Coaching at the Bar

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As all great conversations in history go, this conversation started with a drink in my hand and my friend sitting next to me at the bar. A close friend of mine was looking for some ideas on getting himself organized and motivated for some long term planning/investing. This 26 year old was very excited to finally be doing “responsible” things and to come to me for some direction; he heard that I was pretty good at this stuff. We didn’t get into too much detail then because a bar isn’t really a great setting to help map out someone’s future but there we did talk about some generalities which I thought would be interesting to share. So here are some of the facts:

• He is a full time employee at a Fortune 500 company
• He contributes to his 401k
• He covers his expenses, keeps some spending money, manages to save some
• He just started an IRA that’s invested in a 1 year Certificate of Deposit
• He is looking to put a little extra money away
• He has some short and mid-term goals that he is actively saving for

So based on those facts these were some of the issues I addressed:

1. Savings. I coached him to look at his savings and make sure that he had between 3 and 6 months worth of his fixed (recurring) expenses tucked away. We then talked about an Oops or Stupid Mistake kind of account. A savings that acts a buffer in case something unexpected happens so that it doesn’t eat into his other savings, or the money he has set aside for his goals. It’s something you also don’t touch but just keep adding to every month. Then there was his spending money and making sure that week to week he was conscious of what he spent, kept him comfortable but, still mindful of his savings goals.
2. 401k. I had no idea what the allocation was but I helped him understand that those were dollars that were intended to be used 40 years from now. With a time horizon like that you should be as aggressive as you are comfortable with. There is time to ride out the ebbs and flows of the market and you want to make sure that as you are dollar cost averaging throughout the life of this account you want to give those investments as much a chance as possible to capture capital appreciation. The last thought about 401k’s is making sure you are contributing at least as much as possible to take advantage of your company’s matching program if one is offered.
3. The CD IRA. I wish he had come to me before doing this. Not that there is anything wrong with Certificates of Deposit, they can be very functional financial tools. As for keeping them in an IRA and being 26 years old they’re not ideal. You are putting a long term deposit, with accessibility restrictions; into an account with even more accessibility restrictions should you need access to it (which you shouldn’t inside of at least 5 years).  The other factor here is how conservative it is and what the time horizon inside of an IRA should be. If you needed access to that money inside of a year or two and wanted safety I would’ve advised a money market savings account.  It’s a great effort but the allocation needs to be addressed come a year from now so it doesn’t get just rolled over.
4. Short and mid-term savings goals. Before going to put even more money away long term it’s important that you have accounts and savings plans to make sure you reach your goals in the time you have allotted for yourself. You should be revisiting those savings plans and increasing the rates of savings if you feel comfortable or want to reach those goals faster. The key there is automation and sticking to the plan you set for yourself.
5. After all that if you still have resources available and want to put money away for the long term I would suggest looking into a Roth IRA. Inside of the Roth I would lean on the side of investing aggressively again, these are long term dollars. A note though: aggressive doesn’t mean redundant make sure you avoid investment overlap as much as possible. Investments in the 401k shouldn’t be the same as your Roth or other accounts and you can still get the benefits of diversification through differing asset classes, market capitalizations, and geographical locations. Roth’s are great but you have to make sure that you wouldn’t need any of that money inside of 5 years (rule of thumb) because if you do then investing it is not right for you yet but if some kind of emergency or opportunity were to come up you have options to get access to those funds. With Roth IRA’s you can access the money for qualified events, like home purchases or education, and because the money contributed is after tax dollars it grows and can be withdrawn tax free.  The risk though is that it is an investment and no one can predict where markets will be on the day you might need that money so this is why planning is important. So talk to your financial professional, feel free to give me a ring for some extra coaching or for you do it yourselfers out there pick your favorite online self directed brokerage and have at it.  

Hopefully this helps my friend out a bit, adds to the conversation we had over the weekend and provides some insight to anyone that might be in the same boat.

Cheers!

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