When you resolve to enjoy better health, you can’t find all your answers at the gym! What about your financial health? My City asked Fred Hensler, Founder and CEO of Sapphire Blue Investment Partners, to give us tips for taking a fresh approach to finances in the New Year.
What common financial mistakes do people make at the start of a New Year, and how can they be avoided?
In all reality, the same financial mistakes are present 365 days per year. While New Year’s Day may be a great day to start your financial makeover, it’s not a one-and-done. Like a sports car, it needs to be frequently tuned and maintained.
Step 1 is to create a plan that helps you determine three simple thoughts – it doesn’t have to be fancy and it shouldn’t cost you anything. We like to call it “Yellow Pad” financial planning. Pull out a yellow legal pad and begin writing down where you are today; list your savings and assets as well as your debt and required monthly expenses, where you want to be at a specific date in the future and how you plan to get there.
While New Year’s Day may be a great day to start your financial makeover, it’s not a one-and-done. Like a sports car, it needs to be frequently tuned and maintained.
Step 2: Review your debt, good and bad. Credit card debt, bill consolidation loans and second mortgages are usually not good debt. In the U.S., credit card debt has exceeded $1 trillion with many of those cards charging 25-30% interest! Unless you have the ability and control your spending (in other words, pay off your credit cards monthly), cut them up! Create a spending program that is less than your earnings.
What behaviors can we change to improve our financial health?
Many people have been trained to be ultra conservative. Research has shown us that nearly 80% of people investing in a 401k plan use the most conservative option, which is sometimes a money market plan or a target date plan. This is likely not the best option, as they can cause you to miss out on the growth opportunities the stock market could potentially produce. At Sapphire Blue Investment Partners, we refer to it as the “Bob & Charlie” comparison. Both start a job on the same day and commit to saving $500 per month in their 401k. After hearing how risky the stock market can be, Bob uses the default mode which is an average savings account. Charlie uses the services of a qualified financial manager to help him manage his assets through the storm, using the S&P 500 all-stock option. Assuming both retire today after contributing for 30 years to their 401k, Bob’s account is worth about $200,000 while Charlie’s is worth over $1 million. The question is: would you rather be Bob or Charlie?
What are the most important considerations for someone starting to plan for retirement in 2025?
START NOW! History has told us that if you had opened an IRA at age 18 and invested $2,000 per year in the S&P 500 index, then didn’t invest another dime, you would have been able to retire at age 65 with well over 1mm today. If you wait until age 26, you would have to invest $2,000 per year between ages 26 and 65 to have the same million. Point No. 2: it’s never too late; and No. 3: Don’t automatically choose the most conservative investment! Every time the stock market has declined, it has recovered again to reach yet another new high.
