After I began my first month of budgeting and publicly admitting that I’m terrible with money, I received messages from quite a few people in my life. My brother and sister-in-law invited me and Todd over for dinner to discuss how they budget and live under their means. Salmon was for dinner and for the first time, I actually didn’t hate it. Growing up is weird.
Some of my friends sent me their budgeting tactics and advice on how they got their money and spending under control.
Then, my sister sent me a text gently reminding me that my brother-in-law is a Financial Advisor.
Oh, right. I have a ton of resources all around me and here I am, not utilizing them.
2018 is a new year and it’s the year that I value my connections and even more importantly, time with my family! In honor of the last day of money-conscious January, I hereby present you with the answers to all of my burning financial questions.
Dan is a financial advisor in St. Cloud and as I’ve recently discovered, is passionate about money, living debt free and saving. You’ll see just how passionate he is in his answers below.
What’s your favorite part about your job?
I am most passionate about helping those who are in financial distress, and feel like their situation is overwhelming. Drawing from my background in financial services, as well as personal life experience, I work with people to come up with a simple, yet effective game plan to become financially secure.
Roth IRA or 401K?
I’d like to address this question by first saying that many 401(k)’s actually offer both a “pre-tax” and a “Roth” option for saving. To tackle Roth IRA (Individual Retirement Account) vs. 401(k) is a bit complex, so I’d like to focus more on the 401(k), but offer some insight on “Pre-tax” versus “Roth.”
This is actually one of the more common questions that I get asked by participants enrolling in their 401(k) plan at work. I usually start by addressing the fact that everyone’s specific situation is different and that both types of saving offer tax advantages, however, there are some general rules of thumb.
First, “Pre-tax” is referring to money that is saved before it is taxed. This type of saving reduces your taxable income for the year in which it is saved, however, when the money is withdrawn, the deposit and its growth is subject to federal and state income taxes. For example, if someone makes $10,000 in 2018, but saves $1,000 on a “Pre-tax” basis, they would only pay income tax on $9,000 that year. However, imagine that the $1,000 grows to $5,000 at retirement, and that person withdraws the money. The entire $5,000 is taxable as income in that year. This type of saving is particularly beneficial for someone who is a higher income earner trying to reduce tax liability today.
The term “Roth” is referring to money that is saved after it has been taxed. This type of saving does not reduce your taxable income, however the money you deposit and all of its growth may be withdrawn tax-free in retirement. For example, if that same person makes $10,000 in 2018, and saves $1,000 on a “Roth” basis, they would pay income tax on their entire earnings of $10,000 that year. However, imagine that the $1,000 grows to $5,000 at retirement, and that person withdraws the money. The entire $5,000 can be withdrawn income tax free. This can be a great way to help control your taxes in retirement. This type of saving is extremely advantageous for someone who is young and has many years for his or her “Roth” money to grow tax-free and doesn’t care as much about the loss of tax deduction today as they do about the tax advantage they’ll receive in retirement. For what it’s worth, I personally save entirely on a “Roth” basis for these reasons.
So, to sum things up, “pre-tax” is kicking the tax can down the road, and “Roth” is paying up now, so you don’t have to pay taxes later.
How much money should I be saving a year?
For retirement specifically, most experts agree that you should be shooting for about 15% of your gross income. This number may need to be more if you are starting later in life. The earlier, the better. Compounding interest is your friend!
For more information on saving, Dave Ramsey has some great resources.
For those in student loan debt, what piece of advice would you give them?
In today’s America, student loan debt is super common. In fact, as sad as it sounds, it’s not at all uncommon for someone to still be making student loan payments when they are taking out student loans for their children. Many people have multiple student loans, making matters all the more complex. studentloans.gov offers some helpful resources about consolidation of federal loans and repayment options, which might simplify things for some people. The important thing is to make a plan and stick to a debt pay down strategy.
For those in credit card debt, what piece of advice would you give them?
Cut those cards up! I think organization is key. Organize your debts and come up with a plan of attack. Then, try to trim your budget down as much as possible so you can throw extra money at your debt to pay it off as quickly as possible. It is a great feeling to have no debt payments, and have the ability to send the money you were sending to the credit card companies straight into your savings! For more information, check out this article from our website:
Do you use a credit card? If so, which?
No, we don’t. There are arguments for credit cards such as earning cash back or miles. To which I say: The credit card companies have really got marketing figured out. They wouldn’t be giving out “free” perks to people if they didn’t know that by giving incentives, it would entice people to spend more money, which equates to more interest payments to the credit card companies. “Yeah, but Dan, I pay my credit card bill off every month!” Yes, paying off your credit card balances each month is the best-case scenario if you are using credit cards. Avoiding interest payments is important. BUT, just remember that there are a lot of studies out there that show that people spend about 30% more when using credit cards than when paying with cash. Swiping (or inserting) plastic doesn’t cause pain, but studies show that paying with cash actually causes emotional distress because you’re physically parting ways with hard earned money.
Do yourself a favor and pay with cash when you can!
Backstreet Boys or N*Sync? There is a right answer.
Neither. I preferred Hanson. MMM Bop, baby!
What’s the most common issue you see from those seeking financial advice?
Living outside their means (and not having a clue as to where their money is going). I also see a lot of people who are overwhelmed by debt and lack of organization around finances.
In your opinion, what’s the best way invest?
The best way to invest is one that is in line with your goals, amount of time until you need the money, and your personal tolerance for risk. It’s also one that you can stick with long term. This topic is very specific to each person’s individual needs and it’s best to seek the advice of a trusted fee-based (not commission-based) advisor.
I will say that a 401(k) is a great vehicle to invest in. It offers tax advantages, as well as automated (out of sight, out of mind) investing. Often times, employers also match the money or a portion of the money that you invest. If a 401(k) is not available to you, you can also open a traditional IRA or Roth IRA and set up automated monthly, quarterly, etc contributions.
What is your favorite charity to give back to?
There are several organizations that our family gives to, and our favorite is one that focuses on bettering the lives of children. A thing to remember is to do your research. Some organizations take more of your contribution than others do, leaving less money going to the actual cause in which you are trying to support.
What’s the most common thing you see people spending unnecessary amounts of money on?
Cars, mortgages, and dining out.
How much money should you have in your emergency fund?
I agree with Dave Ramsey’s approach to the emergency fund. A fully funded emergency fund is 3-6 months worth of expenses. This can be a daunting task for many people, so it’s important to take baby steps. The first baby step goal would be to do whatever you can to get $1,000 set aside in a savings account. Then, work hard each month socking away whatever you can, until you’ve reached the equivalent of 3-6 months of expenses. If you’re someone with an irregular income or potentially insecure job, you may want to shoot for 6 months or more.
For more on this topic, check out: http://www.aisplanning.com/blog/st-cloud-financial-planning-funding-your-emergency-savings-account
How long does it take you to save up for something you really want?
Until I have enough money to pay for it in cash (with the exception of a house). Depending on what it is, some things take longer to save up for than others. It is hard to tell yourself “no” or “wait,” but the freedom from debt is worth it.
What are you currently saving up for?
A camper. Maybe one that is a step up from the one Cousin Eddie had in “Christmas Vacation.”
What’s it like having 3 kids?
I’m going to take a page right out of Jim Gaffigan’s book here. “It’s like drowning, and then someone hands you a baby.” All joking aside, my kids are spicy, and I love spicy things.
There it is – all of my questions answered! I’m incredibly grateful for the support and guidance I’ve received from so many this month and am excited for the months to follow. Big shout out to Daniel for taking the time to provide such thoughtful answers. It’s clear his heart is in a place to help those who are struggling in the financial realm and start living their best lives.
I was shocked to discover that people spend too much on mortgages and cars because I thought for sure it’d be travel, coffee and dining out. A mortgage seems like a necessary evil for many homeowners; one of which I’m relieved I don’t deal with yet.
I feel it necessary to end this post stating that there is one answer Dan gave above that I disagree with. N*SYNC is the greatest boy band of all time.