By Eleanora Kukuy
Financial planning is a common concern for many people, especially during a pandemic. Some of us have been laid off, furloughed, or had our salaries cut; and many of us are simply budgeting and planning during an uncertain time. On Wednesday evening of July 15th, MHI guests were invited to listen to a presentation led by Arisleyda Riehl, Vice President at Merrill Lynch Wealth Management. Arisleyda covered a number of relevant topics that spanned budgeting, saving, inflation, and more. Here are some of the key takeaways:
Budgeting is your friend: "You need to have a handle on what's coming in and coming out in order to see where you can cut expenses”
The first step of financial planning is budgeting, which should be done regardless of income level. If you do not budget yet, start right away! Grab a pad and pen and start by writing or typing all your expenses and then continue to do it every day. Over time, you will see where your expenses can be trimmed. Some questions you can ask yourself: "Do I need that unlimited data plan if I'm staying home more often and have a reliable internet? Can I cancel that gym membership if I'm not going every day?" It all depends on everyone's unique lifestyle.
Create ways to save money; Unsubscribe from your favorite retailers!
Arisleyda summarized it best when she said, "We're in a land of consumerism." Consequently, the average American has $10-12,000 in debt. We are always surrounded by money-draining temptations. Protect your budget by eliminating situations where you may be tempted to spend. Some money-saving tips: Try unsubscribing from some of your favorite retailers to avoid getting tempting emails promoting sales. Delete store credit card data from websites where you shop often, to make it harder to purchase something next time you go online. Open a separate savings account where you can put money away without seeing it.
The golden rule is to save at least 3 months of your expenses
How much money should you save up? Arisleyda's golden rule is to save at least 3 months of your average living expenses. Use your budget to calculate how much you pay for all your living expenses per month, and then multiply that by 3. That's the ideal minimum amount you want to have saved up. It is highly advisable to start an emergency fund, which is money that you set aside for unexpected expenses. These could be a "rainy day, an unexpected costly repair or needed purchase, or a special event. When you have money set aside, you can be well prepared to meet these needs.
Never ever take money from your 401k!
"There are numerical reasons not to touch that," Arisleyda warned. Taking even a little bit of money from your retirement account can cause severe tax consequences.
Make sure you put money away on a regular basis, and that your savings grow each year to account for inflation.
For example, the current inflation rate is 2.4%. That means that in 10-20 years, the prices of goods are going to be 2.4 times more expensive. In this case, grow your money at least 2.4% each year, and try to exceed it. Arisleyda gave an excellent figurative example of what happens if you put away a dollar under "a pillow" and take it out 20 years later. If you are satisfied to still have that dollar 20 years later, think again ̶ you're at a major loss. That dollar is worth less now, and you're not able to buy as much for it. Therefore, simply putting away cash does nothing to grow your savings.
Financial wealth is created with compounding ̶ as long as you don't touch your money!
The compounding effect means earning a percent on your money each year. Each year, if you leave that money to collect interest, the compounding effect increases. It was illustrated with a graph that compared three people who invest the same amount of money into their investment accounts each month. Naturally, the person who starts saving earlier, over a period of 40 years, ends up with far more money at the end of the same time period, because her money compounded each year. Make sure you do not take money out of your savings account, as it disrupts the compounding process.
Case Studies of Two Households: Main lessons learned
We examined two different fictional households that were struck with unemployment during the pandemic. Each household is going through unemployment ̶ a 30-year-old single man, and a middle-aged couple. We examined the lessons learned from these two scenarios:
- Avoid dipping into your retirement plan
- Budget appropriately (such as shifting vacation budget to essentials)
- Cut expenses wherever you can
- Do not hesitate to call your cell phone provider, car insurance, and credit card companies to ask for lower fees and less interest rates: every saved dollar helps!
We all have goals which we may need to plan financially for. Some of us want to buy or lease a new car or house; some of us want to plan a wedding or another big event in our life. Start planning and calculating costs in advance. Continually save and invest your money. And most importantly, avoid financial scams and dipping into your retirement savings account.
A video of the presentation is here.
Arisleyda has kindly shared some printable worksheets and information to help us get started:
Tips for Managing Your Finances Today and Tomorrow (including case histories)
For more information, visit Arisleyda’s website.