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Back to Basics

Jonathan Clements

GOT QUESTIONS? We’ve got answers. This week, a new chapter was added to HumbleDollar’s online money guide. The chapter’s goal: to tackle basic financial questions that often crop up, especially among those new to the world of investing and personal finance.

This might seem like an iffy moment to make financial changes. I’d argue just the opposite is true. With the stock market down sharply, this is a great time to get started as an investor. Meanwhile, with the coronavirus spreading rapidly and the economy in turmoil, it behooves all of us to make sure we have the right insurance, enough emergency money and a buttoned-up estate plan.

The good news: None of this is that complicated. Want to get your finances headed in the right direction? Check out the answers to the nine questions below.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Growing ConvictionFacts of LifeMoney and Me and 27 Things to Do Now.

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BenefitJack
BenefitJack
1 year ago

Jonathan, thank you for “Back to Basics”. It is great guidance for everyday Americans, especially those early in their working careers.

Three comments:
– First, many American’s may not be in a position to prioritize if they are living paycheck to paycheck (70+% of Americans, according to the American Payroll Association’s annual survey, Getting Paid In America, and that is pre-COVID-19, see: https://www.nationalpayrollweek.com/wp-content/uploads/2019GettingPaidInAmericaSurveyResults.pdf)
Perhaps you have already offered a second “Basics” recommendation – how to get started? If not, you may want to consider a “universal” account solution – acknowledging that some needs will be sequential and others may occur concurrently. Products might include a passbook savings account at the bank, a Roth IRA, or for those who have access, an employer-sponsored 401(k) or 403(b) plan that offers reasonable liquidity via plan loans (including the ability to repay the loan and initiate a loan after separation). You may know of other products that would be better.
– Second, those living paycheck to paycheck may not be able to save a consistent percentage of income. Our personal savings rate is a residual result of our income minus our consumption. Everything not consumed is saved – and sometimes, we consume more than we earn. For those living paycheck to paycheck, variability in income and expenses may be opportunities or impediments. So, a viable savings strategy may not be so much one of a target savings rate but offering ideas or ways to reduce / avoid consumption.
– Third, in terms of a target level of cash, those living paycheck to paycheck probably shouldn’t allocate 100% of assets to equities. Those who choose the employer’s 401(k) or 403(b) plan as a universal account and borrow from that account should reallocate to the target allocation – recognizing that the plan loan principal is a fixed income investment in the participant herself.

For some, it would be difficult to identify multiple current and future needs, predict the date and amount of each need, choose the best financial product/instrument for each need, and estimate the periodic contribution needed for each item. They would still need to update/revise each determinations from time to time.

They certainly need your recommendations regarding insurance – perhaps moving the entire category to the front, and moving long term disability insurance higher on the insurance list.

Best to you.

Stay safe.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Thanks for this timely reminder. My youngest just turned 18, which is critical for us because of the longstanding issue we’ve had with our will, which is that we didn’t really have anyone suitable to care for them when we are gone… but more recently, that our youngest did not have legal status to manage his own life (while in reality he was absolutely capable of handling not only that but his older special-needs sibling as well.)

The best solutions are now more readily available to us from a legal perspective.

In any case, this is a good reminder to update and solidify our plans.

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