By: Jeffrey Buonforte, CERTIFIED FINANCIAL PLANNERTM
Each stage of life presents new financial needs and the opportunity to reassess your financial goals. Studies show that people who get professional advice before they make major financial decisions fare significantly better than those that do not seek advice1.
Yet many people don’t seek the help of financial planners. If you want to lose weight, you are likely to join a gym, get a personal trainer or go on a diet. Similarly, if you want to get your finances in order, you should develop a financial plan. If you don’t, you’re missing out on how you can grow your money to meet short-term and long-term needs. Each year, when you do your taxes, it’s a great opportunity to review that plan.
At Lakeland Bank, our financial advisors have the experience and expertise to help individuals and families develop both long- and short-term financial goals that meet their needs and wants as well as their hopes and dreams. If the customer is interested, advisors can also recommend financial strategies, products and services that can help accomplish these goals. They also provide a trusted relationship with someone who will help manage the process, make recommendations over time and care about your financial interests. Having a plan can also help individuals and couples navigate life’s detours that inevitably occur with changing circumstances.
Below are some general tips we recommend for each stage of life.
1. Getting Married
Most people don’t enjoy talking about money with a significant other; it certainly is not romantic. Getting married means sharing financial responsibilities, so having an honest discussion about finances before a wedding can help you avoid a lot of stress after the wedding.
Selecting a venue may be the first thing on your mind, but sitting down together with a financial advisor should also be part of the wedding planning process. Get off to a strong financial start with these simple tips:
- Have a frank discussion about each other’s financial history.
- Create a monthly spending plan or budget on which you both agree.
- Build an emergency fund that equals 3 – 6 months of living expenses.
- Set goals together. Examples include saving for a new home, planning for the number of children you want to have, or envisioning the type of retirement you will enjoy.
2. Buying Your First House, Moving Up or To a New Location
To Buy or Not to Buy? Buying a home is one of the biggest financial commitments you will make. You may want to consider the costs of buying versus renting a home. Lakeland Bank offers acalculator to help you compare the financial advantages of these options.
How Much Home Can You Afford? If you decide that buying a home is right for you, the next step is to determine how much you can afford. The most common guideline lenders use is thedebt-to-income ratio (DTI). Most lenders suggest that your DTI should not exceed 36% and your mortgage should not exceed 28% of your monthly income. This means that if you and your spouse have a joint income of $100,000, your mortgage payment (including principal and interest, real estate taxes, and condo fees) shouldn’t exceed $28,000 a year, or $2,333.33 a month. When you add in other debt, such as car payments, college loans, credit card spending, etc., the total debt should not exceed $36,000 or $3,000 per month of your $100,000 annual income.
Saving for the Down Payment. Part of how much you can afford depends on your down payment. Banks require buyers to put 20% down, otherwise the buyer will be subject to pay an additional fee. The more you put down, of course, the less your mortgage has to cover. That is one way to lower your monthly payments.
One way to accumulate the cash necessary for a down payment is to automate your monthly savings. A feature of online banking allows customers to set up automatic fund transfers between checking and savings accounts. Set up automated transfers for each pay period and you can build up your nest egg without even thinking about it.
Shopping for a Mortgage. There are different types of mortgages available for different needs. For example, an Adjustable Rate Mortgage (ARM) is different from a Conventional Mortgage. An ARM offers a lower interest rate, but the interest rate is adjustable after 5 or 7 years and could go up after the initial period which will change your mortgage payment. A Conventional Mortgage has a fixed interest rate over a set term, be it 15, 20 or 30 years. The benefit of a fixed rate loan is that if interest rates go up, your rate will not so your principal and interest payments will remain the same. Withmortgage rates at historic lows, it might be a good time to lock in that rate.
3. Starting A Family
The U.S. Department of Agriculture estimates that raising a child from birth through age 18 costs approximately $234,0002. That’s about $10,000 more than the current median home price and that figure doesn’t include paying for college.
As soon as you start thinking about having a baby, start a baby fund. This First-Year Baby Costs Calculator from BabyCenter can be a helpful way to figure out how much you will spend during your child’s first year of life.
For even the most organized parents, there is no way to know what your child’s future will bring so careful planning is essential. Diapers and car seats will give way to dance lessons, sports equipment, and much more. Creating a family budget and sticking to it is very important. A strategy of managing spending, saving and earning is key to financial growth.
If you have dreams of your child attending college, understand that as the cost of higher education continues to rise, it may be difficult to save the total amount needed for tuition. The earlier you start saving, the better. Some parents think it’s too soon to think about saving for college when a child is just born, but by starting early you can dramatically reduce the financial strain of the process.
Some long-term education savings plans include state 529 College Savings Plans. I recommend visiting www.College.gov and www.SavingForCollege.com to get a better idea of what is available. Parents of a child approaching college age without a long-term tuition account should not fret; there are other financing options available to you. A Home Equity Loan (HELOAN) or Home Equity Line of Credit (HELOC) could be the right choice to finance this major expense. Check out this “Tips on Planning for College” blog post for a detailed description of each of these options.
4. Starting Over – Divorced or Widowed
When you find yourself suddenly single after divorce or the death of a spouse, your finances are the last thing that you want to think about. That’s especially true if you typically were not the one who handled the finances, but ignoring them during this difficult time can end up being costly. There are steps you can take to prepare for a financially stable future.
- Assemble a financial support team
- Gather your financial documents
- Update your accounts
- File claims
- Monitor your credit
- Develop a budget
To learn more about each of these steps, visit our Simply Speaking blog posts that offer financial tips for widows and widowers and tips for surviving a divorce.
5. Planning for Retirement through the Years
In Your 20s: Starting your first job, income may be low and debts high, but time is your ally and this is the best time to start saving for life’s big events. The most common recommendation a financial planner will make is to participate in your employer's 401(k) plan, and with good reason. This gives you an immediate tax deduction, tax-deferred growth on your savings, and usually a matching contribution from your employer. If cash flow is tight, start by contributing a small amount, such as $100 a month, and plan to gradually increase your contributions over time.
In Your 30s: With nearly 30 years to save for retirement, you still have time on your side. Now is time to create a true retirement plan. Think about variables like your ideal retirement age and questions such as: What other major expenses, like paying for a wedding or buying a home, could throw your retirement plan off for several years? Use tools, such as retirement calculators, to figure out how much you need to save each year. Your savings strategy is still basically a two-option approach: employee sponsored retirement plans and individual retirement accounts like a Traditional or Roth IRA.
In Your 40s and 50s: This is a critical time to meet with your financial advisor because you’re most likely at your peak earning years and accumulating the most retirement assets. If you've worked for several employers through the years, and you have a plan with each employer, it’s time to consolidate your retirement plans. The benefit of consolidating is that it allows you to gain a better picture of what's happening with your total portfolio and makes managing it easier. Your 50s is also a good time to evaluate the asset allocation of your portfolio. Are you taking more risk than you're comfortable with by investing too heavily in stocks or mutual funds?
In Your 60s: People are working longer and retiring later. If you’re among them, you can benefit by deferring your Social Security as long as you can. For each year that you defer, you receive an 8% increase in your annual allotment. This is the decade to zero in on a retirement date and plan accordingly.
The Golden Years: Managing your income becomes more important during retirement.
Create, and stick to, a budget. When you start to receive Social Security or income from a pension, 401(K) and IRA, you’ll face a new set of tax rules. Meet with your financial advisor to make sure that you understand them. Your financial advisor also can help you with Medigap insurance, estate planning and other financial concerns during your golden years.
Having a sound overall financial strategy requires you to recognize that your financial needs change as you shift through different stages of life. A financial advisor can help you make the best financial decisions for your family and your future.
Questions to Ask a Prospective Financial Planner
When searching for a financial planner, make sure he or she is a good fit for your needs. The Wall Street Journal offers this checklist for questions you can ask your prospective financial planner.
- Where have you worked, and for how long?
- What licenses and certifications do you hold?
- How are you paid?
- Do you receive any other outside compensation?
- What is your client base like?
- Do you have a specialty?
- Can I have a copy of your firm’s ADV form?
- How much time will you spend on my investments?
- How will you work with other people involved in my financial life?
- What investments do you most commonly recommend to clients?
- How have your investments performed in recent years?
- Why do clients leave your firm?
- What happens to my account if you leave the firm?
- Describe your own portfolio.
- What is your philosophy of money management?
Feel free to contact me with any questions about financial planning at (973) 208-6214 or firstname.lastname@example.org.
1 Financial Advisors and Boomers: Regular Use May Be Beneficial to Your Wealth. Retirement Income Industry Association
2 Expenditures on Children by Families, 2011. USDA Center for Nutritional Policy and Promotion