How Was I Supposed to Know That?

Written By: Allie Schmidt, Financial Advisor, CFP®, CPA

I sat down with the adult daughter of one of my clients last week to just answer a couple questions.  She’s an impressive individual: recent college graduate, just starting her first position as an Electrical Engineer, very bright.  But she, like so many, has never been formally taught about money management or financial planning.  It’s typically a skill that most people learn by trial and error, mistakes and successes, through financial adulthood.   So, I thought it might be helpful to pass along a couple quick bullets to create a foundation to help avoid those errors and mistakes.

1. Debt…

   There are all different types of debt, and they are certainly not all created equal.   Think about the difference between your mortgage debt and your credit card debt.  If you have some extra cash and you’d like to pay down debt, take the following steps to make sure to get the most bang for your buck:  Look at your personal balance sheet (basically your financial snapshot) and break down all of your debt by the amount you owe, the interest rate, and the term.  If you have an extra $300 don’t just put an extra $100 on each loan, take the full $300 and each month pay down the highest interest rate loan first, until it’s completely paid down and then move down the list to the next highest interest rate loan.  This can be an easy way to substantially reduce interest cost.

2. Savings…

   First things first, build your emergency savings. Rule of thumb is 3-6 months of expenses; however, in reality it should somewhat depend on what you do for a living.  If you’re self-employed or have a variable or commission-based job, consider accumulating more cash—6-12 months of expenses— before moving on to other forms of investment or savings.

3. Know thyself…

   Understand and respect your money habits (and learn how to deal with them). Be sure to understand how your innate money habits affect your day to day and long-term financial goals. This can go in both directions.  I have some clients who hate spending money, they feel they have to save every dime, prefer to have their money in cash rather than investments, because they don’t want to risk losing anything.  It’s important for many extremely conservative investors to find a trusted advisor to be sure they stay appropriately invested over time to grow and accumulate for future expenses.  It’s incredibly difficult to save every dollar you’ll ever need, you need the money to grow on its own as well.  On the other hand, I’ve seen clients who receive inheritances or different windfalls and can spend just about any amount of money that appears in their checking account.  For these folks, it’s helpful to put a portion of each paycheck into an account that they don’t touch unless it’s necessary. Neither habit is right or wrong, but you should be aware of your tendencies.  The important takeaway is to understand where you fall and make sure your habits align with your long-term goals or take the appropriate steps to get back on track.

If you fall dramatically on either end of the spectrum, be sure to build in some safeguards, such as outside financial advice or accounts, to keep yourself in balance.  Make sure to have a plan for the debt you assume, the amount you save, and your investment strategy.   At the end of the day, like most things in life, it comes down to balance.

For more blog posts from Allie & her team at HD Wealth Strategies, check out our blog at www.hdwscolorado.com/blog.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.

The opinions voided in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.