Thank you for checking out Telos Financial’s Plan for your Purpose financial planning blog for millennials. The purpose of the blog is to introduce financial planning topics I believe are important. I want to start discussions that will provide education, help benefit, and hopefully improve your financial life. Ultimately, to help you focus on your telos!
The holiday season is in full swing which, for many, means parties, celebrations, and family gatherings. The end of the seasonal festivities for many families are the New Years’ celebrations. Aside from eating fruits, wearing red underwear, or singing Auld Lang Syne, many mark the New Year with resolutions. The vast majority of young folks do it and if you want some help, these tips can help you make a financial resolution and keep it!
So, let’s get into it. Here are my top three financial planning recommendations for 2020 for younger investors to kick off the new year right!
First, sort out your spending.
The first in my top three financial planning recommendations for 2020 is to sort out your spending so you have a comfortable understanding of it. I’ve blogged about this before. Maybe this means making a budget. . . or maybe not. Maybe it means setting aside savings to get closer to a goal. I don’t think everyone needs a budget, but it can be a useful tool if you can’t figure out where you are spending. It’s not an easy exercise and may be painful.
Some ways around it, if you’ve already done your financial plan and know where you are, you can walk or step your way into getting to your target savings numbers. For example, if your plan says you need to save $1,000 per month. A great strategy I see work for a lot of families is to start with something more achievable and slowly increase. Maybe $500 feels affordable, so you could start there in January. You could also break it into two contributions at $250 each per month, if that feels like an easier lift and aligns with your inflows or pay timing.
Each month, increase your savings by $50 (or $25 each if you do this twice per month). That would get you to your $1,000 per month savings number by the end of October, I think a great goal for this walk in strategy would be aim for year end, that allows you two months to skip the increases if it feels like too much a couple months along the way.
If you do a budget and just want to free up cash flow for savings, you would need to dig in to it and decide where to cut or look for areas you are overspending that can be opportunities to save. If you don’t see any opportunities, talk to your tax preparer, accountant, financial advisor, a trusted friend, or find a CERTIFIED FINANCIAL PLANNER™ professional who works on helping with budgeting to get some help.
Next, review your tax situation and outlook for 2020.
Second of my top three financial planning recommendations for 2020 is review your past taxes and future expectations and adjust your investing appropriately to take advantage. We’re well into the TCJA tax rules and many of the questions around the uncertainty that existed when this law rolled out have been answered. I suggest you review your 2018 return, look at where 2019 is or ended, and plan around this for 2020.
There’s a lot you can learn and that can inform your financial planning from a tax standpoint, much of it will be situational depending on your goals. Without being a tax expert, some things you can ask yourself are will your household income be higher or lower in 2020? Maybe you had a big bonus in 2019 that won’t repeat. Maybe you are starting a new job and expect great growth next year. These can influence where you save from a tax standpoint. In higher income years, it typically makes more sense to defer taxes (that is, to save pretax and defer those taxes for future lower income years). If you have a lower income year, or expect your income to dramatically increase in the future, it can make more sense to pay more tax today and save in a tax free capacity.
Doctoral students are a great example of this, though not the only application. As a hypothetical example, when students are residents, they might earn $75,000 per year for a few years in residency, but that will increase to $400,000 per year when they finish. Knowing that, saving to a Roth IRA or similar account might make more sense in residency and to a traditional IRA after. For a married couple, $75,000 puts you in the 12% federal tax bracket, $400,000 puts you in the 32% bracket. That’s nearly three times more tax you would pay on those dollars!
That’s an extreme example, but many sales jobs have predictable fluctuations and foreseeable career changes also can help inform where you save. The bottom line here is knowledge is power. The more you know about your taxes and what you pay, the better decisions you can make about how your savings impact your tax bill.
Other examples of tax informed investing decisions include selling to take advantage of gains or losses, pre tax versus after tax versus tax free savings, back door Roth IRA contributions, super back door Roth contributions, estimated payments, many saving and investing decisions you make can be informed and improved by considering how your taxes will be different this year versus next.
Last, update or create your financial goals.
The third of my top three financial planning recommendations for 2020 is create or update your goals. It’s hard when you’re young or just starting out earning a real wage. You might feel like things are too far away, or you just started getting paid and want to enjoy the new lifestyle for a while. If you don’t have goals, start working on them. If it feels overwhelming, too far away, or unattainable, it’s not. The sooner you start planning, the better able you are to adjust them to make them realistic and to know a path to pursue them. You need to start somewhere, so making your goals gives you a place to begin the analysis and make an educated decision if you need to revise, change, or maybe even improve upon your goals.
If you already have your financial goals, it makes sense to review them at least once per year. Are they still what you want? Do you need to change them? Maybe it’s been tough at your workplace and you want to look into changing careers, retire early, or just change jobs. Any changes to your financial life play into your plan and you can review how all of these scenarios will affect your plan and long term goals.
Depending on where you are in your planning and financial life, you may be encountering different financial issues. These recommendations here can help most families, but having a financial plan that you follow and maintain is the biggest recommendation I have for those who want to know where they are going financially. My biggest recommendations for you in 2020 are to 1) review your spending or make sure you’re hitting your savings goals, 2) review your tax outlook for the year to inform your savings decisions, and 3) update or create your financial goals.
If you’d like to learn more about these topics or financial planning, Telos Financial may be able to help you. Contact us to schedule a free introductory meeting and we can talk more in person. Telos is Michigan’s financial advisor for high income and high net worth millennials recent college graduates, and small business owners.
Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and their families. Dennis LaVoy is a CERTIFIED FINANCIAL PLANNER™ DesigneeAllow me to reintroduce myself and a Chartered Life Underwriter®. He founded Telos Financial and now serves many families as Michigan’s financial advisor for Plymouth, Ann Arbor, Detroit, and serving millennials across the great United States of America.
FSC Securities Corporation does not provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.