Tis the season for graduations and weddings. After attending a number of those events recently, I thought I would put together a checklist of the five questions that need to be answered by those who are newly married or graduating this spring and early summer. I’m making an assumption that most of those graduating or getting married are probably in their 20’s (although I know a large number of graduates and those getting married are older or may have a wedding or two behind them). With the economy being in the situation that is now, we all know how difficult it is to find a job, especially coming right out of school. That can be the same for newlyweds who now have a whole new set of expenses that they may have inherited from their new partner.
It would be easy to put down 100 things that they can worry about, but I wanted to focus in on the top five laundry list items to abide to help them for the rest of their life. These questions may not be of the magnitude of the 18th-century philosopher Marcel Proust (of which I have 33 of sitting on my desk right now), yet they are questions that will make your life better financially if you adhere to them.
- Do you understand what you’re getting into when it comes to your career and your earning power? How much money you make is certainly a driver of how financially successful you can be, but please don’t allow your pension to surpass your passion! Money is certainly important, but having a passion for what you want to do far exceeds just the dollars and cents. I think it is more important to do the things that you enjoy in life because it will give you constant motivation and improvement, which money alone rarely does. Living the life of George Bailey, from it’s a Wonderful Life, does not make for a happy or decent human being. Also if you start in a job that really doesn’t inspire passion but does pay well, it makes it harder to follow your passion later because you’ve gotten used to that financial lifestyle. The good news though is a lot of retirees are reigniting that passion that they may have not been able to pursue in their younger years and it’s making the retirement process much more gratifying as a result.
- Do you realize what is the single most important form of capital that most younger adults have? Human Capital is the largest form of capital that most possess. It’s all those potential years of earnings power that matters when you’re younger. That’s because most people don’t inherit sizable estates or wealth, they are dependent on their brains and their bodies to generate their lifetime income. Human capital is the most under looked and under mentioned asset in the financial world! With that being said you better go out and get some disability insurance right away, especially if you’re lucky enough to have a job. That’s because if something happens to you, you have zero protection to assure any quality-of-life other than government and family support. So when you run into the first person who prospects you for life insurance (and rest assured there will be someone) and you don’t have any dependents, tell them no, but you would like to buy some disability insurance!
- Do you understand a budget? Cash is king in a meandering or down market, but its essential when you have to pay your rent, make a car payment, have healthcare and buy food. So just understand the premise that you need more money coming in, than going out! It’s the essence of financial management and unfortunately about 70% of America is either just making ends meet or taking on more debt, according to Jean Chatzky’s book, The Difference.
- Do you know how to borrow money? I feel that the focus many times from Financial Planners is to get people to save money and not so much how to borrow better. Some of that may be how we are paid (compensated for commissions and fees on assets versus planning or refinancing debt). Don’t get me wrong as the asset side of the balance sheet building up is good, but it might go better if you’re paying less money on the liability side by lowering your interest payments for hundreds of thousands of dollars many have from home, school, car and credit card debt. As an example, if you’re paying over 20% for credit card debt, it doesn’t make a whole lot of sense to invest because you’re almost never going to get consistent 20% returns on your money to match the cost of your loans.
- How much risk can you handle? This is where I have to interject that after 30 years of sitting down with clients and trying to determine their risk, I have yet to find anybody who knows how much risk they can handle. There’s also the question of what kind of risk. Is it risk of taking care of your family if something happens to you, is it the volatility that’s in the markets every day as we try and figure out how to invest, or the taking of risk and your job and profession so that you can make more money by taking on more responsibility or get more training (that’s that human capital thing again)? When it comes to investing I think that risk is essential. I feel most people want to maintain or increase their standard of living. That means if you’re going to have the same amount of spending power next year you need to get a rate of return better than inflation, after you pay your taxes. In order to do that you need to consider putting some of your money to work in stocks, real estate, commodity-based investments and even your business. History shows that over long periods of time, you rarely are able to do this by putting your money into guaranteed types of investments like money market funds and bank certificates of deposit. The younger you start doing this, the less risk you’ll take as time heals market corrections. This question also brings me back to what I call the rocking chair question, which is what you’re saying to your grandchildren as you’re sitting on your rocking chair somewhere many years in the future. Do you want to tell them that you took too much risk in life or too little? Unfortunately, only you can decide as risk is rarely comfortable for most people. When pursued diligently and prudently, it can be handled and can help you toward the financial life that you dream of.
Here’s a poem that I thought appropriate as we make those determinations of risk:
William Arthur Ward on “Risk”
To laugh is to risk appearing a fool
To weep is to risk appearing sentimental
To reach out for another is to risk involvement
To expose your feelings is to risk exposing your true self
To place your ideas and your dreams before a crowd is to risk embarrassment
To love is to risk not being loved in return
To live is to risk dying
To hope is to risk despair
To try is to risk failure
But risks must be taken because the greatest hazard in life is to risk nothing at all
The person who risks nothing does nothing, has nothing, and is nothing, and may avoid suffering and sorrow, but they cannot learn, feel, change, grow, love, or live
Chained by their certitudes, they are slaves
They have forfeited their freedom
Only a person who risks is free
Dave Caruso is a Registered Representative with and securities offered through LPL Financial, member FINRA/SIPC.
Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA
