How A Fiduciary Can Help You Through Financial Planning

FIRE, an acronym for “Financial Independence, Retire Early” is trending as a new financial lifestyle.  In a nutshell, FIRE promotes extreme savings in your 20s, 30s, and 40s, with the goal of being able to live off passive income from the accumulated nest egg much earlier than typical retirement age.  Some proponents suggest saving 70% of your income until you have collected 25x your annual salary, cutting your working years in half.  Extreme saving is not a new idea, but the phrase has taken off in the last couple of years, creating a cult following online.

Putting aside additional savings to fund a “work optional” lifestyle is a fantastic idea in theory, but most Americans would find it quite difficult to only live on 30% of their income without making DRASTIC changes.  If you are willing to downsize, live with roommates in a cheaper part of town, eat beans and rice, drive an old car/take the bus, and limit purchases, you could be successful at FIRE.  However, this level of deprivation may cause unintended sacrifices that impact your social life and happiness.

Our take on FIRE is to find your happy medium.  For example, you absolutely should increase your savings rate incrementally every year if you can afford to do so, but initially choose an amount that’s attainable.  To help you get started, these are the questions we encourage clients to consider:

1) What is your current cash flow?

Do you have a firm grasp on how much you spend on monthly groceries?  Going out to eat? Gifts at the holidays for friends and family?  The key here is to consider all expenses, not just big-ticket fixed items like your car payment or mortgage.  Once you have an idea of how much you are spending compared to household income, you can then evaluate your current savings rate.

2) Where can you cut back to increase your savings rate?

Can you meal prep on Sundays to avoid going out for lunch during the week?  Can you stay in to watch a movie instead of going to a theater for date night?  Are you willing to have a “no-spend” week?  Some people use tracking software (our firm provides EMoney to our clients) to help set up electronic budgets to alert you when you are close to going over set categories of spending. Alternatively, can you bring in additional income via a side hustle?  Can you work additional hours at work to qualify for overtime pay?  Make an honest assessment to determine where you could potentially improve your cash flow on a monthly basis.

3) Are you debt-free, or leveraging debt appropriately?

A mortgage with a low-interest rate is an appropriate means of financing a lifestyle you want, while potentially building equity via real estate.  If you still have student loans or credit card debt, though, your increased cash flow should go towards paying this off ASAP. Just make sure you have 3-6 months of living expenses built up in an easily accessible emergency savings account as well.

4) Outside of your emergency savings, are your accounts keeping pace with inflation?

Historically, inflation rates average around 3% annually.  This means that your purchasing power decreases, as the cost of goods increases over time. Remember when you could buy a Coke bottle out of a vending machine for a dollar? Your parents or grandparents may even recall purchasing a soda for a quarter!  That’s inflation at work. If you’re planning to retire early, this means you need to account for inflation over several decades. The best way to maintain your purchasing power is by investing excess savings in the stock and bond markets and taking advantage of compounding interest over time. A Financial Advisor can determine the best investment strategy for you.

5) Are your investments in a diversified portfolio in line with your risk tolerance?

Trying to time the market to buy and sell holdings is incredibly difficult to do.  Diversification via broader index funds and investing consistently (to take advantage of pullbacks) has proven to be a more successful investment plan for most Americans.  The concern with the FIRE movement is knowing how risky you can or should be with your asset allocation depending on your time horizon to retirement.  For example, if you are closer to reaching your retirement goal, you don’t want 100% of your assets invested in the stock market.   A comprehensive financial planner can help determine how much risk you should be taking on by looking at your finances holistically, and ensuring portfolios are rebalanced regularly according to your needs.

The road to early retirement is still a long one, so you’ll need to regularly evaluate your progress, reassess as needed, and don’t forget to acknowledge small victories!

Our advice is to push yourself to save more, without going to the extremes of the FIRE lifestyle.  If you would like additional accountability, Trilogy offers progress checks through our Decision Coach process more frequently than annual reviews.  And if you need a road map to help find your path to success, reach out with any questions here.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.

The day you become a parent is a day of overwhelming emotions. You may experience joy at the sight of your precious child, relief that he or she made it out of the womb, and for many of you, fear and anxiety because you somehow have to turn that seven-pound baby into an independent, responsible, and successful adult.

As parents, there are so many things we have to teach our children, beginning with the basics of how to eat and share toys to more complicated lessons such as making decisions and getting along with others. As a society, we are excelling in some areas of parenting, but falling behind in others. In a recent National Financial Capabilities Study, only 24 percent of Millennials (age 23-35) were able to answer the first three financial literacy questions correctly, and a mere 8 percent answered them all correctly.[1]

Most parents agree that we need to do a better job teaching our kids about money. Last year, T Rowe Price reported that 80 percent of parents didn’t think schools were doing enough to teach kids about financial matters.[2]However, parents cannot abdicate all responsibility to the schools. Raising children and teaching them to navigate the world is first and foremost a parent’s responsibility.

Set A Good Financial Example

The first step in teaching your kids about finances is modeling what you want them to learn. Few parents would disagree with this concept. The same T Rowe Price study mentioned above found that 69 percent of parents are very/extremely concerned about setting a good financial example for their kids. The vast majority, eight out of ten, feel that they are setting a good financial example, but two-thirds also admit to doing things that wouldn’t qualify as setting a good example.

An enormous 40 percent admitted that when it comes to talking to their kids about finances, it’s “Do as I say, not as I do.” Anyone who has raised kids knows that isn’t enough. My clients tell me they are very concerned about setting a good example for their children. The first step in teaching your kids about money is simple: Show them.

Talk About Finances

Sometimes a silent model isn’t quite enough, and some areas of personal finance aren’t very visible. That is why it is imperative to talk to your kids about finances. But talking about money may be a long-standing cultural taboo. Often this reluctance to discuss financial matters spills over into the home as well.

Forty-nine percent of the parents in the T Rowe Price study said they rarely or never discuss family finances with their children. Eighteen percent admitted to being very/extremely reluctant to discuss financial matters with their kids and 72 percent of parents experience at least some reluctance to having such a discussion. But how are kids going to learn about money if you avoid talking to them about it?  Some topics require more in-depth discussion and openness and finances are one of them.

Get Your Kids Involved

If you want financial understanding to actually sink in, you need to get your kids involved. Learning theory and research have consistently shown that the more active a learning experience is, the greater the learning gains and retention.[3] Most people have to do something to truly learn it.

How does this work with kids? Here are some ways I’ve put this into practice with my daughter: Even though she is young, I have taught her the difference between a penny, nickel, dime and quarter. Beyond just teaching the values of the coins, I then show her how to earn money by completing basic, age-appropriate chores such as making her bed and folding her clothes. As her coins start adding up, she has the opportunity to buy a toy or to save her money and earn interest (a penny for every dollar). Just as any adult, she loves the idea of making money for no extra work, so she often chooses the savings option!

At this point, I take a step back and let my daughter make her own financial decisions (and sometimes mistakes) so that she can learn from them. She and I have different values and I’ve learned that I need to let her be independent and respect her choices. On one occasion, she decided to impulsively purchase a My Little Pony beanie baby that I thought would be a waste of money. Rather than refusing to buy the toy for her, I took a step back and allowed her to buy it with her own money. Sometimes I am surprised in the process, as she still plays with this toy three months later!

Imparting financial wisdom to your kids is a challenging process that takes years. So, if you don’t feel like you’re doing an adequate job of teaching your kids about money, you’re not alone. Even if you are doing a good job, you probably agree with the 77 percent of the T Rowe Price survey parents who said that they wished there were more resources available to help them teach their kids about financial matters.

I believe that every child can learn critical financial lessons at a young age that will set them up for future success. I want to provide you with the tools to help you on this journey. To set up a meeting, call my office at (949) 221-8105 x 2128, or email me at mike.loo@trilogyfs.com.

[1] http://gflec.org/wp-content/uploads/2015/01/a738b9_b453bb8368e248f1bc546bb257ad0d2e.pdf

[2] https://corporate.troweprice.com/Money-Confident-Kids/images/emk/2015-PKM-Report-2015-FINAL.pdf

[3] http://www.joe.org/joe/1994august/a6.php