College – The Next Chapter: The Selection Process

A generation or so ago, the path to financial freedom was pretty direct for most. You found a job and saved for a home and a rainy day. When it was time to retire, you collected from a pension and enjoyed your remaining twilight years. Over time, things have drifted away from womb-to-tomb employment and gotten a lot more complicated. Today’s Americans have to be much more proactive with their finances. In this day and age, saving isn’t enough. Make sure your money is working as hard as you work for it.

There are a lot of concerns for the future. Buying a home. Sending kids to college. Making sure that your current career will be around to see you to retirement. People are living longer, so their retirement money has to go farther. Many high costs associated with medical care aren’t covered by Medicare, such as many prescriptions and long-term care. Pensions are no longer viable option for most Americans, and Social Security, a program that was never intended to replace income, no longer provides the level of security people need for their future. There’s a lot to prepare for.

Due to these concerns on the path to financial independence, people need to be mindful of their money. Even the most conservative Americans need to do more than contribute to a standard savings account, which can’t keep up with the rate of inflation. Investing your money will grow it exponentially faster than simply saving due to the power of compound interest. Yet, preparing for the future can be very emotional work. Today’s retirement planning relies far more on the decisions made by an individual rather than a company or organization, which can be a lot of pressure. Fears of not having enough money, a very common concern, can cloud decisions and can prompt people to react rather than plan. This is why an objective third party is necessary. Financial advisors can see past the emotions and help you plan your path to your financial freedom.

In this day and age, there are real and unique concerns that can derail you from the path to your financial independence. Trilogy Financial is here to help you establish your goals and invest your money to help get you where you want to go. It is our mission to ensure that every American, from Main Street to Wall Street, has access to great planning and the tools to establish their financial independence.

If you're one of the millions of Americans who received, or are expecting to receive, a tax refund, you are probably trying to decide how to spend it. The average refund this year is around $3,000, a nice chunk of change to throw at one of your goals. Rather than impulse buying that new Apple iWatch or splurging at Sephora, make the best use of this windfall by putting it towards improving your financial situation.

Build Up An Emergency Fund

Some very good friends of mine woke up recently to find that their downstairs had flooded from a burst pipe on the second level. They had to rip up their hard wood floors, replace furniture, and even replace some of the walls. Luckily, their bedroom and their child's nursery was spared, but THIS type of unexpected event is exactly why you need an emergency fund. If they didn't have cash readily available in a savings account, they might have been tempted to put charges for repairs and replacements on a high-interest credit card. Depending on your situation, you should ideally have 3-6 months of regular expenses in the bank. Use your tax refund to start, or top off, your rainy day fund.

Pay Off Debt

The power of compounding interest can work in your favor when investing, but it can also cause debt to grow faster than you might think. Credit card companies apply their interest fees to the amount that you owe initially. But every month (and sometimes every DAY!) after that, the compounding interest will apply to the principal, as well as the previous month's interest. If you want to apply the snowball method, apply your refund to the smallest account you can close out. Alternatively, you can use the “Avalanche” method, and put your refund towards the card with the highest interest rate. Paying off the smallest account might feel good, but if you have double digit interest accruing on a card, get that debt paid off as fast as you can. Take the windfall from your refund and put it towards cleaning up your personal balance sheet.

Fund an Individual Retirement Account

IRAs are one of the greatest savings vehicles you can have for retirement. These vehicles allow you to invest in the market outside of any employer-sponsored plans (like a 401K) with tax-free growth (no capital gains!) until retirement. There are two types of IRAs that are available to the general public: Roth IRAs and Traditional IRAs. With a Roth, you contribute post-tax dollars and don't have to pay income taxes on any distributions in retirement. There is, however, a phase-out limit based on income. With a traditional IRA, you do pay income taxes on distributions in retirement. However, contributions made could be tax-deductible for that tax year (contributions made from January 1st of the current year through April 15th of the following year). As of now, individuals can contribute up to $5,500 per year ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit.

Monetize Other Financial Goals

Planning to take a big family vacation to Disneyland in 5 years? Dreaming of owning a house but need to build up a sizable down payment? Wondering how you are going to pay for your pre-teen's college tuition? If you have any intermediate goals (prior to retirement), consider opening a brokerage account to help your money grow more efficiently. Statistically, the stock market has more up years than down, and historically, has recovered from those down years relatively quickly. If you have time on you side, consider monetizing these goals by participating in the market at a level that is in line with your risk tolerance.

But If You Must, Splurge…A Little

If you just can't help it, take a small percentage of your refund to treat yourself. Whether it's a nice dinner, a manicure, or checking out a movie with your spouse, take a minute to blow off some steam. Keep this amount small though as the path to wealth is paved with good decisions. Start making good habits today to delay gratification and secure a financial safety net in your future.