Your Goals for 2019

Welcome to 2019! A new year brings a fresh chance to accomplish your goals. Maybe you’re dreaming that this will be the year you buy your first home. Maybe you’ve realized that your kids are one year closer to college and it’s time you start preparing. Maybe this is the year you want to exit from your current job so you can spend more time doing the things you love.

Even if your goals are further out than 2019, by December 31 of this year, you can either be several steps closer to achieving those goals, or you can sit right where you are today and risk that they will remain forever out of reach. Time stands still for no one. This is the only chance to do 2019 before it is gone forever.

Many of your goals have a financial component. Whether it is becoming a home owner, paying off your student loans, getting married, saving for a college education, planning for your retirement, or supporting your favorite charity, we can help you achieve your goals. The objective of our financial planning is not to own a bunch of stocks and bonds or get a nice tax break, it is about finding an effective, efficient, and logical way to help you accomplish your life’s goals.

We love when someone has a concrete, specific objective. When you truly embrace an important goal, there is ample reason to find the discipline for whatever steps are needed to achieve your objectives. I can tell you all about the benefits of a Roth IRA or a 529 College Savings Plan, but if that doesn’t fit into your needs, all my words are worthless. The “why” has to be there first, before we can get excited about “how” we are going to do it.

If you have goals that you want to accomplish in 2019 – or 2020 or 2029 – I’d like to invite you to join us and become a client of Good Life Wealth Management today. We serve smart investors who value personalized advice centered on their goals.

I’d welcome the opportunity to share our approach and allow you to consider whether it would be a good fit for you and your family. 

  • Our process focuses on planning first – we want to fully understand your goals and needs before we make any kind of recommendation. You would think this would be universal, but believe me, most of the financial industry has a product that they want to sell you before they have even met you. (Read our 13 Guiding Beliefs.)
  • We have no investment minimums. Younger professionals have financial goals and complex, competing objectives (hello, student loans!) even if they haven’t started investing or only have a small balance in a 401(k). We think helping young professionals build a strong financial foundation is important work. This is our Wealth Builder Program.
  • I’ve been a financial planner for 15 years and hold the Certified Financial Planner and Chartered Financial Analyst designations. Professional expertise and deep investment experience should be a given if you’re seeking financial advice. (More about Scott.)
  • Having your own plan means that you have taken an objective measure of where you are today, that we have created specific goals and objectives, and that we identify and implement steps to achieve those goals. While this is often savings and investment based, we’re going to evaluate your whole financial picture, from taxes and employee benefits to estate planning and life insurance. Bringing in a professional delivers accountability to a plan and protects you from what you don’t know you don’t know. (Financial Planning Services)
  • We are a Fiduciary, legally required to place client interests ahead of our own. Our fees are easy to understand and transparent. We aim to eliminate conflicts of interest wherever possible and if not possible, reduce and disclose. I invest in our Growth 70/30 model right along with our clients; if I thought there was a better way to invest, we would do that instead. (Skin in the Game)

Successful people – in any field – seek out the help and expertise of others. They surround themselves with knowledgeable professionals, not to abdicate responsibility, but to improve their understanding through asking the right questions. I became a financial planner to help others achieve their goals, and I love my job. For me, it is endlessly interesting and personally rewarding.

You could make a New Year’s resolution about your finances, but I genuinely believe you are more like to have a good outcome if you hire the right advisor who can help guide your journey. If you want 2019 to be the year when you turned your dreams into goals and a plan, then let’s talk about how we can work together.

Extend Your Car Warranty for Free

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth. 

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill. 

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself. 

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can. 

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan. 

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience. 

I am aware that other fluid makers offer warranties, including Mobil 1Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received.  Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.

You CAN Invest in a Taxable Account

I spend a lot of time talking about retirement accounts, and for many Americans, the only stocks they will ever own are in their 401(k) and IRAs. I don’t know why, but many have never even considered investing outside of a retirement account, and a few have even thought it was not possible.

It is a GREAT idea to invest outside of your retirement accounts. Why? Because the contribution limits are so low for IRAs ($5,500) and 401(k) accounts ($18,500). There are a lot of people who put in that amount and then think they can’t do any more investing or that they don’t need to. There’s nothing magical about these amounts. No one is promised that if you save $5,500 a year into an IRA that you will have enough to retire (especially if you are getting a late start). And if you have ambitions to be wealthy, it may take you 30 or 40 years of 401(k) contributions to break the $1 million mark.

While we often talk about the tax benefits of retirement contributions, let’s actually run through the math of an IRA investment and making the same investment in a taxable account. The results may surprise you.

Let’s say you put in $5,000 to a Traditional IRA this year and also deposit $5,000 into a taxable account. In each account, you buy the same investment, such as a S&P 500 ETF, and hold it for 20 years until retirement. Assuming you get an 8% annualized return for those 20 years, in both accounts, your position would have grown to $23,304.79.

At the 20 year mark you withdraw both accounts. What taxes are due?

From the Traditional IRA, the entire withdrawal is treated as ordinary income. You may be in the 24% tax bracket, in which case you would owe $5,593.15 in taxes. That’s pretty painful and the reason why so many retirees hate taking money out of their IRAs and limit their withdrawals to their Required Minimum Distributions.

What about for the taxable account? You started with a $5,000 cost basis, so your taxable gain is $18,304.79. It is a long-term capital gain (more than one year), and will be taxed at the capital gains rate of 15%. Your tax due is $2,745.72. That’s less than half of the tax you’d pay on the withdrawal from the retirement account that you did for the “tax benefit”. Is that IRA a scam?

No, because you also got an upfront tax deduction for the IRA contribution. If you were in the 24% bracket, you would have saved $1,200 in taxes for making that $5,000 contribution. If you subtract the $1,200 in tax savings from $5,593, you still see that your net taxes paid was quite high: $4,393.

However, that is ignoring the time value of money and getting to save that $1,200 now. If you actually invest the $1,200 you saved that year, and have it grow at 8% for 20 years, guess what it grows to? $5593.15. (If you invested this in a retirement account, you will owe 24% in taxes on this gain, or another $1342.)

The key to coming out ahead with doing an IRA versus a taxable account is that you need to actually invest the tax savings you receive in year one. If you just consume that tax savings, instead of saving it, you actually might have been better off instead doing the taxable account where you could receive the lower capital gains rate.

The best solution is to maximize your retirement accounts AND save in a taxable account. If you want to become a millionaire in 10 years, save $5,466 a month. People have ambitious finish lines, but don’t set savings goals that are in line and realistic with their goals. The short-term activity has to match the long-term objectives. Once you are in retirement, it is a great benefit to have different types of accounts – IRAs, Roth, and taxable – to manage your tax liability.

My point is: Don’t be afraid of a taxable account. Retirement accounts are good, but mainly if you are going to save the upfront tax benefit you receive! Today’s ETFs are very tax efficient. While you will likely have dividend distributions of about two percent a year in a US equity ETF, when you reinvest those dividends, you are also increasing your cost basis. If you’re looking to invest in both a retirement and taxable account, let’s talk about how you can do this in the most effective way possible.

Financial Planning In Your Sixties

Investors in their sixties are in a decade of decisions. Up to this decade, you could do very well by putting your saving on autopilot, and doing little more for your portfolio than occasionally rebalancing it. Now, you’re faced with some important decisions, whether you are planning to retire soon or to wait many years down the road.

See: Six Steps at Age 60

1. Social Security. The decision of when to start receiving your Social Security benefits is independent from when you retire from your job. The Full Retirement Age (FRA) today is 66, but you can start early benefits from age 62 on. Or you can delay past FRA, all the way to age 70, and receive an 8% annual increase in benefits for waiting.

Where else can you get a guaranteed 8% increase in benefits? It’s a great deal to wait, even if it requires that you spend down some of your cash. Guaranteed benefits are the best way to offset longevity risk, so maximizing your Social Security can be a great idea if you are healthy and have a family history of long lives. For married couples, there is a survivor’s benefit, which means that the spouse with the higher benefit has essentially a joint benefit. There are a lot of things which people don’t consider about Social Security, and that’s why it’s best to talk to me first.

See: Social Security, It Pays to Wait
See: Guaranteed Income Increases Retirement Satisfaction
See: Social Security Planning: Marriage, Divorce, and Survivors

2. Health Care. Medicare starts at age 6r5. If you retire before 65, you will have to figure out how you will be covered until age 65. And when you do reach age 65, you will sign up for part A, and probably Part B (unless you have proof of employer coverage), and will then need to consider whether a Medicare Supplement or Advantage plan makes sense for you. Again, lots of decisions here, and if you don’t sign up at your “window” at age 65, you may have to pay permanent penalties on Part B when you do enroll.

See: Types of Medicare Health Plans

3. Retirement Age. The most dangerous thing I can hear is “It’s okay, I don’t plan to retire.” There are so many people in their sixties who planned to work for another decade or more and things didn’t work out as planned. Maybe they were laid off, or had a health situation, or their spouse had a health issue, or their employer asked them to relocate. Things change. We can’t assume that we have the ability to maintain the status quo indefinitely by choice. My goal for every sixty-something client is that you work because you want to and not because you have to. So even if your planned retirement age isn’t until sometime after 75, make sure you and your family will be all set financially if you decide to retire earlier.

See: How Much Income Do You Need In Retirement?

4. Withdrawal Strategies. If you are retiring and starting withdrawals from your accounts, you will need to make decisions about how much to withdraw and from which account or assets. If the market goes down, can you withdraw the same amount? What is the most tax efficient way to withdraw from your accounts?

See: Taxes and Retirement

5. Asset Allocation. We typically plan for a 20-30 year retirement period, so even if retirement is close, we are still investing for the long-term. Even so, we want to reduce market risk in the five years before retirement to mitigate the potential impact of a bear market right before you plan to begin withdrawals. After retirement has begun, there is evidence that it may be beneficial to sell your bonds first and not rebalance your portfolio. This would mean that your equity holdings would become a larger weighting in your allocation over time.

See: What Is The Best Way To Take Retirement Withdrawals?

Of course, there are many other decisions which we evaluate in a financial plan, such as whether to take a pension or a lump sum upon retirement. When you are facing these decisions, what you don’t know can hurt you. That’s where I can help you navigate these decisions whether you have already retired, are retiring soon, or have many years before you plan to retire.

Financial Planning In Your Fifties

My hope for every fifty-something investor is that you have by now attained financial independence, where you have enough assets to stop working if you wanted and live off your investments. Most aren’t quite there yet, but if you’re working with me, we have a good idea of your finish line, a quantifiable goal, and the steps needed to get there.

What does scare me is when someone says that they plan to never retire, so this doesn’t matter or apply to them. While it’s natural to wish that time would stand still or that things won’t change, it’s a poor plan to assume that change isn’t going to happen to your life.

I think of a relative who worked for one company for 30 years, until age 59, when they went out of business. He was used to making a certain level of income, which just wasn’t available in his small town, for someone with skills that didn’t easily carryover to other types of business. He was planning to work forever, but it turns out, he wasn’t interested in jobs that paid 50% of his previous salary. He was unemployed for three years, before starting Social Security at age 62.

See: The Boomer’s Guide to Surviving A Lay-Off

For many employees in their fifties and sixties, they want to keep working, but if they lose their job, they discover how tough it is to get another high-paying job in today’s economy. Others leave work due to health issues, or to care for an ailing spouse. The point is that things change. It’s great to work if you want to, but not because you have to. The single-minded goal of every fifty-something investor should be to build their nest egg to where they would be fine if they didn’t work.

1) Prepare your retirement finish line. What size nest egg should you have? At a 4% withdrawal rate, you need 25-times your annual needs. Need $50,000 in withdrawals? Your goal is $1.25 million. Are you there now? How much do you need to save to get there? And while you are at it, download your Social Security statement.

Why 3% withdrawals might be better for retiring early: Can You Retire In Your Fifties?

2) Increase your contributions to catch-up levels. In the calendar year that you turn fifty, you can now contribute an extra $1,000 to an IRA ($6,500 total), and an additional $6,000 to your 401(k) or 403(b) ($24,500 total for 2018). There’s also a $1,000 catch-up for Health Savings Accounts (HSA), but you have to be 55 for the HSA catch-up.

Learn about The Secret Way to Contribute $35,000 to a Roth IRA. 

3) While it’s possible to manage debt into retirement, most people are more confident about their finances when they are debt-free before they retire. I’d suggest you avoid creating new debt in your fifties and consider paying your mortgage off entirely.

4) Many of us are going to need some type of long-term care in the future, especially as life expectancy rises with medical advances. Increasingly, in-home care can allow people in their eighties to remain in their home. Why are we talking about this now? The most cost effective time to buy long-term care insurance is in your fifties to early sixties. You can’t wait until you have a need for care, and then apply for insurance. Instead, we ought to look at creating a pool of funds that could provide this care should you or your spouse need it, decades in the future.

5) Rethink Retirement. Some of you will have a traditional retirement, where one day you stop working and never work another day. However, many of you will have a very different “retirement” than your parents. Maybe you change careers, go to part-time, start a business, or find new sources of income. It’s all possible! Let’s figure out how to make it happen.

See: Replacing Retirement With Work-Life Balance.

Financial Planning In Your Forties

In your forties, it’s time to get serious about your money. Let’s take care of business and establish your financial plan. You can create your future. When I meet with people in their sixties, their net worth and retirement preparedness has little to do with their income, but has a lot to do with how consistent they were with their planning and saving in their thirties and forties. So, be the 40 year old that will make your 65 year old self proud.

1. You are behind. Chances are that you have neglected some aspects of your financial planning at this point and many people in their forties are not on a trajectory that will lead to a comfortable future. Some people are only a little behind and just need to add a few things, but others are severely in danger. You still have the potential for significant compounding of your investments so take advantage of the fact that time is on your side.

Here’s a checklist of what you should have:

  • savings plan of how much to save and where;
  • a retirement plan that calculates a finish line when you can retire;
  • an estate plan;
  • a college funding plan for your kids;
  • comprehensive insurance for your assets, life, and for unexpected liabilities;
    tax strategies to minimize your tax bills;
  • a disciplined, investment program and target asset allocation.

Catch up: Financial Planning In Your Twenties
Financial Planning In Your Thirties

2. Get Rid of Debt. At this point, you should have a mortgage as your only debt. You should have paid off your student loans, and should be paying your credit cards in full every month. “Living within your means” means you don’t borrow money for furnishings, vacations, or toys.

If you are serious about your financial future, you will recognize that cars are a terrible waste of money. All cars lose about 50% of their value within five years. I see a lot of people who are leasing a Mercedes or driving a new $65,000 truck who tell me they cannot afford to put $400 a month into an IRA. My advice: keep your current car for as long as possible, 100,000 miles or more, then buy used and pay cash.

See: Rethink Your Car Expenses
Should You Get A New Car to Save Gas?

3. Save Based on Goals. In your twenties and thirties, you probably saved based on ability: I can afford to save $300 a month, or, I’ll save 10% to my 401(k). That’s okay to start, but it’s not looking at what is actually needed to accomplish your goals. Maybe you didn’t even have a goal! When your goal is specific, a course of action becomes obvious. If your goal is to pay for four years of tuition at a certain university, we can project how much that will cost and how much we need to save to achieve that goal.

For financial independence, start with your living expenses and apply a 4% withdrawal rate. If you need $60,000 a year to spend, that would require a portfolio of $1,500,000 (4% = $60,000). Now you have a specific goal. How much do you need to save to get to $1.5 million at age 65? Can you do it by 62? Are your investments likely to achieve the return necessary to reach your finish line? Your actions – spending, saving, and investing – should be based on a plan for your goals.

See: Setting Your Financial Goals

4. Family Needs. Increasingly, we are seeing adults who besides having to plan for their own future and their children’s needs are having to help their retired parents with care or financial support. Have a conversation with your parents and understand how they have planned for their retirement. Do they have a retirement income plan and an estate plan? Are you seeing any signs of memory loss or a decline in cognitive skills? These are signs of potential difficulty managing money in the future. If your parents are in their seventies or older, it might be a good idea to have conversations about money and their wishes. And of course, they might need a financial planner to help them as well.

See: Financial Planning for the Sandwich Generation

5. Umbrella Policy. When it comes to insurance, don’t just get “a” policy. Take the time to understand what your policies cover and exclude and make sure your coverage is more than adequate. People who look only at getting the lowest rate on their home and auto insurance are likely to be disappointed by their coverage, exclusions, and deductibles if, or should I say when, they have a claim. It’s important to make sure you have enough insurance, especially as your net worth grows.

That’s why I recommend clients consider an Umbrella Policy, which will supplement the liability coverage on your home and auto policies. If you have a car accident, your umbrella policy can provide another $1 million or more in coverage above the $250,000 limit on your auto policy. For a few hundred dollars a year, it’s worth owning an umbrella. If you don’t have a policy, or want to shop rates, I can refer you to an independent agent who can help you consider your options.

See: Don’t Forget Your Umbrella

Financial Planning In Your Thirties

In your thirties, you are establishing the financial habits which will last for the rest of your life. Choose carefully! You might think that it was tough to save and invest in your twenties. Well, I wish I could say things get easier in your thirties, but there are going to be new demands and expenses. You might still have student loans, but will be adding in a mortgage and car payments. Besides your own expenses, you may have a young family and all the joys and bills of day care, pre-school, and then clubs, sports, and music lessons. Your time and your money can disappear very quickly!

It’s important that you don’t delay your financial planning for another year. One year can turn into five or ten before you know it. I know it is easy to feel overwhelmed with all the financial pressures you face. Although there is a lot to do, we can help you get through the process and take the steps to create financial security and eventually, financial independence.

1. Catch Up. Most people in their thirties still need to do some of the key steps we discussed for your twenties: establishing an emergency fund, managing debt, tracking net worth, starting investing, and getting term life insurance.

See: Financial Planning in Your Twenties

2. Increase Savings. As your career progresses, you may find you are being promoted from entry-level to higher paid positions. You might change employers, relocate, or even pursue a new, more lucrative career. From 30 to 39, you might see a significant increase in your income. The question is: When you get a raise, will you spend it or save it? If you can get in the habit of increasing your saving and investing, you can generate a significant amount of investment capital in your thirties.

The challenge is that you will see so many friends who are buying a bigger house, leasing two luxury cars, taking lavish vacations, or buying a boat or a lake house. You have to resist the temptation to “Keep up with the Joneses”. They may be taking on a vast amount of debt to fund their lifestyle and are not being responsible with their money. Just because a bank will give you a credit card or loan, doesn’t mean it’s a good idea to spend the money.

3. Put Your Investing on Auto-Pilot. What works is squirreling away money consistently. Set up the accounts you need: 401(k), Roth IRA, 529 Plan, Health Savings Account (HSA), etc. Pay yourself first and set up monthly automatic contributions to each account. Don’t worry if you have to start small, you can always increase your amounts later. If you don’t make contributions automatic, you probably aren’t going to have an extra $5,500 lying around at the end of the year to fund your IRA.

See: How Much Should You Contribute to Your 401(k)?

4. 15-Year Mortgage. If you begin your house search process with the pre-approval for a 15-year mortgage, you can save a fortune in interest over the life of the loan. Of course, you also have the opportunity to own your house free and clear in just 15 years. Even if you move after 10 years, you will have significantly more equity if you started with a 15 year rather than a 30 year loan.

See: The 15-Year Mortgage: Myth and Reality

5. Start a 529 College Savings Plan. The sooner you can starting saving for your kids’ college, the more time you can enjoy the benefits of compounding. And since a chief benefit of 529 Plans is tax-free growth, you get more benefit by starting at age 6 than at age 16. An early start is helpful.

See: How Much Will It Cost to Send Your Kids to College?

6.  Establish an Estate Plan. No one wants to think about their own mortality, but this is an important step that you need to take. If you have minor children, you really do not want to leave decisions about what happens to your children (and the money to support them) in the hands of a Judge who doesn’t know you. Courts are bound by rules that may lead to outcomes that you would not have wanted. I can refer you to an attorney who can complete this process with you. The cost for most plans will be only $750.

See: What Happens If You Die Without a Will.

Financial Planning in Your Twenties

In your twenties, you are out of college, starting your career and maybe will be starting a family soon. What is most essential is to realize is that financial planning is not just for people your parents’ age who are getting ready to retire. Financial Planning is for YOU!

The steps you take in your twenties will lay the groundwork for the rest of your life. Will you become wealthy or will you be just one step ahead of your bills and debt like many Americans? A lot of us older folks wish we could be twenty-five again but with what we know at 45 or 65. Then we could get an early start and be in much better position later.

So, let’s get organized, educate ourselves about money, investing, and taxes. Define your goals and create a written financial plan. It’s an exciting time to be seeing your hard work starting to pay off. There are plenty of money issues that create a lot of stress: student loans, credit cards, buying a car, housing affordability, low paying entry level jobs, etc. We need to tackle those issues head-on.

Here are five crucial steps for being in your twenties.

1. Emergency Fund. Keep three to six months of living expenses in a safe, liquid account that is separate from your regular checking or bank account. Unplanned expenses are an inevitable reality of life. Cars break down, houses need repair, injury or illness happens. It’s not really a matter of “if” these things will occur, but just when. An emergency fund is a prerequisite before you can start to invest for long-term goals.

2. Manage Debt. Avoid taking on new debt and be smart about managing your existing liabilities, such as student loans, car payments, and credit cards. You have to plan for how to pay off your loans, while still having a plan for the rest of your financial goals, too.

See Should You Invest or Pay Off Student Loans First?

3. Annual Net Worth Statement. Adding up all your assets and liabilities is a key step to managing your financial life. Understand where you are today and direct your cash flow to grow your net worth. By tracking this annually, you are not only measuring your progress, but creating a sense of urgency that will help align your short-term decisions with your long-term goals and dreams.

4. Start Investing NOW. Don’t think that you can make up for lost time later. Compounding works over time and the earlier you start, the earlier you can reach the finish line.

See The Cost of Waiting from 25 to 35

5.  Term Life Insurance. You might not have significant assets today, but when you are young, you have the largest amount of future lifetime income. If you have a spouse or family, the greatest need for protection is at age 25, not at 65, when most of your earnings years are behind you. We don’t use insurance as an investment; it is to protect against potentially devastating and rare risks. So, buy a term life policy. If you are healthy, it may be only a few hundred dollars a year. And if something were to happen to you, the term policy would be the most important financial planning step we took. Don’t skip this!

See A Young Family’s Guide to Life Insurance

The Cost of Waiting from 25 to 35

I am on a mission to get people in their twenties saving and investing. Why? Because an early start on good financial habits creates an exponential difference later. The solution to the next generation’s retirement crisis of a bankrupt Social Security, underfunded pensions, and increased longevity will require people get an early start.

Let’s compare two investors, both of whom will earn an 8% return over time. Smart Sally starts a Roth IRA at age 25 and contributes $5,000 a year through age 35 (11 years). Then she makes no further contributions.

Late Larry starts his Roth at age 35, also contributes $5,000 a year, and makes this contributions all the way through age 60. He will end up contributing for more than twice as long as Sally.

At age 61, both Sally and Larry retire. Who has more money in their Roth IRA? Sally has $615,580. Larry, although he contributed for longer, never caught up to Sally’s early start. He has only $431,754.

Of course, if Sally had contributed all the way through age 60, which is what I hope she would do, she would have the sum of both amounts: $1,047,334. If you can start a Roth IRA at age 25, you could have a million dollars by retirement. But if you wait just a decade, until age 35, you will likely lose more than $600,000 from your retirement.

It’s that first decade of investing that is so important. At an 8% hypothetical return, you are doubling your money every nine years. The early bird will likely finish with at least twice as much money as someone who starts a decade later.

If you are a recent college grad, please sign up for your 401(k) and put in at least 10%, preferably more if you can afford it. Most of your friends will only contribute up to the company match. Do better, contribute more. If you don’t have a 401(k), determine if you are eligible for a Roth IRA, a Traditional IRA, or a SEP IRA.

But most of all, just do it now and don’t wait. Because when you wait one year, one year has a way of turning into 10 years, and then you are the 35 year old with no retirement savings. I know you have student loans, are saving for a car, house, wedding, etc. You may have kids of your own. No excuses, you just have to find a way to get started. Even if you can only start with $100 a month, get going, and then increase your contributions when you can afford it.

The truth is that there is never an easy time to save and invest. It will always require planning and maybe even a little sacrifice. At 25, you have student loans and credit card bills. At 35, you may have a big mortgage and young kids. At 45, you might be trying to figure out how you are going to pay for your own kids’ college. So don’t think that it will be easy to save later. That day may never come!

For the parents, grandparents, aunts, and uncles reading this, you have the opportunity to help your twenty-something young adults get a leg up and make a positive impact on their whole life, even after you are long gone.

  • Talk about investing and the importance of starting early. Ask about their 401(k) and IRAs. Forward this article. Kids are NOT taught to be financially savvy in school. If parents don’t teach this, young adults are likely to miss the opportunity of an early start. (And thank you to my Mom and Dad for their wisdom.)
  • Send them this book: The Elements of Investing. It’s short and an easy read, but contains essential information for becoming wealthy.
  • Hire me to be their financial advisor. I love helping young investors, to teach them the ropes and help establish their financial foundation at an early age. See our $99/month Wealth Builder Program.
  • Instead of leaving a lump-sum inheritance when your children are middle aged, you might establish better money habits by funding their Roth IRA at an early age and involving them in the process. If a 16-year old has earned income, they can contribute to an IRA, or you can let them save their money and make the contribution for them. (Note that a student’s IRA is not reportable on the FAFSA, although some colleges will count the account as a part of their expected contribution.)

Good habits last a lifetime. While it is never too late to invest, there is an enormous cost to waiting from age 25 until age 35. It’s potentially the difference between having a million dollars or $431,000. You can’t control what the market is going to do, but the real game changer could be getting an early start. Of all the levers we can control, an early start is going to make a bigger difference in your lifetime outcome than anything else.

Reducing the Cost of Healthcare

The Tax bill passed in December eliminated the individual mandate requiring consumers to have health insurance or pay a tax penalty, starting in 2019. As healthy individuals drop their insurance, it is expected that premiums will rise by an average of 20% next year for individual plans on the insurance exchange. As prices rise, this creates a negative feedback loop where more healthy people cannot afford insurance, the insurance pool becomes worse for insurers, and premiums increase again.

As a result, more consumers are adopting higher deductibles and pay for more of their care out of pocket. Health Insurance will shift from being used for every appointment to being catastrophic coverage where you will only have claims in rare years. Think of your auto insurance – you don’t expect it to pay for oil changes, only when you have a wreck.

This will shift the burden of cost-savings to the consumer rather than the insurer. Unfortunately, doctors offices and hospitals are terrible at sharing price information with patients, so it’s extremely difficult to know how much something will cost at one office, let alone be able to determine if you could save money by going elsewhere.

Cost transparency is the only thing that is going to save our health system from continuing to escalate out of control. We have a fee for service system which encourages for-profit hospitals to charge as much as they can and to add on extra tests, services, and procedures to increase their bills. And it’s not easy being a doctor, where every patient wants a quick-fix (other than eat right, exercise, and take care of your body in advance). With the risk of malpractice claims, doctors order extra tests to cover themselves even if the actual need for those tests is small. That’s called “Defensive Medicine”, and it’s not about defending the patient.

At a conference I attended last week, a Doctor turned financial advisor presented information on how to save money on your health care. Here are nine tips:

1. In-Network. Don’t ask a doctor if they take your insurance, ask “Are you in my network?”. Write down who you spoke with and the date and time. Later, if you get a bill that shows out-of-network charges, you can contest that with the evidence of what you were told. In fact many doctors offices record their calls, and you can demand to listen to your call.

2. PPOs used to offer choice of going anywhere, but networks are often very narrow for small plans. A cheap plan usually means that very few doctors are in that network. You have to ask at each step. If you have a planned hospital procedure, get a signed estimate in advance, and write on your paperwork: “I will only allow in-network care.” Otherwise, you may find out that some of your care is out of network even when you are at an in-network hospital!

3. Balance Billing. If you are out of network, you may be billed for the difference between the in-network price and what the hospital wants to charge you. For example, in Texas, insurance will pay up to $12,668 for an Appendectomy, but the average hospital bill is $40,893. So when you get an outrageous bill, you can find out this information to negotiate a lower price. This information is published by the Texas Department of Insurance Healthcare Costs Guide.

4. If you go to an in-network hospital and receive charges from an out-of network provider for over $500, you have the right to seek Medical Bill Mediation again through the Texas Department of Insurance. They have been able to lower these bills in 90% of the cases submitted to the state.

5. Reduce unnecessary tests and medications. The vast majority of a doctor’s diagnosis comes through patient history and the physical examination. Doctors today have to see a large number of patients and are in a hurry, so they often default to ordering expensive tests to save time. Before going to an appointment, type up your symptoms, medical history, medications, and diet. Write down the questions you have. Print three copies. Mail one in advance. Give one copy to the receptionist when you arrive. And if the doctor walks in without it, give them the third copy.

If they want to order additional testing, ask: What do you hope to learn from this test? How will the results of this test change the approach to treatment? If they are going to prescribe medicine, ask how long you will take the medicine. What are the benefits, side effects, and risks? What alternatives (i.e. lifestyle) are there to this medicine?

6. Independent Practice or Hospital. Hospitals are buying up doctors offices in their area and raising prices. Where a doctor might charge $100 for an office visit, a hospital can charge $250. Ask if an office is an independent practice or part of a hospital.

7. Ask your pharmacist if there are generics or less expensive substitutes for your medicines. Doctors are not always aware of the price of the medicines they prescribe.

8. If you hit your deductible during the year, try to take advantage of the fact that insurance has kicked in. Fill your prescriptions in December for the year ahead. Complete any tests that you should have done. If you’ve put off knee surgery or other procedures, try to get those done as well.

9. If you have a High Deductible Health Plan, fund your Health Savings Account (HSA), so you can pay your co-pays, deductible, prescriptions, and other costs with pre-tax money. That’s like saving 12-37% on every dollar you spend.

If you don’t have an HSA, but your employer offers a Flexible Spending Account (FSA), that will also allow you to pay medical bills with pre-tax money. Just remember that unlike an HSA, FSA is use it or lose it – money not spent before December 31 is forfeited.

Healthcare costs have increased by 7.76% a year since 1970. The US spends about 19% our GDP on healthcare each year, significantly more than any other nation. Even countries which guarantee healthcare for everyone only spend 11-13% of their GDP. We have a broken system but seem unwilling to learn from what works in other parts of the world.

The trend will continue: to reduce insurance claims, more expenses will be shifted to the consumer. Capitalism works to bring down costs, but it requires that consumers have price transparency, something which doctors and hospitals have been unwilling to do. They should publish their prices and post prices on their website. Today, we have to ask and be our own advocate to keep healthcare costs down.