Hard Work Doesn’t Create Wealth

Posted On September 21, 2024 By Scott Stratton, CFP(R), CFA In Behavioral Finance / No Comments

When asked about their success, some wealthy people are quick to cite hard work as their key to success. I’m sure they have worked hard. But hard work doesn’t create wealth.

“Hard work” is a classic example of the correlation-causation fallacy. Wealthy people did work hard, but the vast majority of hard working people are not going to become wealthy. Instead, I want to talk about what really helps people to become wealthy: intention and process. Once those are in place, there may well be hard work, discipline, patience, and grit. Those are the fuel for creating wealth, but they are not the engine. The engine is creating intention and process.

Intention

Wealth is not an accident, it requires intention, financial literacy, and planning. When we are clear on our goals and values, our decisions start to become more aligned. My wealthy clients have made economic security a high priority. They focus on building a high income that supports their goals. Their intentions shape their education, careers, spending habits, personal vision, and other life-long decisions. Wealthy people have a wealthy mindset and focus on the following:

Living below your means. Most Americans spend 100% of their income. (Some spend more and go into debt.) If you can make frugal choices on your house, car, and leisure spending (especially eating out and vacations), you can place yourself in a situation where you can save a meaningful amount of money.
Delayed gratification. Your future self will thank you for the actions you take today. The more you can save today, the faster you may reach your finish line. Focus on increasing your income, not so you can spend more, but so that you can save more.
Understand things will not make you happy. We live in a consumer culture of materialism. There are too many people who are focused on appearing successful rather than being successful. Your home is not an investment, it is an expense.
Track your net worth, know your assets and liabilities. Have a plan. Most Americans spend more time planning a week of vacation than they do their entire future. Hoping you become wealthy is not a plan.
Start early. Compounding is amazing. Believe in the process and stick with it.

At retirement age, some investors will be millionaires. And they will work alongside people who have the same paycheck but who will retire with almost nothing. The successful made different decisions. They put in the maximum in their 401(k), not the minimum to get the company match. Their decisions reflected their intention to achieve financial success.

Process: Automatic Beats Hope

The process of becoming wealthy is simple. Save regularly over time and invest efficiently. It’s really not rocket science. The key is to make the process automatic. If you wait until the end of the year to fund your Roth IRA, you might not have an extra $7,000 lying around for you and your spouse. But if you set up monthly contributions of $583, you can achieve the same result. And then you don’t even have to think about it. Otherwise, if you are putting yourself in a position where you are hoping you can save, you are setting yourself up to fail.

Automate your contributions to your 401(k), IRA, 529 or other accounts. You can’t spend the money that is automatically contributed. Increase these contributions every year until you reach the maximum.
Don’t time the market. You will experience a Bear Market every 4-10 years. If you panic and sell everything, you cannot recover. In hindsight, every Bear Market (2000, 2008, 2020), was an amazing buying opportunity. Keep buying all the time. When you are young, you should love buying in a Bear Market.
Don’t aim to beat the market. In 20 years as a wealth manager, I’ve never met anyone who was wealthy because of their brilliant stock picks. The market does whatever it does. And what it has done over the years is fantastic and more than enough. Focus on what you can control: your savings rate. And then keep costs, taxes, and turnover low. Index funds work.
Be an optimist. You have to have some faith in the process. Not a blind faith, but the fortitude to stick with the plan when times are tough.

Things Always Change

America is the land of opportunity. We’ve never had a more level playing field than today for any American to become wealthy. Unfortunately, it is also becoming harder to get ahead. Many young adults face a tougher time than their parents in buying a house, paying off student loans, and being able to save. The wealth gap is widening and attaining economic security is becoming more challenging.

Even against that backdrop, it is still possible to become wealthy. Everyone wants to be a millionaire, but they have to first figure out how to get to $100,000. Once you’ve done that, getting to $200k and then $400k, is just a matter of time. Wealth creates more wealth. You build a savings muscle and establish your wealth engine, and then it just works for you.

Intention sets your focus and creates the decisions which enable you to save. Take control of your financial life and have a plan. Process is understanding what works and keeping your momentum headed in the right direction. Automate your savings and you remove yourself as the roadblock to your success. Neither intention nor process require hard work. They are a mindset.

You should work hard to develop your career and maximize your earnings. But that hard work won’t create wealth if you don’t have alignment on how your money can create your financial independence for you over time. Years from now, when a young investor asks about the cause of your success, I hope you can give the right answer. It was intention and process, not hard work, that created your wealth.

Cash Back Credit Cards

Posted On July 20, 2022 By Scott Stratton, CFP(R), CFA In Financial Planning /

I am a big fan of cash back credit cards for good reason: this past year I’ve gotten back $1,294.18 from my two personal credit cards. Both cards have no annual fee and I pay my balances off every month and pay no interest charges. We are moving away from cash payments with our spending today and so it makes sense to get cash back on money you would have spent anyways.

This has certainly been a big spending year, with our wedding last October and a trip to Europe this August. Additionally, we spent over $20,000 in renovations and furnishings for our two new Airbnb properties in Hot Springs. You can check out our listings here: The Owl House and The Boho Loft. So, all the spending adds up.

Two Percent Cash Back

There are a lot of cards that offer 1 to 1.5% cash back, and those should be pretty easy to find. Today’s top cards offer 2% cash back, and there’s a good list of 2% cards on the Nerdwallet site. I’ve had the Fidelity Rewards Visa Card for years. It has no annual fee and gives me 2% cash back, deposited automatically into a Fidelity brokerage account each month. I can then transfer the cash out to my checking at any time. (My brokerage accounts are all at TD Ameritrade – I only keep the cash back at Fidelity.)

I don’t really worry about the interest rates on these cards since I never carry a balance. If you do have a balance, you’re probably better off finding a zero-interest balance transfer card and working on paying off your principal. I do prefer a card with no annual fee. And I’m not a big fan of hotel points or airline miles. I know others who are loyal to one airline and prefer an airline credit card, but I believe the airlines have made it harder to redeem points in recent years. (If you’ve had a great – or a terrible – experience with airline cards, I’d love to hear about it. Please send me a message.)

Discover 5%

I’ve also had a Discover Card since 1999. It provides 1% cash back on everything and 5% cash back on a category that changes each quarter. So, I use my Visa for most purchases and the Discover card for the 5% categories. Here is the 5% Cashback calendar for 2022:

January-March: Grocery Stores and Gym Memberships
April-June: Gas Stations and Target
July-September: Restaurants and PayPal
October-December: Amazon and Digital Wallets

I don’t spend as much on Discover, except for the 5% categories. Customer service at Discover has been excellent.

Store 5% Cards

There are a number of store-branded credit cards which offer 5% discounts or credits. These may not be cash back, but if you frequent these stores, they may be a better deal than your 2% cash back credit card. Presently, the only one I have is the Target Red Card. The Red Card gives me an instant 5% discount off my purchases at Target. I set up the card to autopay from my checking each month and don’t think about it after that.

I’m also looking at three other 5% store cards. The Lowe’s Advantage Card gives a 5% discount on purchases. That’s definitely worth it if you are doing some big projects. Please note that if you get the 10% Military discount at Lowe’s (like my Dad), you cannot stack the 5% on top of the Military discount. However the 5% discount will apply to appliances, unlike the Military discount.

The second card I would consider is the TJX Rewards Card which offers 5% back in certificates to use at the store on future purchases. The card and rewards can be used at TJ Maxx, HomeGoods, or Marshalls. We’ve spent a bit there in the past year, but I’m not sure we need it going forward.

And third is the Amazon Prime Rewards Visa. It offers 5% back at Amazon and Whole Foods, plus 2% back on restaurants, gas stations, and drug stores. There’s 1% back on everything else, and no annual fee as long as you are already an Amazon Prime member. This one may make the most sense for us, given how much we use Amazon.

Spend Wisely

Cash Back Credit Cards are a good deal for consumers. I’ve been getting 2-5% cash back on my spending for years, and it helps. I’ve also added a 1.5% cash back card for my business this year, which I probably should have done years ago! Some people are worried that opening new credit cards will hurt their credit score, but this will probably have little or no effect. And if you aren’t planning to buy a house soon, you shouldn’t worry at all.

It pays to do a little research and find the right card for you. Over time, cash back cards put money back into your wallet. And then you can contribute more to your Roth IRA like I’ve been suggesting, right? Helping you become intentional with your money goals is important to me, even if it is something as small as which credit card you use. Little decisions create good habits that keep you moving forward.

House Hacking

Posted On October 22, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you are looking to buy a home and want to really grow your wealth, consider house hacking. Our ability to save, invest, and grow real wealth begins with a very simple premise. You have to spend less than you make. It couldn’t be more simple, but that doesn’t make it easy.

For most people, your three biggest expenses are housing, taxes, and cars. If we manage those three expenses well, you may be able to save a significant amount of your income. The more you save, the faster you grow, and the sooner you might reach your goals. Read more: Five Wealth Building Habits

The problem is that most Americans are doing the opposite and creating a lifestyle which consumes 100% of their income. And then there is nothing, zero, left to invest.

House Hacking gives you an incredible opportunity to reduce your biggest expense, in some cases, down to zero. Here’s how. Instead of buying a single family home, you buy a duplex, triplex, or four-plex. You live in one unit and rent out the rest. Your tenants will cover much or even all of your mortgage. You can live there with little or no monthly expenses.

With a house hack, you are freeing up your income so you can save and invest. You can pay off your credit cards. Maximize your 401(k) and Roth IRAs. Start saving for college in a 529. And it’s all because you were willing to live in a multi-family home rather than spending thousands every month on a single family home.

The Details

Sure, house hacking isn’t going to be for everyone. But maybe you want to ask how this might work, if you were to consider it. Although you are buying a multi-family building, you are going to use the house as your primary residence and live there. That means you can still use an FHA mortgage and not have to get a more expensive mortgage for a rental or investment property. With an FHA mortgage, you can put as little as 3.5% down with a FICO score of just 580.

Of course, if you have 20% to put down, you could also do a conventional mortgage as a primary residence. Or, if you’re a veteran, you might be eligible for a VA loan with zero down.

Once you have the property, you can split costs between the area where you live and the area which you rent. This means you can also enjoy some of the tax benefits of being a landlord. Let’s say for example, that your building is 3,000 square feet and you live in 1,200 feet and rent out the rest. You occupy 40% and have 60% as a rental.

Then you can look at your costs, such as insurance, utilities, repairs, taxes, etc. For your bills on the whole house, you can allocate 60% of those costs against your rental income on Schedule E. For the 40% where you live, you can also qualify for the Section 121 capital gains exclusion, when you sell.

Living with other people in the same building might not be your dream situation, but if you can make it work, there could be great benefits for you financially. When you manage your biggest expenses, it becomes easy to have money left over to save and invest. Put your savings on autopilot. Maximize your 401(k). Put $500 month into your Roth IRA to get to the $6,000 annual limit.

Who Can Do a House Hack

House hacking certainly makes sense for a first time home buyer, a single person, or a young couple. That’s probably the typical situation. But it could also work well for older investors who want to turbo charge their savings while they are still working. And if you could reduce your monthly housing cost from $2,000 to $200 or $0 a month, would that change when you will be able to retire? Probably. A house hack might enable you to retire at 55 versus 65. Under the 4% rule, reducing your expenses by $2,000 a month means you now need $600,000 less in your nest egg to retire.

Most of us will resist making a sacrifice to be able to save. Still, if you have an open mind, a house hack might be a brilliant way to save and invest. While your friends and colleagues are barely saving anything, you might be able to put away 50% of your income while your tenants are paying down your mortgage. If you can invest $2,000 a month for 10 years, at a 7% return, you could have $344,000. That might be worth a small sacrifice.

Housing is an expense. Your house should go up in value over time, but the expenses of interest, taxes, insurance, and upkeep are not building your wealth. What if you get someone else to pay for your house? When you reduce those expenses, you are giving yourself a tremendous opportunity to save and invest in appreciating assets. If that is important to you, look for creative ways to cut your biggest expenses!

Have you done a house hack? I’d love to hear from you about your experiences. Send me a note!

When Can You Splurge?

Posted On May 2, 2021 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

We all have things we enjoy, and the question of when can you splurge has unique financial planning considerations. We probably think about these choices, consciously or subconsciously, every day. And while I don’t think there can be a hard and fast rule, there are some things to consider. Once we start peeling back the proverbial onion, there are many psychological layers to this question. We all have a relationship with money. It is based on our experiences, upbringing, and innate preferences. The question isn’t just When can you splurge? It is How can you have a better, more effective relationship with your money?

“Money makes a terrible master but an excellent servant”
P.T. Barnum

First, let’s define what we mean by splurge. Clearly, your normal living expenses should not count as a splurge. But, even this is problematic. There are many Americans who have adopted a lifestyle which they cannot afford. Their choice of housing, cars, vacations, clothes, etc. consumes all of their income. And then when an emergency does occur, it has to go on the credit card. They end up in debt and there is no way to pay off those debts with their current consumption. They don’t see that they are splurging already, and spending in an out of control manner. Read more: Machiavelli and Happiness in an Age of Materialism.

A definition of splurge as “to spend money freely or extravagantly, especially on something special as a way to make yourself feel good.” Most definitions imply wastefulness and vanity. But I also think that occasionally being able to spend money on things which you enjoy is a great freedom. We all may have interests which make no sense to others. Perhaps it is cars, or watches, or shoes, or a boat. To us, it is the realization of a dream. To someone else, it would be a waste of money. That’s okay. The blue car pictured above is my splurge from this March. Maybe that doesn’t do anything for you. For me, a lightweight sports car with a manual transmission is a joy.

When Not to Splurge

Let’s begin by laying down a few prerequisites for a splurge. Perhaps it is easiest to think of these as a checklist:

Can you pay in Cash? Or would this splurge be funded by credit card debt? If you don’t have the cash to purchase an item, maybe you should hold off until you can afford it.
Do you have an emergency fund with at least 3-6 months of living expenses?
Are you funding accounts for your long-term goals? For example, a 401(k) or IRA for retirement, a savings account for a house down payment, or a 529 plan for your kid’s college.

If you can pass these three prerequisites, then the splurge is not going to hurt you. After all, we don’t want to look back on our splurges with regret and be angry that we made a mistake. Number one, credit cards, also suggests that if you presently have a lot of credit card debt, you should not splurge. You should prioritize paying off your cards, first. How much should you save for number three? If you are in your 20’s and are currently saving at least 12% towards your 401(k), I think you are off to a good start. If you got a late start, you may need to save more than 12% to be prepared for retirement. Read more: What percentage should you save?

Start with a Plan

My purpose as a Financial Planner is to help you be smart with your money. Our ultimate goal is to make sure you achieve your financial goals. With that in mind, we are always looking to design long-term diversified investment strategies built within a planning process. We are always looking for the most cost-efficient, high-value ways to manage your money.

The beauty of the plan is that it creates awareness and a process for change. For some individuals, that may mean establishing automatic savings programs to fulfill your needs for retirement, debt management, house goals, college savings, etc. We can break down each goal into a monthly target and set it on auto-pilot. Read more: Do You Hate Saving Money?

For others, a plan can show them that they are on track. Because many people are afraid to splurge. And I am writing for them, too. Yes, there are people who need to splurge less. But there are also people who need to splurge more.

If your relationship to money is centered on fear, anxiety, and regret, you are carrying a terrible amount of stress with you at all times. This is a scarcity mentality, which is psychologically harmful. It impacts your behavior and hurts your satisfaction. In one study, adults who had a positive attitude about aging lived 7.5 years longer than those with a negative mindset. Your thoughts matter! Read more: 5 Ways to Go From A Scarcity to Abundance Mindset.

Your plan will let you know how much you can splurge and give you the confidence that you aren’t doing anything to hurt your future self. Maturity is often defined as the ability to delay gratification. We all need to save for the future. Still, splurging doesn’t require that we have already accomplished all our goals! Only that we are presently taking the steps necessary to get us there. If you want to feel more confident about your splurge, start with your financial plan. Otherwise, how do you know?

But Should You Splurge?

Still not sure if a splurge is a good idea? Afraid you will regret a big purchase? A few last thoughts.

Avoid impulse buys. Shopping as therapy for stress, boredom, or other problems is only a band-aid. Find a better solution. Talk to a friend, go for a walk, do something that makes you feel better and actually addresses the emotional need.
Could this be easily reversed? Some items hold their value. If you buy an item for $3,000 and could resell it in a couple of years for $3,000, it’s a fairly low risk proposition. And if it brings you joy, then why not.
Have you shopped around and done your research? Can you buy used or find an alternative? A splurge doesn’t have to be reckless; see if you can find a great deal.
Do you have a bucket list of experiences that you’d like to do and and see? A splurge can also be a trip or event, and it is healthy to spend on creating memories and not simply buying more things. We only get so many trips around the sun. Our time here will go quickly and it is finite. 10 years from now, you may still smile when you think about that epic vacation to Machu Picchu. You probably aren’t going to be thinking about what it cost because in the long run, it didn’t matter.
An itch needs to be scratched. Sometimes, an idea takes hold and we simply need to do something. If it doesn’t go away, maybe we will be richer as a person for having allowed ourselves to live a little more freely. What is the worst that will happen if you do this one splurge?

Intention, Choice, and Balance

Money is a great tool to lead a satisfying and interesting life. We all know that more things can’t bring you happiness. And we all know someone who spends too much and rationalizes it as “self-care”. How can you find a balance? At the one extreme, many Americans are not saving anything and are two paychecks away from being broke. At the other extreme, there are hoarders who are paralyzed with fear of spending and losing their money. I’m a frugal person, but this can be taken too far.

Choose what is truly important to your life. Don’t let others decide for you what is a good use of your money. But be smart. Start with a plan and cover your bases. When you have your savings plan established, be intentional with your spending so your choices align with your goals. By that I mean, don’t just spend blindly, splurge in ways that are meaningful to you. Maybe bonding on a family vacation is more important than upgrading your car this year. Maybe keeping your housing costs reasonable will allow you to spend on other priorities. The balance is deciding where to splurge and where to not spend your money. The right balance is to splurge neither too much, nor too little. Never splurge to keep up with the Joneses.

When can you splurge? I’m not going to show you the compound interest on a daily cup of Starbucks. I’m not interested in slapping people on the wrist to make them feel bad about how they spend their money. I believe you can align the head and the heart on your spending. When you have invested time and energy into your financial plan, you will have earned the confidence to know when you can splurge. Then, giving yourself permission to splurge will not be from weakness, but to help you live the life you truly want.

Where to Invest $5,466 a Month

Posted On February 5, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

Why should you invest $5,466 a month? Why that very odd number? Well, at an 8% hypothetical return, investing $5,466 a month will get you to $1 million in 10 years. That’s what we are going to explore today and it is very possible for many professional couples to save this much.

Last week, we looked at where to invest $1,000 a month. That’s a reasonable goal for many people, a 10% savings rate for a couple making $120,000 or 15% for an individual making $80,000. And while saving $1,000 a month may be okay, it will take decades to amass enough for retirement. If you want to accelerate the process or aim for a higher goal, you have to save more.

Saving $5,466 a month is $65,592 a year. For a couple making $200,000, that represents saving 33% of your income. That’s challenging, but not impossible. After all, there are many families who get by with making less than $134,000.

There are many different ways you could invest $5,466 a month, but I’m going to focus on adding tax benefits both in the present and future. Let’s get right to it!

Retirement Accounts

Maximize 401(k), $1,625 a month each. That will get you to the 401(k) annual contribution limit of $19,500. It is surprising to me how many people don’t do this. For a couple, that is $3,250, more than half our goal to invest $5,466 a month.
Company match, $416 a month each. Many companies match 5% of your salary to your 401(k). For an employee making $100,000 a year, that equals $416 a month. I am assuming this couple each makes $100,000. For two, that’s $832 a month. Added to your 401(k) contributions and we are now at $4,082 a month.
Backdoor Roth, $500 a month each. At $200,000 for a couple, you make too much to contribute to a Roth IRA. However, you may still be able to make Backdoor Contributions to a Roth IRA, for $6,000 a year or $500 a month each. Added to 1 and 2 above and your monthly total is $5,082. We only need to find another $384 to invest a month to reach the goal of $5,466.

Additional Places to Invest

Health Savings Account (HSA), $600 a month. If you’re a participant in an eligible family plan, you can contribute $7,200 a year to an HSA. That could be up to $600 a month, and that is a pre-tax contribution!
529 Plan, $1,250 a month. If you are saving for a child’s future college expenses, you could contribute to a 529 College Savings Plan. A 529 Plan grows tax-free for qualified higher education expenses. Most parents choose to stay under the gift-tax exclusion of $15,000 a year per child, which is $1,250/month.
Taxable Account, $ unlimited. You can also contribute to a taxable account. And while you will have to pay taxes on capital gains, dividends, and interest, we can make these accounts relatively tax efficient.

Other Notes

Tax Savings. While trying to invest $5,466 a month is a lot, you will be helped by the tax savings. A couple making $200,000 a year (gross) will have just entered the 24% Federal tax bracket after the Standard Deduction of $25,100 (2021). Some of your tax deductible contributions will be at 24%, but most will be at 22%. Using just 22%, your joint $39,000 in 401(k) contributions will save you $8,580 in taxes. That is $715 a month back in your pocket. Add in $7,200 to an HSA and save another $1,584 in taxes ($132 a month).
Catch-up Contributions. If you are over age 50, you can contribute more to your 401(k) and Roth IRA accounts. There are also catch-up contributions for an HSA if age 55 or older.

I wish more people had the goal of becoming a Millionaire in 10 Years. We cannot control the market, but we can do our part and do the savings. At an 8% hypothetical return, starting to invest $5,466 a month can put you on track to $1 million in a decade. And if you already have $1 million, saving $5,466 for another 10 years would get you to $3.2 million.

For couples making over $200,000, can you afford to invest $5,466 a month? Can you afford not to? Planning is the process of establishing goals and then creating the roadmap to get you there. If you’re ready to create your own roadmap, give me a call.

How to Save More Money

Posted On August 29, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

Growing your net worth is the product of saving and investing. Sometimes, we assume this means we have to slash our spending to be able to save more. Sure, you want to have awareness and planning regarding your spending. But it’s not much fun to give up coffee or never take a vacation. There has to be a balance between sensible spending and your saving goals.

Luckily, there is another way to increase your savings rate: earn more. Especially for younger investors, as your income grows you will find that you can easily save more. This may take a number of years. But, as your career takes off, your income may increase at a double digit rate during your twenties and thirties.

So, don’t despair if you cannot save as much as you would like today! Focus on growing your career and increasing your income. Saving will get easier.

Hold Your Spending Steady

As you get promotions and raises, avoid the temptation to keep up with the Joneses. You will see friends and classmates who are buying fancy cars and huge houses. Good for them! But what you might not see is how much debt they have, how little they save, or their net worth. You won’t know how stressed they are about their finances. They may be two paychecks away from being broke.

Hopefully, your current lifestyle is enjoyable and you find happiness in your relationships and the things you do. Getting more expensive things is not likely to create lasting satisfaction. The temporary, but fleeting, pleasure from consumption is known as The Hedonic Treadmill. If your priority is becoming financially independent, using a raise or bonus to save more is a better choice than spending it.

Put Your Savings On Autopilot

As your income grows, save your raises. Establish recurring deposits to your retirement plans and other accounts, and increase them annually. If take this step when you receive a raise, you will not miss the extra money. Skip increasing your monthly savings, and you probably aren’t going to have extra money leftover at the end of the year. If it’s in your checking account, you will spend it!

For couples, a joint income is a tremendous opportunity. If you can live off of one salary and save the second salary, you will grow your wealth at an amazing rate. In some cases, this could literally be saving one of your paychecks. Or, it may make more sense to participate in both of your 401(k) plans, and save the equivalent of one salary.

Multiple Sources of Income

Given the economic fallout from Coronavirus, many people aren’t getting a raise this year. A lot of us are seeing that our 2020 income will be lower than 2019. Hopefully, this will be temporary, but there are lessons to be learned. It is a risk to have all your eggs in one basket with one job. If you lose that job, you’re really in trouble.

As an entrepreneur, I have always had multiple sources of income. My financial planning business is diversified across a number of clients. I also sell insurance. I make music in a couple of orchestras and teach a few lessons on the side. Some of it is small, but having multiple sources of income gives me flexibility and safety.

Have you considered finding a side hustle, second income, part-time business, or online gig? Find something you enjoy and make it into a business. Find something people need and provide that service. You never know where that part-time work might take you. Maybe someday it will allow you to retire early or be your own boss! In the mean time, use your additional income to save more and build up your investment portfolio. Don’t give up your time just for the sake of buying more things.

How and Where to Save More

How much should you save? If you are saving 15% of your income, you’re doing way better than most people in America. Start at a young age, and a 15% savings rate will likely put you in a very comfortable position by retirement age. For those who are more ambitious, or just impatient like me, aim to save more than 15%. You could be putting $19,500 into your 401(k) each year ($26,000 if over age 50).

And you might be eligible for an IRA, too, depending on your income. Or, consider a taxable account, Health Savings Account (HSA), or 529 College Savings Plan. There are lots of places you could be saving! Put your savings on autopilot with recurring deposits to your retirement plans and other accounts. If take this step when you receive a raise, you will not miss the extra money, but you will be growing your wealth faster.

Do you need a reason to save more? The sooner you save, the faster you can achieve financial freedom. Even if you enjoy your work, it’s great to have the means to not have to worry about your job.

You can save more by spending less. That’s true, but you can only eliminate an expense once. Most people will have some tolerance for cutting costs, but austerity is no fun. Focus on increasing your income, hold your expenses steady, and increase your monthly savings. Put your energy into building your career, and aim for a high income. Couples have a great ability to save, if they can aim to live off one income. Look for creating a second or third income stream. A lot of the wealthy people I know have an entrepreneurial mindset. They have multiple income streams.

As your earnings grow, you will be able to save more and invest more. Most of my newsletters deal with investing, tax, or planning questions. But those benefits only accrue after you’ve done the first step of saving that money. It’s not how much you make that matters, but how much you keep!

Extend Your Car Warranty for Free

Posted On January 3, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

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 1, Castrol, 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

Posted On September 29, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

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.

The Cost of Waiting from 25 to 35

Posted On June 2, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

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 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.

5 Steps to Boost Your Savings

Posted On April 21, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

The key to financial independence is your commitment to saving.

The market has captured our attention in the past quarter, as volatility spiked and concerns have risen about everything from interest rates to North Korea. While everyone is fixated on how the Dow is doing or how much the S&P 500 is up or down each day, we all need a reminder from time to time that the only way you accumulate money is by setting it aside. Saving is the real growth engine for investors, not rates of return.

It’s not that returns don’t matter. It’s just that we have no control over what the market does, and worrying about those short-term gyrations is a waste of your time and energy. Volatile markets often make people not want to invest, preferring to wait until there is more clarity.

Uncertainty is always going to be part of investing; long-term investors have done very well by ignoring what they can’t control and concentrating on saving as much money as possible.

Here’s a guarantee for you: if you save $2,000 a month, you will accumulate ten times more money than if you had saved $200 a month. If your plan is to reach $500,000 or $1,000,000 or $5,000,000, the sooner you save, the faster you will accomplish your goal.

Saving is the most difficult, simple thing in the world. There is nothing complex about saving money, but actually doing it is quite challenging. Let’s break it down into five steps:

Step 1. Update your attitude about saving. Thoughts become actions.
Do You Hate Saving Money?

Step 2. Create an ambitious goal.
How To Become a Millionaire in 10 Years

Step 3. Find ways to reduce your expenses.
23 Ways to Save Money

Step 4. Create a Financial Plan.
How Some Investors Saved 50% More

Step 5. Stick with the program.
How Exercise Can Make You A Better Investor

Want more evidence?
Study: Deferral Rates Trump Fund Performance

A lot of financial advisors only want clients who are already very wealthy. They can charge more fees that way. For me, I love helping investors who are at all points on their financial journey and my purpose in life is to lift others up to achieve the American Dream. That’s why we have no investment minimums at Good Life Wealth. I can help you the most if you are committed to saving and recognize that saving is the key to your financial future.