.

Related Reading:

What’s your Credit Score?

Brad Sherman is a financial planner who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call or contact him today to see if his services are a good fit for your needs.

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Financial Planning for Millennials: Overcoming the Fear Factor

financial planning for Millennials

What do you think of when you think of Millennials? The media loves to paint Millennials as “adventurous”, “risk takers,” and “thrill seekers.” But, surprisingly, when it comes to financial planning for Millennials, their behavior is anything but risky.

In fact, there is evidence that, while emotions and biases play a large part in Millennials’ investment decisions,  fear leads the list of behavioral influences.

We Millennials grew up during the Internet crash and have witnessed one of the most turbulent market cycles in recent U.S. history. With the financial crisis of 2008, and the housing bust leading to a recession, many of us have watched our parents struggle with financial security and worry about whether they’ll ever be able to retire. Many recent grads have experienced unemployment as a result of the crisis, and many are burdened with significant student loan debt. Good times? Not.

These experiences during their impressionable years have led many Millennials to take an emotionally driven approach to Financial Planning for Millennials and to adopt conservative money habits that analysts have compared to the investment behavior of young adults during the Great Depression.

They tend to be wary of investing in equities, for instance, resorting to a behavioral bias that favors peer narratives and unscientific anecdotes – such as stories of retirement-age people whose nest eggs were destroyed by the financial crisis – over careful data analysis.

In May 2013, Wells Fargo released the results of a study surveying more than 1,400 Millennials, that found that Millennials view the stock market, and most investments, as a risk not worth taking. More than half of Millennials are “not very confident” or “not at all confident” about the stock market and many of the Millennials who do consider investing in stocks see the market as a short-term investment. The survey also found that Millennials’ primary concerns were student loan debt and paying their monthly bills.

In fact, Millennials have not only taken on more student loan debt than any previous generation but they continue to struggle in a challenging job market. With many Millennials remaining unemployed or underemployed, and with bills and debt as their top priorities, they have very little disposable income for investing. Many, according to a Pew Research poll released in October 2013, did not even begin thinking about saving or establishing a 401(k) until about five years into their careers.

Additionally, a UBS Wealth Management survey report featured on Bankrate.com found that, more 39% of the Millennials surveyed – more than any other age group – said that cash is their preferred way to invest money that they don’t need for at least ten years. That’s three times the number who chose to invest in the stock market, despite the fact that the S&P 500 has gained 17% over the past year while most cash investment yields remain below 1%.

The Danger of Playing it Safe

The problem with short-term stock investment approaches and dipping in and out of the stock market is that it can work against investors, because short-term investments may be subject to a higher rate of volatility. Instead of looking at the long-term data, which shows that stocks typically outperform other more conservative asset classes over the long run, those young investors are fearful of the short-range volatility, clouding data about the positive potential of long-term investing.

That reluctance to get into the market can be problematic for long-term portfolio growth because, without the returns from stocks, it can be difficult to reach savings and retirement goals.

Bigger is Not Always Better…When Finding a Financial Advisor

With the crash of the big banks and the negative publicity surrounding Wall Street financial firms, Millennials became a generation that looked at financial professionals with mistrust. Instead, they rely more heavily on the Internet, social media, and personal networks for financial advice. Their experience with market volatility and lack of job security has had a significant impact on their attitudes and behaviors toward investing. With very little disposable income after bills and debt payment, Millennials want to feel a sense of security with their investments.

When it comes to working with a financial professional, ‘old school’, traditional banking services are of no interest to them. Bigger is not better in their minds; a smaller, more independent financial planning firm may be able to offer a more hands-on and collaborative approach to investing that Millennials feel more comfortable with.

It’s important to Millennials that they find someone they can trust and who can relate to their concerns and be open to new ideas and methods of investing. Sherman Wealth Management understands that being a part of the investing process is a must in financial planning for Millennials. We fill a role for clients who can no longer relate to, or trust, the large financial institutions that once held a stronghold in the marketplace. The professionals at Sherman Wealth Management provide a personalized plan for investing and help our clients navigate through the difficulty of prioritizing financial obligations.

Remember how it was the overconfidence of the large financial firms and irresponsible investors that brought us the financial crisis in the first place? That Millennial reluctance to let history blindly repeat itself may turn out to be a pretty good thing after all!

Learn more about Financial Planning for Millennials and our Financial Planning services.

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