The Middle Years
Don’t let daily life distract from long-term goals
BY MARY LEE HARVEY DIRCKS
The 30s and 40s are exciting, busy years for women. Careers are well underway, and the family may be expanding. It’s easy to get caught up in the hubbub of daily life and activities and lose sight of long-term financial goals.
In your 30s, time is on your side, says Kerry Monif, financial advisor at Black Oak Investment Counsel/Securities America Inc. “You can never get that back.”
She advises her clients to work toward always contributing the maximum amount into their retirement accounts, with everything else coming second. “There are no scholarships for retirement. You have to pay yourself first,” she says. Monif likens it to the instructions aboard an aircraft: Secure your own oxygen mask before assisting your child or other passengers.
Her second mandate is to protect income by purchasing disability insurance and life insurance. “Your earning ability at this time in life is probably your greatest asset. You need to protect it.” Most employers offer group plans with discounted costs. Another safety net that Monif and most other experts recommend is to maintain an emergency fund that equals three to six months of living expenses to cover unforeseen surprises, such as major home repairs or job loss.
“Live below your means,” stresses Monif, “which means not spending more than you earn.” A good way to determine your success in this area is to go back three months and document your income. Then note all of your outgoing money, looking at your checking accounts, credit cards and withdrawals. “Be ruthless,” she says. “List everything. Hopefully the difference between those two is a positive number.” If it isn’t, then it’s time to look at cutting back.
Monif’s final piece of advice to all 30-somethings and beyond is to educate themselves. “Keep abreast of what’s going on in the financial world by reading on the Internet and attending financial seminars and workshops,” she suggests. Information is abundant but can be overwhelming, so Monif recommends establishing a team of people you can draw upon to understand all aspects of your financial well-being: insurance and investment advisors, accountants and attorneys. If married, decide to actively participate in the finances. Women too often allow themselves to take a back seat in financial decisions and planning. Monif makes a point to include both spouses in all discussions and decisions when working with couples. “You are partners in the marriage; be partners in finance.” Yearly financial check-ups are recommended to make sure finances are on track and to make investment adjustments along the way.
Upgrading Your Home
The good budgeting habits established in those early years out of college continue to play a leading role in tracking toward established goals. Planning ahead is the key to upgrading to a larger home, says Jessica Blake, mortgage loan originator at Security National Bank. She suggests meeting with professionals in the real estate industry six months to a year ahead to establish a realistic picture of what your current home might sell for and how much you’ll need to invest in getting it ready to list. This also establishes an idea of the equity in the home that can be used as down payment for the next home.
Another first step is pre-qualification for a general loan amount. It’s an easy process and can be done online at no cost. Again, planning ahead gives you the opportunity to clean up any credit problems that might keep you from getting the best possible interest rate, Blake says. Loan pre-approval is a much more detailed course of action with application fees and is done closer to the time of actually finding the home that you want to purchase, within about 90 days. Armed with an estimate of the equity you have in your current home, you can gauge what price range you feel comfortable with. Wikipedia gives easy-to-understand definitions of two terms you’ll want to familiarize yourself with. Here’s a very quick synopsis:
Loan-to-value (LTV) ratio describes the relationship between the loan amount and the value of a purchased asset. The lower the percentage, the lower the risk to the lender, resulting in lower interest rates for you. In cases of a high LTV ratio, over 80 percent, you could be required to purchase mortgage insurance, which is an added expense to you.
Debt-to-income (DTI) ratio represents the percentage of your monthly gross income used to pay debts, including all housing costs and monthly debt obligations that require monthly payments such as car loans, credit card bills, child support etc.
What’s the magic number, or rule of thumb? How much equity in your home is the right amount?
“There’s no percentage that’s right for everyone,” says Angelia Thomas, financial advisor at CRPC with Leyden, Thomas & Associates, financial advisory practice of Ameriprise Financial Services, Inc. “It depends on where you’re headed and what you want to accomplish.” The deciding factor, Thomas says, is not so much the amount of equity as it is the amount of discretionary money left over each month after all budgeted expenses are covered. These include a fully funded three- to six-month cash reserve, savings for retirement, college tuitions and future goals. “We are seeing more and more people who are hesitant to take on loads and loads of debt since the 2008 downturn,” she says.
Teaching Kids Fiscal Responsibility
This conservative trend encompasses what experts suggest parents should aim to teach their kids about money. A great tool for parents is Money As You Grow, a recommended initiative from the President’s Advisory Council on Financial Capability. The website moneyasyougrow.org provides age-appropriate lessons and activities categorized into five age groups spanning from preschool to beyond high school graduation. Each section highlights four milestones with suggested activities that fit into everyday life. Suggested activities include regular visits to the bank to deposit savings, and for parents to consider giving a matching percentage for every dollar saved. Milestones and activities advance conceptually with each age group.
Thomas has clients who go a step further and set up an account within the parent account that is reserved for the child. The kids sit in on financial meetings to review their own portfolios and select their own stocks. “They can see that they bought a stock for $10 and watch the price go up to $12 or $13,” she says. “And on the flip side, they understand the risks when they see that they bought a stock for $10 and it’s now worth $8.” In conjunction with watching the steady accumulation of a savings account, Thomas likes the added knowledge kids gain by experiencing the magic of watching funds compound and fluctuate.
As kids enter high school, begin to drive and start to seriously consider future plans, great financial teaching opportunities naturally present themselves. The Money As You Grow series mentioned above gives comprehensive tips to encourage good financial habits as well as help them to envision a realistic view of college expenses. Parents are encouraged to discuss with children how much they will contribute toward college expenses, and are directed to websites like collegecost.ed.gov/scorecard and consumerfinance.gov. Other milestones address credit cards, student loans and investment options for young people.
Planning for Children’s College Tuition
When should you start saving for your children’s college expenses? “You can open an account as soon as the child has a Social Security number,” Monif says. “While a 529 plan is a popular choice, there are other options.” She suggests talking with your financial advisor to determine which options are best for your situation.
“If you’re working with a financial advisor that you trust, once your kids finish college, bring them in with their benefits book and pay stubs and get them started on the right track,” Thomas says. “That’s the best gift you can give your kids.”
Financial literacy starts wherever you are at right now and continues through the ages.
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