MoneyMonday: Start Smart: Road to Financial Success

Thanks for viewing this workshop, Starting Smart, your foundation for financial success. I’m Janel Cross, one of your MoneyNav coaches.

If you’ve attended a session already, you’ve been introduced to the three stages of financial wellness. If this is not familiar, make plans to join an Intro to MoneyNav session offered at the beginning of every month. Or check out our Money Milestones course which explores the stages in detail.

This is a Stage 1: financial safety course.

Starting Smart focuses on three areas: savings, debt management, and investing.

Let’s start with saving. To know how much you can save, you need to know how much you’re spending. While few people get excited about budgeting, knowing what you’re spending is the first step in finding dollars to save. These are our recommended spending ranges in key areas. Notice they add up to more than 100%. That’s because everyone’s situation is unique. If you live in an area with higher housing costs, you may need to reduce spending in other areas.

So, step one is to figure out what you’re spending and determine what percentage of your monthly income is going to each area. Odds are, you’ll find a place to spend less so you can save more.

Speaking of spending now is the time to build good credit habits. Using credit cards isn’t always bad and sometimes it’s necessary. But only use credit for needs purchases as opposed to wants. If you can, pay off your balance every month.

Also, pay attention to your credit score. Your creditworthiness influences lots of things like the cost of car insurance and the interest you’ll pay on credit cards or mortgages. 35% of your FICO score is derived from payment history so pay your bills on time. Consider setting up automatic payments for the minimum due and then paying more at the end of the month.

Another major component of your FICO score is amounts owed. Aim to keep your charges under 30% of your credit limit.

One of the most essential good habits is maintaining emergency savings. Having an emergency account can keep you from building credit debt or raiding investment accounts when life deals you a lousy hand.

Keep your emergency savings separate from other savings. Use an account that’s easy to add to and hard to withdraw from. I use an online bank for my emergency savings. I can transfer money back and forth from the mobile app, but I don’t carry a debit card for the account. That makes me think twice before I dip into my savings.

In our MoneyMilestones workbook, there’s a place for you to list the reasons you will use your emergency savings. Listing things like losing a job, medical emergency, or car repair keeps you from thinking that getting tickets to the summer music festival constitutes an emergency.

Initially, aim to save $1000. Determine the number of months you want to allow yourself to reach that goal and then figure out how much to save each month. Once you’ve hit $1,000, work hard not to touch it for at least 3 months. As you progress, aim to build your emergency savings up to 6 months of your regular living expenses, which includes rent/mortgage, food, debt payments, and insurance.

A medical event is a common reason for using emergency savings. Many health insurance plans have a high deductible which means a medical event could send you into debt quickly. To avoid that, consider contributing to a Health Savings Account, or HSA if one is available to you. Like you did with your emergency account, set a monthly savings goal to set aside enough to cover your deductible in a desired number of months.

And, as a bonus, your HSA savings come with a tax deduction which makes filling this bucket even easier.

That wraps up our savings strategies. Let’s talk about good habits to manage debt. The most important factor in managing debt is motivation. And, as with most things, we are unique in what motivates us. There are lots of ways to pay down debt but the two most common are the Snowball Method and the Avalanche Method.

In the snowball method, you pay off your smallest debt first which is great for folks motivated by “small wins” or “checking things off the list.” Organize your debt balances from smallest to biggest. Make the minimum payment on each card. Make an additional payment on the smallest balance. When you pay off that card,   add its minimum payment plus the extra payment to the next smallest balance.

In the Avalanche Method, the gratification is less immediate. You focus on the debt that has the highest interest rate and pay it off as quickly as you can. When that balance is paid off, apply the additional payments to the next highest interest balance.

This method is motivating for folks who focus on the big picture – in this case paying the least amount of interest over time. But progress is slower. So, as long as you can stick with it, the avalanche method will have you paying less interest overall.

Our Understanding Credit and Living Debt Free workshops explore these topics in more detail.

If you are just starting out, you might also be managing student loan debt. There are resources in MoneyNav specific to this topic as well as our Student Loan Strategies workshop. So, we will just touch on it here. But if this is a primary concern for you, we invite you to schedule a 1-to-1 coaching session.

This graphic is a decision tree that can help determine whether now is a good time to consolidate or refi your loans. 

If you determine refinancing might benefit you, consider visiting credible.com. This site allows you to enter loan information and compare your situation to others. If better rates are available, Credible will direct you to lenders (SoFi for example) to investigate refinancing.

The next major debt decision you’re likely to make is whether to buy or rent a home. It’s often said that renting is “throwing money out the window.” But we don’t believe that’s true. The decision to buy or rent is a decision about risk, not investment. Are you financially prepared for the costs of maintenance and major repairs? In other words, if the air conditioning breaks, can you pay for it?

Also, like any other investment, building equity in a home happens over time. If you aren’t sure you’re going to stay, but for the foreseeable future, you may not recoup the money you’ll spend on closing costs, taxes, improvements, etc.

In short, don’t be in a hurry to buy. Focus on building a strong financial foundation so you can afford to take on the risks of home ownership. And, while you’re at it, build up your FICO credit score so you can get that mortgage at a lower interest rate.

Check out our Buying, Renting, and Refinancing workshop for more on this topic.

That brings us to our last key area, investing. With a healthy emergency savings account and good credit habits in place, it’s time to look to the future.

Retirement might seem a long way off but the sooner you start, the easier it is to save the money you’ll need. A rule of thumb is to save at least 7% of your pay in a retirement account if you’re getting started in your 20s. Target 10% if you start in your 30s and 15% when starting in your 40s. If life’s gotten in the way and you aren’t starting your retirement savings until your 50s, you are shooting for a lofty 20% savings target. As you can see, the longer you wait to get started, the steeper the climb.

Also, your employer might offer a match. If they do, try to reach the savings level necessary to get the full match as soon as you can. We call this match “free money.” And just like you wouldn’t walk past a $20 laying on the sidewalk, you don’t want to leave free money behind when it comes to your retirement savings.

If you enroll in your 401k or start an IRA, you’ll probably need to pick investments. Navigating investment jargon can be intimidating but it doesn’t have to be. There are professionally managed investments called Target Date Funds that make investing easy when you’re starting out.   Target Date Funds are portfolios built around your date of birth. The closer you get to retirement, the less aggressive the portfolio becomes.

If you want to learn more about investing, you’ll find lots of resources in MoneyNav or you can check out our Money in Motion: Basics of Investing workshop. And, of course, your MoneyNav coaches are here for 1-to-1 sessions as well.

Finally, as you begin to move beyond the Financial Safety stage, you’ll want to consider your insurance coverage. Insurance is an important part of a complete financial plan. From car insurance to life insurance, there’s coverage available to protect against anything life might throw at you. This is a big topic, and you’ll find lots of insurance resources in MoneyNav and the Insurance 101 workshop. Or schedule a 1-to-1 coaching session to learn more!

With that, I’ll remind you that a great next step in your financial wellness journey is to complete your MoneyNav assessment. This questionnaire takes about 5 minutes and results in a series of To Dos, or best next steps, that are built into your personalized MyMoneyNav dashboard.

You can also schedule to meet 1-on-1 with a coach. And we hope you will continue to join us here for MoneyMondays. Visit moneynav.com/moneymondays for upcoming sessions and to sign up. On behalf of the entire MoneyNav team, thanks for joining me today! If you have questions on this topic or another, please reach out. We look forward to connecting with you.