I was recently invited to be a guest on the Holderness Family Podcast. They’re working with Protective Life to educate the public on the importance of managing debt and building personal savings while simultaneously planning for college and retirement. As a financial advisor for the better part of 30 years, I appreciated their interest in tackling these issues head-on for their listeners.
We live in a world where it can be pretty easy to avoid aspects of our lives that make us uncomfortable. But the reality is there isn’t a filter for your real life finances. Worrying about money is the type of stress that can keep you awake at night. Paying down debt, planning for retirement, saving for college – these are just a few of the financial realities families face that you probably won’t see people talking about in their social media newsfeed.
But it’s important to remember that avoidance of a plan is not a plan.
While the topics can make people uncomfortable, I think many people have the same questions even if they are scared to talk about them. I wanted to share a bit more detail about some of the bigger topics the Holderness family and I talked about during our time together. My hope is that by reading this or listening to the podcast, others will find the courage to approach building a plan for their finances.
Pay off debt or save for college and retirement?
So, how does one pay off debt or build a personal savings while needing to save for their kids’ college and their retirement?
The short answer is to develop a process to track spending and start keeping score. I want to help people understand there is not a single solution or the proverbial magic wand that can be waved. Instead, there is a process that should be initiated. This process includes:
- Identifying your expenses
- Prioritizing the expenses
- Budgeting these expenses against income
In your day-to-day, it can be easy to avoid taking the time to look closely at where your hard-earned money is being spent. One idea is to carry with you a small notebook or index card that will fit in your wallet or perhaps your bank has an app that will do this for you. As you go through your day, note every item you purchase no matter how trivial it might seem. A lot of seemingly inconsequential purchases like eating out for lunch or coffee purchases can add up at the end of the month. Keeping score is a close look at your check register and your credit card statements to see where the money is going.
Once you have identified your expenses or have determined what the score is on this side of the ledger, look at the other side of the ledger at your income. Prioritize your expenses and match them to your income – this is essentially budgeting. Ask yourself: Is each expense is a necessity or a want? Is it more important to spend money on expense A or expense B?
After you have matched expenses to your income, you are in a better position to determine what is left over and how that could be allocated for savings. If your expenses after completing this process exceed your income, it will not be easy, but you are going to have to start eliminating wants in favor of necessities.
The main takeaway: The purpose of keeping score is to understand where your money is being spent. You have to know this before you can fix the problem and determine the availability of funds to put aside to longer-term goals like saving for college and retirement.
If you want a different result, you must change what you are doing. That applies to spending habits as well. What can you eliminate or cut back on? Nothing is off limits.
What are you spending on clothes? Eating out? Expensive grocery items? What impulse purchases are you making? Do you really need the latest tablet, flat screen TV or other item that pops up on your computer when you are shopping online?
The main takeaway: Spending money is often a habit we have developed over many years. Give yourself some tough love and aim to break bad spending habits.
Once you know the score and have taken a hard look at your spending habits, it’s now time to set priorities. Do you you have to choose between paying off debt and saving for retirement? I'm a big proponent of eliminating debt. But not all debt is equal or necessarily bad. What you need to look at is the cost of that debt.
What is the rate of interest being charged on your debt? The decision to pay off debt is different for a mortgage at an interest rate of 4% as compared to credit card debt at 24%. Once you determine the cost of the debt, ask yourself this question: Is there a reasonable expectation I could earn the same return over a longer period of time?
Most people would say yes for a 4% mortgage and no for credit card debt at 24%. Paying down credit card debt at my hypothetical example of 24% is probably going to be more prudent than setting the same funds aside for retirement.
The main takeaway: You can’t do everything at once and it certainly won’t be accomplished overnight. Prioritize what you are going to do first. If that is pay off high interest debt first, then set a goal to look at your savings after that.
I’m glad to have joined Kim and Penn Holderness to discuss this issue. We’re planning to talk about a few additional topics such as how to plan for college, save for retirement and what to do when an aging loved one needs help managing their finances. I’ll share more about those in future posts, but in the meantime there are many resources on Protective’s Learning Center that can help you explore all of these topics and more.
This material is for informational use only and does not constitute advice or the solicitation of any product or service.
Greg Patterson offers Advisory Services through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc. a Registered Broker/Dealer and Member FINRA/SIPC.
Advisors Financial Group, Inc. is independent of ProEquities, Inc.
Representatives may only conduct business with residents of the states for which they are properly registered.
ProEquities is a wholly owned subsidiary of Protective Life Corporation.