By Starting Early, a Little Planning Can Go a Long Way to Ensuring Future Financial Success

Today’s news is filled with dire warnings about future financial problems related to mounting college debt for recent graduates, the impending social security crisis as baby-boomers start to retire, and the general lack of financial literacy in the United States that spell doom for the economic prospects of this country. It is a great way to sell magazines and newspapers, but adds very little to actually helping to solve these problems.

In reality, all it takes is a little knowledge, some discipline, and time to solve most of these future financial problems if organizations and individuals start to plan for their future financial security. Here are some pointers to get you started:

* Save first: Keep in mind that your income today is not just for today’s needs. Someday you’ll stop working, and will need money to live on continue living. The best person to help you in that future is your younger self today. So always allocate a portion of your income to savings before discretionary expenditures: Otherwise, you may find yourself with money burning a hole in your pocket and end up spending what you should have saved!

A good rule of thumb for young professionals is to allocate 20% of gross income to taxes (Federal, state, and FICA), 5% to 10% to insurance, 10% to 15% to savings, and no more than 55% to 60% to current expenditures.

* Manage your debt: There is good debt and bad debt, especially for recent college graduates. Credit card debt is bad debt, since the rate you pay is ALWAYS higher than you’d be able to get on your investments! Credit card debt is also not tax-deductible, so do work hard at paying these off as soon as possible, even if you have to postpone savings initially.

Education debt is good debt, since it already enabled you to finance an education that got you your good paying job. Education loans under the Federal Family Education Loan Program (FFELP) like Stafford loans also carry an interest rate that is below market for signature loans. In addition, these loans have flexible payment options that include income contingent payments, graduated payments, and extended payments. You can even consolidate your loans for additional savings, so don’t be in a panic to pay these off too quickly while not saving for the future.

* Invest for the long-term: Many people do not segregate their savings into short-term money and long-term money. These should be managed differently. Short- term savings to cover emergencies should not be subject to volatility since you may need to access it on short notice and cannot afford to wait for the market to come back up be profitable.

Long-term money should be invested and exposed to volatility, or market risk, since that is what will eventually earn you higher returns to compensate for the volatility you are experiencing. The risk premium historically in the US S&P 500 market is about 6% above inflation over the long haul, and is a good benchmark to compare your investment results.

* Protect your income: The first step in ensuring future financial success is to cover against risks that can jeopardize the ability to work, like premature death and disability. What good is a disciplined savings plan if the source of contributions - a person’s income - is disrupted or ended due to death or disability? If you have dependents, a good rule of thumb is to buy as much pure insurance coverage as your short and long-term obligations are, or affordable based on your budget.

* Never Wait: It doesn’t matter how old you are, never wait to start planning for the future. The longer you have, the more time becomes your strongest ally. The rule of 72 is a simple way to illustrate the compounding power of time. If you divide 72 by your rate of return, you’ll get the number of years it takes to double your money. So if you started saving immediately out of college and managed to save $20,000 by the time you are 25, that may be all you need to build a retirement nest egg.

Retiring at age 67, you’d have 42 years for your money to compound. If you earned 7% on your money, you’d end up with $1.28 million at when you retire! If you waited 6 years and kept everything the same, you’ll only end up with $640,000 or half of what you would have had. So it is important that you start saving as soon as possible.

Keep in mind that there are risks associated with an investment in the securities market and there is no assurance that any asset class or investments will double within specific timeframe. The rule of 72 is a mathematical concept and does not guarantee investment results or functions as a predictor of how your investment will perform. It is simply an approximation of the impact a target rate of return would have. Investments are subject to fluctuating returns and there can never be a guarantee that any investment will double in value.

* Keep it simple: Especially when you are getting started, don’t get too creative with your money. Many young professionals look for exciting (otherwise known as RISKY) places to invest their money. Once insurance needs are satisfied and savings rate established, invest in a well-diversified portfolio of mutual funds that only require periodic checking. Spend your time on work and personal needs instead of setting up a portfolio that needs constant attention.

* Hire professionals: In today’s “do it yourself world” dominated by Home Depot and Loews, many people feel the need to manage their finances that way as well. Financial security, however, is too important to tackle solely as a weekend warrior. Read up on finances and learn all you can, but don’t be shy about hiring a professional to help you manage some of or all of the components in your financial plan. A good insurance agent can save you many hours off of searching and comparing life and disability insurance quotes, and a good investment advisor can help you set up a low-maintenance portfolio. Hiring an accountant to file your taxes each year can reduce anxiety and eliminate costly penalties from filing a return too late or making mistakes.

Source: “The Long Run Equity Risk Premium,” Jeremy Siegel, CFA Institute Conference Proceedings, July 2004; “Efficient Frontier- The Gospel According to Ibbotson, Part II,” William Bernstein, 1999


Author: Steven I. Yeh, JD, MBA - President, CSN Financial Services

Steven Yeh is an attorney and President of CSN Financial Services. He has sixteen years of experience as a financial advisor, offering securities and advisory services through Jefferson Pilot Securities Corporation, member NASD/SIPC. He is also an instructor for several courses on financial & college planning through the American Education Foundation. He can be reached at the following address:

Steven I. Yeh, JD, MBA - President, CSN Financial Services, LLC
300 International Drive, Williamsville, NY 14221 (716) 626-3676
(716) 626-3677 facsimile; e-mail: syeh@csnfs.com