Finance 101 with my financial advisor

Soooooo I started this post in March of last year, and alas it’s finally here! Punctuality: F. Rhyming ability: A+. So sat myself down at my desk after talking to my financial advisor and got it done!

I spoke with my financial advisor Gabi Tauro to answer some of the most asked questions regarding finances and financial planning. Broken down into categories below – hope you enjoy!

Finances 101

  1. Common misconception of financial planners: they all cost a fee to get consultation.

False, not all financial advisors are fee based planners.

 

  1. How do I even start with my finances?

The idea of personal finances can feel very daunting to a lot of people-especially if you have never been educated in finances.  Starting with the basics, we need to know how much is coming in monthly, but also how much is going out monthly. I call budgeting the crash diet of financial planning because a lot of times people pick a number that is impossible to stick to, become frustrated, and then never follow through.  Instead, when starting at the basics I always have my clients fill out a budget composed of what they ACTUALLY spent the month before, and sometimes the month before that.  Sometimes more gets lost in the shuffle of life so we want to figure out truly what your capacity to save is.

Once we understand the capacity of savings, we move into the strategy of where we should put your dollars.  This part of the exercise I would recommend getting connected with a Financial Advisor because even if you start investing with small dollars—even a few dollars a week—you can accumulate wealth, taking advantage of every uptick in performance leveraging time and compound interest.

 

  1. Realistic down payment % for a home, obviously 20% is the goal but is doing less stupid

One of the things I try and encourage people to do is get as close as possible to 20% mostly so your mortgage payments monthly will be lower.  Being “house broke” is a very real feeling when someone buys too big of a house that they simply cannot afford.  I get excited with my clients when they start talking about buying a home—and I want to make sure they are picking a mortgage that is within their means.

If you’re curious about what your mortgage payment would look like you can play with a calculator on my website gabrielletoro.nm.com under resources there is a calculator section.  At the bottom of the page under savings there is a calculator that allows you to figure out what it might take to save for a vehicle, home, etc.  Very useful!

 

  1. How do you know when your bank account is ready to buy property instead of rent?

You should always have 3-6 months’ worth of living expenses in the bank account for your emergency savings fund.  On top of that, you should have your down payment in cash when you are getting ready to buy the home. 

 

  1. Easy do-able tips to stick to a budget. I made one and still amazon too much.

What I teach my clients is to reverse engineer their “budget” and figure out how much a month you should be saving.  After you know how much you have the ability to save, pay yourself like a bill and make it automatic and systematic.

 

  1. Budget tips! Best apps, etc for creating (and maintaining) a budget.

Great question. One thing I do with the people I work with is making budgeting a little easier—we see how much you typically spend and then automatically transfer what you are saving into the right buckets of money depending on your goals.  This way you don’t have to think about it, it just happens.

 

  1. How to budget after losing a job

First of all, I am really sorry to hear about the job loss.  This has been a topic of conversation I have had with more people than I would like in times like these.  Outside of coronavirus being the cause of a loss of job, losing a job is more common than people realize.  There is always a chance that something could disrupt your income.  I always tell the people I work with to keep 3-6 months’ worth of living expenses in their bank account in case something like that happens.  After you lose a job it is very important to look at a budget and figure out what are the fixed expenses and what could potentially be cut out until you find the next role.

 

  1. If I hate / am bad at budgeting, is this something a financial advisor can help with?

Absolutely—most people need help with the capacity of saving!  It sounds silly but I strongly identify with being the personal trainer for my client’s savings muscle.  Let’s be honest, a lot of people have no idea how to work out that savings muscle.  FAs help build automatic, systematic savings strategies so it is something that happens every month without much thought. 

 

  1. General budget / saving tips, how to track down 401ks you’ve lost track of

The general rule of thumb is to allocate 20% of your gross income to saving and investing. But, of course, the amount you should be saving depends on your personal goals for the future. I always try and get to know more about the people I am working with so that I can help build strong foundations for whatever they may want to accomplish in their perfect utopia.  Do you see yourself getting married and having kids or is marriage not a part of your plan?  It is completely situational.

With old 401Ks, there are three things that if done correctly, will not result in a tax liability; leave them where they are,move them to your current 401k, or roll them into an IRA.  I would suggest connecting with a FA to go over those options and what makes sense and they can help you call the company and track them down.

 

  1. Overall budget to follow, especially for undergrad / grad students

When in school it is often hard to save. I have different budgeting templates for fixed expenses such as rent and well as discretionary expenses such as going out to dinner. If you are able to save at the end of each month the first goal is to create an emergency savings fund.

 

  1. How much money should I have saved in the event of a recession?

The goal is to have six months of living expenses in an account you can access easily, like a savings or checking account. It’s okay to start small and add to it over time – but shoot for six months of expenses.

Once you’ve got an emergency fund in place, you can focus on your other priorities: starting investment strategies, savings for the house or house project, saving for retirement, or anything in between.

 

  1. What to do with stimulus check?

My first question would be do you have 3-6 months worth of living expenses in your emergency savings fund in the bank?  That is the most important thing to have built.  Then, if that is already done my second question would be what are your goals?  Do you have any short term goals/5-10 year goals, retirement goals?  Then we would start picking the correct amount to allocate towards any goals you may have.  If there was one bucket of money that had all the best characteristics life would be glorious, we would put all of our money there, and I would definitely need a different job!

 

  1. Income vs cost of living – what’s your recommendation on what ratio is good?

A good rule of thumb is 20% of your income should be set aside each month for saving and investing.  The other 60 percent and 20 percent of the 20/60/20 rule is found in the SPEND section of our checklist. No more than 60 percent of your income should be spent on essential expenses – things like housing, transportation, food, children, health care and insurance. Be sure this includes payments to pay down any debt such as car loans, student loans and credit card balances. And then the remaining 20 percent of your income can be spent on the fun stuff – the nice-to-haves like going out to eat, that new gadget or the vacation you’ve absolutely earned. If your current spending doesn’t line up with this 20/60/20 rule, you’ll have some decisions to make about where you can adjust your spending. 

 

  1. 23 yo in my first job post college. Top things I should be doing with my $$$.

First, creating an emergency savings fund (3-6months worth of living expenses).  Once that is established then you can start expanding your balance sheet for safe, aggressive and home run buckets of money.  After your emergency savings fund I would suggest connecting with an FA to go over different options and become educated on the choices you have.

 

  1. How to prioritize credit card debt/credit score/ retirement savings/

Awesome question—this is one I would suggest connecting with a FA about.  Being able to break down your goals, looking at your credit card debt interest rates, talking about increasing your credit score and walking through simulations on retirement are all part of our role.  You need to create a debt repayment vs savings strategy to break down the credit card debt while still being able to manage your living expenses and savings.

 

  1. Best place to put savings?

High yield savings accounts may be a good option, especially when you are carrying a larger amount of money.  I suggest those for my clients who are saving for a large short term goal such as buying a house. 

 

  1. What’s the one things millennials should (trying) to save for? Retirement, house, rainy day.

I always try and create a plan to do a little of all of the above.  Many people get stuck in—what I like to call—the “tunnel vision of life” meaning that they are always focused on the next short term goal.  There will always be a short term goal but how can you create a plan that focuses a little for now, a little for 5-10 years from now, and a little for 10+ years out.  That way you can always be prepared and never feel like you are constantly playing catch up.

 

Student loans

  1. My husband and I are saving up to buy a home, we are in an apartment for at least another year. I have student loans and a car payment to pay off. Should we save or pay off first?

I would want to do a deeper dive on how much are remaining on the student loans and car loan, what kind of house you are looking to purchase, how much you are making and able to save, etc. These are awesome questions to talk through with a FA because there are some variables I would want to know more about.

 

  1. Refinancing student loans?

Talking to student loan consolidators can be super helpful if you have higher student loan interest rates!

 

  1. How to manage repayment?

This is worth talking to a FA about.  Having a written plan for your student loan repayment strategy brings clarity on what you should be doing and also can help alleviate that uncomfortable weight in the back of your brain surrounding student loans. 

 

  1. How to find a FA that specifies in student loans?

A financial advisor should be asking about your student loans and talking to you about what to do with them.  Whenever I have a client with any student loans I ask about the interest rates on all of them (if more than one) and help them get connected to a student loan consolidator if I feel their interest rates have potential to be lower.

 

  1. To pay off student loans faster or put more money into 401K when young and making okay $$

This is worth a conversation.  My questions would be how much are remaining on the student loans, what are their interest rates, and what are your retirement goals.  Digging a little deeper into what is important to you personally and creating a financial plan to support those goals is what I love doing!

 

  1. Loan refinancing – where, how, what etc.

Talking to a student loan consolidator is a beautiful place to start.  Depending on your income, credit score, and current loans they are a helpful resource.

 

Investments

When it comes to investments two key disclosures are necessary:

  1. Investment disclosure. All investments carry risk, including potential loss of principal. 
  2. Strategy disclosure. No investment strategy can guarantee a profit or protect against loss in a down market. 
  3. absolute super beginner tips about stock investing. Like what even is a brokerage account

So where should you be saving your money? Here’s a rundown of the most common types of savings and other investment vehicles:

Of course, there’s a traditional savings account at the bank or credit union.

Then there are bonds, which companies and governments issue to fund day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money for a certain period of time to the issuer. In return, you get back the loan amount plus interest.

Mutual funds pool money together from thousands of small investors, and then its manager buys stocks, bonds or other securities with it. When you contribute money to a fund, you get a stake in all its investments. Since most funds allow you to begin investing with as little as a couple thousand dollars, you can attain a diversified portfolio for much less than you could buying individual stocks and bonds. 

And then, in terms of saving for retirement, if you work and your employer offers a 401(k), it’s a great way to save for retirement. Your contributions are pretax and grow tax deferred if you chose the traditional contribution option.  12 years ago, there was introduced a ROTH 401k contribution option that allows you to contribute dollars after tax regardless of your income. Talk to an FA about this option because most people are not educated on this and miss out on a huge opportunity to have tax free dollars especially if you make too much for a ROTH IRA. And if your employer offers a company match, that’s free money you don’t want to leave on the table.

There are many different types of IRAs, including an Individual Retirement Account (IRA) or Roth IRA.

 

  1. Books or tools to get education about investing (not just stock market) and how to start

https://www.northwesternmutual.com/life-and-money/

This is a place I direct clients that have similar questions for educational resources on investing, etc.  If you click on the little magnifying glass in the top right corner you can type in anything you are interested about and it will give you some quick reads.

A book I love is Rich Dad, Poor Dad.  It is an easy read and really teaches you the fundamentals on how to make money, and keep it!

 

  1. Tips for investing when you’re young?

Investing is particularly important when saving for the long term, like a down payment on a home, a child’s education and your own retirement. Even if you start small, the sooner you start saving for your future, the better. And as you probably know, that’s because it allows you to take full advantage of compounding, which is earning interest on interest over time.

You’ll be amazed at how much of a difference compounding can make. Let’s say you decide to start investing $100 a month when you are age 45. If you assume you’ll get a 6 percent annual return (including compound interest), you can double your money by the time you turn 65. BUT if you start saving 10 years earlier, at age 35, you could triple your money (assuming no market losses)– because you’ll be earning interest on your interest. And if you start at age 25, you can quadruple your money by age 65.

Start saving as early as possible. We’re all living longer these days, and women tend to live longer than men. That’s great news – but it also means you may have to cover the cost of 30 or more years in retirement.

 

  1. When would you recommend investing if you’re right out of school with lots of student debt?

Working with an advisor on your debt repayment vs savings strategy is one area we spend a lot of time on.  We break down your student loan interest rate, how much should be going into the loans, and what you should do with what is left over.  I have seen opportunity in creating a investment vs debt repayment strategy but it has to be fine tuned to an individual’s situation.

 

  1. How should I start investing?

The best way to start is figuring out how much you should be investing.  Dollar cost averaging is huge—picking a number monthly so you can get the average of the market instead of trying to time in.  The next step is what company, what fund, what asset class, how to diversify, etc.  Definitely ask a FA all these questions—investing is not a one size fits all conversation!

 

  1. How much to be contributing to 401K?

This depends on what you want your retirement to look like.  I use a software to project out what you are currently doing now into retirement to see how on track you are for your goals. Really a cool exercise if you’re wondering if you are on track.

 

  1. Investing for the future – where should I put my money (cd, 401K, etc)

It depends on your goals for the money you are saving.  I try and have my clients do a percent of their savings for short term goals, middle of the road goals (5 years-10 years) and long term (10+ including retirement).  Once I know what your goals are, we work on the right percent in each one of those places.  There are different buckets of money—some are correlated to the market, some are non correlated, some are taxable, some are tax free, there is money that is liquid immediately, money that is earmarked for college education, and money that is for after you turn 59.5.  After we talk through your personal goals I try and make everything as easy as possible—picking numbers that are meaningful but DOABLE—and have them go into those different areas automatically.

 

  1. 401K! Should we be putting less money in during these crazy weird times?

I would argue almost the exact OPPOSITE!  Especially when you have a longer time horizon than 5 years,you’ll have a longer time to see the opportunity for market change!  When you are putting money in when the market is going down you are buying the stocks at a discount.  It is like walking into a store, and your favorite shirt is 30% off.   Obviously when purchasing a discounted shirt, there’s no potential for loss as with an investment, but the concept is similar. 

 

  1. Paying off student loans or investing: what’s the bigger priority (I’m 22 w salaried job)

The answer is both at the same time!  What we want to do is talk about what your student loan interest rates are and how to pay them down strategically while also being able to invest (even a small portion is better than not at all!).

 

  1. What is the best way to invest when you don’t make a lot of money?

The best way is to start now!  Even with small dollars compound interest is very powerful.

Say you start with $1,000 and contribute an additional $100 each month. Based on a 6 percent rate of return on your savings or investment, you could have $18,117 in 10 years. If you leave that money undisturbed and continue to contribute $100 each month, in 20 years that money could grow to $48,772. And in 30 years it could grow to $103,670. That’s why it’s so important to start saving early.

 

  1. What are some resources for stock market beginners who want to invest?

Me! Please use me as a resource or another financial advisor.  We can break down investments into bite sized pieces to make sure you are taking the right steps based on your goals, how much you make, and how much you are able to save a month.  Investments can be complicated and if you are a woman—there is a statistical gap of women who invest and men who invest. Getting the proper education is really important to make the first step of investing your dollars.  Time and compound interest is so powerful so please find a FA that can help empower you to take the step of investing.

 

Thank you so much, Gabi for lending your expertise for this post!! To find out more about Gabi, head to her website at: gabrielletoro.nm.com

 

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Gabrielle Joyce Toro-McCue is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI, (long-term care insurance) a subsidiary of NM, and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA (www.finra.org) and SIPC (www.sipc.org).

Representative of Northwestern Mutual Wealth Management Company®, Milwaukee, WI (fiduciary and fee-based financial planning services), a subsidiary of NM and federal savings bank.

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