With retirement decades away, many young people just entering the workforce imagine themselves to have ample time to get around to saving and planning. However, financial experts recommend that young adults consider their future now, as waiting sacrifices valuable years of saving and planning.
Here are some tips for anyone who is considering their financial future.
1. Pay Attention to Your Spending
Unfortunately, many high schools do not offer practical finance classes that teach basic skills such as budgeting and investing. As a result, many young adults may find themselves with an income but little control over their spending.
Learning how to set limits on yourself and stick to a budget are basic skills necessary for developing a solid financial foundation. That means not running up credit card debt to make purchases or spending your entire paycheck when some of it could be saved, the consequences of which could be significant and lasting. For example, if you use a credit card and don’t pay off your monthly balance, your debt could continue to grow, resulting in a potentially substantial amount of your income going toward interest payments rather than paying down the credit card’s balance.
A better approach is to be more mindful of your spending and potentially delay purchase-related gratification. Do you really need a $7 coffee daily, or could you save that money for a special treat? Is that pair of shoes worth the interest you’ll have to pay on a growing credit card balance?
Making a budget and tracking your spending will force you to pay attention to your spending habits and consider the impact of purchases on your finances.
2. Save Now
The more you save for retirement now, the bigger the payoff will be when you retire. Plus, it’s never too early to establish a lifelong habit of saving.
Numerous options are available to help you save for retirement. Your employer may offer a 401(k) and provide matching contributions. If that’s not the case, check into a Roth IRA, which offers tax-free withdrawals (contributions are taxed) starting at age 59 1/2. Although that may seem like a lifetime away, the sum you accumulate over a lifetime of saving will be worth it once you retire.
3. Save for Emergencies
In addition to retirement savings, it’s important to begin building an emergency fund. Ideally, this fund would be enough to cover your expenses for six months if you lost your job. It could also be used to cover unexpected medical expenses, car repairs, or other large, unexpected expenses that don’t fit into your budget.
While traditional savings accounts are easy to use, they don’t generate a lot of interest. Better choices for emergency funds include high-interest savings and money market accounts, as well as short-term certificates of deposit. When you set up an account, make sure that you can withdraw money easily in an emergency.
When making a budget, savings for an emergency fund should be a priority, even if you can only save a small amount. In addition to building your savings over time, this practice should confer some peace of mind since you will be financially prepared for unexpected expenses.
4. Learn about Taxes
It’s important to understand how taxes work, as they can have a significant impact on your income and financial planning. For example, when you get your first job offer, you’ll need to know whether the salary is enough – after taxes – to cover your budget and savings goals. Likewise, if you receive a promotion or otherwise change jobs, you could secure a higher salary that moves you into a higher tax bracket that cuts into your raise. You can calculate your taxes with an online tax calculator.
5. Invest in the Market
Investing in the stock market can be intimidating, and many don’t invest because they’re afraid. However, following a set of easy rules for investing wisely in the stock market can reap significant advantages.
When purchasing stocks, which offer you partial ownership in a company, buy when they are priced low and sell when their value is higher than what you paid for your shares. Stocks can be purchased individually or in mutual funds, which means that you buy pieces of multiple stocks in the same purchase. New investors should choose mutual funds, as they spread your investment across numerous stocks and are less risky.
6. Enlist a Financial Planner
While managing your own money doesn’t require a finance background, once you move beyond the basics, it can be helpful to bring in a financial adviser. These professionals can assist you with creating an overall financial strategy, including plans for budgeting, saving, and investing. Be sure to hire a financial professional that only charges a fee and is concerned with your best interests rather than a financial adviser who receives a commission when you buy into investments their company supports.
Investing your money, whether in the stock market or a retirement account, is a good way to take advantage of compounding interest and secure your financial future. However, understanding risk levels and investment products can take time, and many new investors fall into the same trap as they navigate financial markets and make decisions about their money.
Here are some of the most common mistakes that first-time investors make—and how to avoid them.
Mistake #1: Not Selecting the Right Advisor
Financial advisors can teach you about financial markets and products and provide helpful input as you make decisions about your money. However, your parents’ or friend’s financial advisor might not be the best advisor for you.
Rather than choosing someone you know works with, do some research yourself. You’ll want to ask what type of clients these potential advisors typically work with, what they could do for you, what their investment philosophy is, and what services and products they offer.
Mistake #2: Making Trendy Investments
Likewise, don’t make investment choices based only on the recommendations of others. Be particularly wary of celebrity endorsements. Companies may be using celebrities’ fame to try to get you to invest. In some cases, celebrity-endorsed investment products are scams.
A better practice is to research the investment product. Does it fit your financial goals? In choosing this product, are you just going along with a trend or will the product truly be a good addition to your portfolio?
Mistake #3: Making Your Own Market Predictions
It makes sense to buy stocks when the market is low and sell them when it’s high. But the real art comes in figuring out the timing. Is the market at its highest point now, or should you wait one more week to sell? Is this really rock bottom for this company, or could you wait one month and get it for even better deal?
Rather than putting energy into predicting a stock’s ups and downs, financial advisors recommend taking a long-term, measured approach to investing. That means buying shares on a regular schedule rather than basing purchases on market predictions.
Mistake #4: Being Overconfident
Some first-time investors enter the market with an abundance of confidence, sure that they will get big returns on their well-timed stock purchases and sales. However, overconfidence can lead to major rookie mistakes, according to financial planners.
Most importantly, don’t misinterpret the market’s movements as confirmation that you made good decisions about the timing of your investment. Trading often to “beat the market” typically doesn’t work, even for investors who read the news and keep up with trends.
A better approach is to slow down on trading decisions and focus on creating a diverse array of investments. When you take a realistic viewpoint about your investment decisions and returns, you’ll make better decisions that will get you closer to your financial goals.
Mistake #5: Overvaluing Cost
In the stock market, the sticker price isn’t always an indicator of value. For example, a $6 stock may not be a bargain if the company is new and unproven. Likewise, a $3,000 price tag is not necessarily an indicator that the stock is valuable.
Rather than drawing assumptions about stocks based on their price, new investors are advised to research each stock’s value by looking at factors such as their past performance, growth potential, and leadership.
Mistake #6: Panic Selling
When the stock market tanks, it can be hard to resist the urge to dump your stocks in fear that the market will drop even lower in coming days. However, more than 90 percent of investors identify this emotional reaction as a top mistake that investors make. Unfortunately, panic selling typically ends in financial loss.
That’s because selling stocks at a low price locks in your losses and eliminates any chance you have to benefit from the almost certain recovery that will follow. For example, in March of 2020, S&P losses totaled 34 percent, and in the US, investors sold out of more than $325 billion in mutual fund positions, according to Strategic Insight. Those investors then couldn’t take advantage of the market’s 20 percent rebound a month later.
Financial advisers recommend laying low when the market turns downward. Stick with a long-term investment strategy instead of short-term decisions and wait for the inevitable market correction that will erase those losses.
Mistake #7: Holding on to Returns
While it may be tempting to spend your returns, or earnings, from the market, a better strategy is to invest them back in the market. This practice, which is called compounding, will help your money grow faster. With a commitment to savings and compounding, over time your investments should flourish.
When uncertain financial times loom, questions about your retirement are sure to come up. Have I saved enough? Do I need to keep working? How can I safeguard my savings?
As people who lost significant savings in the economic recession of 2008 can attest, it’s possible to survive a recession. That year, an economic crash erased about $2.4 trillion from Americans’ 401(k) and IRAs. This was an especially hard hit for people approaching retirement, who didn’t have much time to rebuild their savings or wait for the stock market to rebound.
Here are some questions to consider when thinking through how your retirement will weather a recession.
Should I Begin Taking Social Security Payments?
While Americans are eligible to begin drawing Social Security benefits at age 62, often it can be beneficial to wait. The earlier you begin collecting Social Security, the smaller the payments will be—although one benefit is that you will receive more payments overall.
For every year that you wait to collect, your Social Security benefits typically will increase about 8 percent. You could claim the benefits early and invest them, but that option requires the discipline to invest the checks and a market that’s going to generate at least an 8 percent annual return (unlikely during a recession). Financial planners find that many people end up spending at least some of those early benefit checks. A better choice could be to hold off on withdrawing Social Security as long as possible.
When Should I Retire?
A recession may cause you to rethink your retirement plans. If you can no longer afford to stop working completely, you may find that a part-time job will generate enough income to match or exceed your portfolio’s annual distribution. For example, if your part-time job pays $13 an hour for a 20-hour workweek, you’ll earn $13,520 annually—the equivalent of a 13.5 percent annual return on a $100,000 portfolio value.
In today’s job market, you may find several types of part-time jobs that match your interests or skills. You could pet sit, plan weddings, repair cars, or turn almost anything you enjoy doing into a small business. You’ll also find plenty of work-from-home jobs that could draw on your professional skills or areas of interest. Working a part-time job would allow you to postpone withdrawing Social Security benefits and buy your portfolio some time to recover.
Should I Keep Contributing to My Retirement Account?
If you are still working full-time and have an IRA or 401(k) when a recession hits, you may have to consider whether you want to continue contributing. If you feel secure in your job, this can be a great time to buy into the market at low prices, and the market most likely will rally back.
However, recessions can be scary and emotional times for investors. Instead of getting caught up in the market, you may want to continue investing on your regular schedule. If you already have automatic paycheck deductions into your 401(k), this will be easy.
If a recession leaves you cash poor, however, and you haven’t been able to save up an emergency fund, you may need to temporarily stop contributions to free up cash for monthly expenses.
Should I Invest?
The days following a financial crash can be an excellent time to invest if you are willing to take the risk. For example, people who bought into the S&P 500 the day after Black Monday in 1987 saw 50 percent increase in only two years. If you have cash or savings on hand, consider investing through an index fund. You could recoup your losses from a recession quickly.
Which Accounts Should I Withdraw From?
Sometimes, people must draw on their investment portfolios during a recession to meet monthly expenses. While the best plan is to not touch your retirement accounts prematurely, if you’re in this situation, consider the tax implications of withdrawing from different types of accounts before you decide where to withdraw.
If you are already collecting Social Security and withdraw from a 401(k) or traditional IRA, the combined income could move some of your Social Security into a category where they are taxable. In this case, a better choice would be withdrawing from a Roth IRA, where withdrawals are not taxed and will not impact your Social Security payments.
If you do not collect Social Security, you won’t be affected by these rules. However, if you do prematurely withdraw money from your 401(k) and don’t pay it back, the withdrawal will set off a 10 percent penalty if you are younger than 59 1/2. However, the IRA does have 18 exceptions to this rule, so it may be worth reading the fine print if you need to make this kind of withdrawal.
Of paramount importance during a recession is staying calm and making good decisions about your retirement, even as the financial markets are in turmoil. If you are in doubt, a financial planner can help you navigate your finances during difficult times, as the decisions you make could significantly impact your retirement long after the recession ends.
The family office has served as an integral part of wealth management since ancient times, although the modern form of the family office was born in the late 19th century with the Rockefellers. In 1882, John D. Rockefeller created an office to organize his many lines of business and oversee his family’s investments; this office managed the Rockefeller wealth as an investment portfolio, rather than individual businesses. Though this setup was never described as a “family office,” it’s similar to the concept today. In essence, a family office is an organization, typically made up of financial professionals, who help wealthy clients and their families manage their money and make sound decisions about their investments and financial futures.
In 2020, according to a recent Forbes report, the idea of the family office will continue to evolve and grow in response to cultural, economic, and financial trends. This structure still will help individuals and families build and preserve legacies, amass inheritances, and protect family businesses. However, many family office providers will need to rethink think their structures and purposes in response to a changing world, according to Forbes.
Here are six trends that will affect the family office in 2020.
Family offices already are preparing for a recession, according to Forbes. A UBS Campden Wealth Family Office Report published this year notes that more than 50 percent of family offices are prioritizing increasing their cash reserves, mitigating risk, and taking advantage of opportunistic events. Almost half of the family offices surveyed are also increasing their contributions to direct private equity investments, while 42 percent are prioritizing private equity funds and 34 percent are investing more in real estate.
Transitioning family businesses
Many families now are selling their established businesses or buying other family businesses, while others are moving from managing companies to managing large wealth portfolios. This trend is increasing the need for family offices, as families seek to preserve their wealth and legacies for future generations, according to Forbes. Family offices are providing support and structure for wealthy families transitioning into new stages of wealth management.
Advances in technology and changes in global economic patterns have created a new phase in globalization that some experts are calling “Globalization 4.0.” Trade in the global south is growing quickly, and the developing world is playing a greater role in international trade flows. In addition, automation, artificial intelligence, Big Data, the Internet of Things, and other paradigm-shifting technologies are impacting markets and trade, giving rise to a trend that’s seeing more products made locally, close to their consumer markets. For family offices, this shift can force rethinking about where individuals and families want their holdings located and how they will structure their governance.
New family office structures
Wealth is shifting as the number of billionaires worldwide declined by around 5% amid market changes and slowing economies. However, more family offices are being created, according to Forbes, as businesspeople who started companies in the 1990s sell and tech entrepreneurs are preparing to put their companies on the market. Much of this influx of wealth will be invested, and for individuals and families, a family office can be an excellent structure to manage assets and chart a financial future.
How will this impact family offices? This influx of investors looks different from previous generations. Instead of a single or multi-family office, investors are looking for new structures, such as virtual and private multi-family offices or on-demand resources. The sharing economy has also made its way to the family office, as some investors now are interested in pooling their resources with other families to open more investment opportunities.
Prioritizing other risks
Family offices now are increasingly factoring in non-financial risks when making decisions about their investments. Climate risk, for example, is now part of the World Bank’s risk management strategy. Since the publication of the Panama Papers, which exposed the innerworkings of some family offices’ investments, the threats to an individual’s or family’s reputation is more frequently considered when assessing risk. Another important factor is the risk surrounding succession, which fails two-thirds of the time. According to Forbes, half of family offices do not have a succession plan. This is clearly a risk that more family offices will need to prioritize.
The role of banks and financial advisors has diminished as digitization has given family office holders more access to systems and information. Often, family office members can manage their own investments and transactions, which can give them complete control over how their portfolio grows.
Digitization also is affecting wealth management services that work with family offices. Families are demonstrating growing concerns about the security of their information and are asking for greater access to their transactions and portfolios. To meet these demands, wealth management services must increasingly utilize software and other digital tools to store data in a centralized, accessible location. They must also provide regular, open communication with clients, as well as more tailored, customized solutions.