Now What?: A Practical Guide to Figuring Out Your Financial Future

By Brian M. Ursu

Real-Life Financial Advice for Your Fiscal Future

​So you’ve finished school and found your first well-paid job. Congratulations! Now don’t squander it! With real money flowing into your account for the first time, it’s easy to embrace those new preapproved credit cards or to buy that new car you’ve been dreaming about. But without a solid understanding of your financial future, you risk losing everything you’ve worked for.

Many of us—and not just those starting out—were never educated in financial planning or sustainable wealth management. Now What? bridges that gap with practical advice for readers of all ages dealing with fiscal change. If you’ve just landed your first big paycheck, have recently inherited, or are divorced or widowed, this book will guide you around the pitfalls of new wealth.

Brian Ursu offers you concrete guidance for paying down debt, including student loans; planning for life’s expensive milestones, like buying a house or having children; and creating a sustainable lifestyle now and in your future. He also explains the basics of investment, where and—maybe even more importantly—why to invest and how to build a portfolio, so you can grow the money you’ve earned to create not just a solid foundation but also a legacy for you and your family.

• Language: English
• Publisher: Greenleaf Book Group
• Release date: Feb 25, 2020
• ISBN: 9781632992604

Book preview

choosing.

PART 1

THE SOMETIMES-BORING STUFF

1

RULES TO LIVE BY

Ihave never been a person to avoid stating the obvious. For instance, after my family and I go out for dinner, I often ask, Who wants a ride home? Of course, they all do. They usually respond with an eye roll, but it never gets old for me. Truth be told, I primarily do this because it amuses me. But in a subtle way, I also want them to not take anything for granted.

The same is true of financial planning. People routinely ignore the most fundamental aspects of their finances, which can eventually lead them to financial ruin—or, at the least, in the opposite direction of financial independence. In order to avoid taking your financial future for granted, follow these simple rules to live by.

Don’t spend more than you make

You should not spend more money than you earn. Your books need to balance at the end of the month. No kidding, Sherlock, you might say, but this is advice that can be difficult to follow, especially when your income changes dramatically. Once you get your first real job or finance a car or cell phone—anything that requires debt—you will see credit card offers flood your mailbox. At first, you may feel a little flattered; I mean, these companies believe in you. Don’t let them fool you. They know they can play you like a Stradivarius. They will make spending money alluring and glamorous. What could be more exciting than a nice dinner and drinks out with friends? How about an amazing vacation? These companies will make it so easy and convenient. You don’t need to worry about how to pay for it; just charge it. What could be easier?

Long after the food has worked itself through your system (I know—gross) and you have unpacked your suitcase, the reminder arrives in your mailbox—the bill. Conveniently, they post in bold numbers the minimum required for payment. It’s a relatively small number, so you think, I can afford that. You continue your life. Oooh, those shoes are nice, and they are on sale. I don’t have any cash; I will just charge it. Then, Sure, I can join you on the weekend trip! Cha-ching, more and more gets added to the card.

The next bill comes in, and you can still pay the minimum, but it is going up. Before you know it, the balance is significant; even the minimum payment is intimidating. The interest on the balance is accruing at 18%–22%. Soon, paying even the minimum becomes a mathematical impossibility, and you are buried alive under the weight of your spending. Remember: In the end, math always wins.

Unfortunately, I have seen many people just starting out in their adult life trying to pick right up where their parents dropped them off, trying to recreate the same lifestyle that their parents have—but without the capacity to achieve it. I remember hearing stories my parents told of their first home (which was tiny), and for the first year or so they had no furniture. I pictured them sitting on the floor using a box as a table. Slowly, as they could afford it, they bought a dinette set, and then a dresser, and then a sofa. They had a refrigerator when they first moved in; I mean, how else are you going to keep TV dinners frozen?

The point is that they waited to buy things until they could afford them. It’s always a balance between wants and needs. Too often, you really don’t need what you want.

One of the best ways to avoid the temptation of buying what you want when you don’t need it and can’t afford it—and the debt that comes with that decision—is to not have a credit card at all.

What? you gasp. No credit card? Are you crazy? How else am I going to establish my credit?

I’m glad you asked. One easy way to establish credit is by using credit in small and controlled doses. A great start would be to have a small limit on a major credit card ($500–$1,000) that can be used for online purchases, linked to PayPal, or used for Uber or whatever else you might need. This would limit the trouble you can get in with a high credit limit.

Better yet, a simple budget is the single biggest way to avoid spending more than you make. The simplest method is just to track all sources of income and expenditures in the same place. You can find any number of apps to create your budget, but a pen and paper also work. Start with your annual salary; divide by 12 to arrive at your monthly income. Subtract out taxes (Uncle Sam will always get paid first), then your rent, car payment, utilities, and other fixed expenses.

Fixed expenses are costs you incur regularly that will be there no matter what, like rent, utilities, taxes, insurance, and phone. Contrast those with variable expenses, which can fluctuate and are under your control to some extent. They include entertainment, savings, cable, restaurants, lattes, gym membership, data for your phone, and so on. Think of variable expenses more like lifestyle expenses; you determine the level by what you spend. I would recommend exercising great control in this area.

So, back to budgets. We have your income, then we subtract fixed expenses, and next we subtract variable expenses. Once you have completed that equation, you should have a balance of monthly income. This leftover is called discretionary income, and as the name implies, you have discretion over how to spend it. At the very beginning, depending on your salary, you may not have any discretionary income. This means one of two things: You need a larger salary or you need to dial down your variable expenses.

I will be the first to tell you—because it’s likely our society has not done it—that you are not entitled to a larger salary. Unless and until you are able to provide greater value to your employer, your employer is completely happy with you staying right where you are. You have entered into a contract of sorts with your employer: You do your job for them, and they pay you for your work. This is an economic exchange of value. The only way to change how much you are paid is to put yourself in a position to increase your value to your employer. This will require extra effort from you rather than simply time on the job.

Invest in yourself. Improve your skill set. Do more than is expected. If you don’t know how to overdeliver, then talk to your employer about steps you can take to increase your value. By working harder, doing more than is required, bettering yourself through training, reading, and adding more skills, you will improve your economic value to your employer. And then, as a result, you will have earned a larger salary. If they won’t give it to you, and you are genuinely more valuable, their competitors will likely pay you what you are worth. This is how the economy works. I know this may seem old-fashioned, but it is reality.

The other option is more in your control: You can dial down your variable expenses by looking at what you need versus what you want. Be creative. Make more meals at home. Cut your cable and stream instead through Hulu or Netflix. Take in a roommate.

There is no shortage of ideas out there on how to do more with less. Go to Pinterest for ideas, or explore other social media sites. Whatever you do, find a way to reduce your expenses. By using your budget and determining what you truly need, you will know what you have to reduce and how to do it. Think of limiting your wants now as a small sacrifice for your future self.

Pay yourself first

It is important to develop the habit, as soon as possible, of paying yourself first. What that means is that before your income gets spent or deposited, you need to take a portion off the top to put aside for savings or investing. We will discuss investing later, but just to be clear: If you don’t put money aside for yourself, no one else will. And if you wait until the end of the month to see if there is any discretionary income left, well, I’ve got news for you. It will be gone. Most people spend what they have available. When faced with the decision of fun in the moment or a current sacrifice for some nebulous future benefit, fun now always wins.

Back in the olden days, an employee had a company pension and the promise of Social Security awaiting her upon retirement. Life expectancy generally also extended just a few years after retirement. Financial planning wasn’t really necessary, because retirement didn’t last very long.

Today, unless you’re a congressional representative or in the military, there isn’t likely a pension in your future, and it is not unusual to retire in your early 60s and live well past 90. To top it off, Social Security will likely be long dead when you retire. (There! I said it!)

What? I hear you say. Are you crazy? Social Security is guaranteed!

I hate to be the first to break the bad news to you, but Social

Security will self-destruct before you ever receive a retirement benefit. Remember: Math always wins. When the government developed Social Security, there were 26 employees paying in for every one person receiving benefits. The person receiving benefits did so for one year. Not a bad system. What the designers did not anticipate was, first, that the baby boom generation would constitute a huge population that needed to soak up benefits all at the same time and, second, that life expectancies would dramatically increase to where a beneficiary could receive benefits for longer than they paid into the system. Today, instead of 26 people paying in for every one person receiving benefits, there are about two. Another factor in the demise of Social Security is lower birth rates: There are fewer new contributors to the program while a greater number draw benefits.

It is up to you to secure your own future, and the time to start is now. Plan on taking a portion of your income and putting it away for your future. I don’t mean that everything you save must be for retirement. More immediate expenses will come up, and you will need to have money that is easy to get and available without penalty. I recommend you save 15% of your income. This is a target; if you can do more, by all means, do more. If 15% is not possible, start with what is possible and work toward the goal of 15%.

Establish an emergency fund

A portion of your 15% savings should go into some sort of liquid (easily converted to cash), guaranteed, and insured account, such as a savings or money market account. This account will serve as your emergency fund, which you will use for emergencies and unanticipated opportunities. Without an emergency fund, you will go into debt when the earliest crisis occurs—say, you need tires for your car or you face an unexpected job loss or your dentist hands you a large bill. If you have an emergency fund with an adequate balance, none of these situations will be devastating, nor will you need to pay with a credit card.

I usually recommend an emergency-fund balance of between three and six months of your living expenses. This is not three to six months of your income, just your living expenses. Because you have done your budget, you know how much that is per month. For example, if your living expenses are $3,000 per month, you should have between $9,000 and $18,000 set aside in a safe place that doesn’t penalize you if you take it out.

You will notice that’s a pretty wide range. You’ll have to judge for yourself where to fall in that range, but it should reflect how much you risk having unexpected expenses. For example, being married or having children increases your potential health-care costs over just caring for yourself. Your job security should also influence how much you put in your emergency fund: If you are likely to lose your job or may have trouble finding another one, you should plan—and save—accordingly.

However, despite its name, the emergency fund is not just for emergencies. You can also use it for opportunities. Let’s say you have a chance to take the trip of a lifetime or you would like to buy a new road bike or golf clubs or a computer. With an adequate emergency fund, you can do so freely and without guilt because you have the cash to pay for it. This presumes that, after the trip or after you’ve bought the new bike or clubs or computer, you will focus on getting the fund’s balance back to its desired level. It also presumes that you don’t go overboard with opportunities, spending money unnecessarily.

In addition to building up the emergency fund, a portion of your 15% savings should go into some investment for intermediate financial goals, which could include a down payment on a house, an investment in a business, a car, a wedding, or any other major purchase. These would be expenses that you don’t foresee within the next year—maybe you see them three to five years out—but you want to be prepared.

The balance of your 15% target should go into your retirement account. This needs to be a priority. If you doubt me, go back and reread the part about pension plans and Social Security.

Think long term

Have you ever seen those apps that age your face so you can see what you will look like 30 years in the future? How about the Snapchat filter that does the same thing? I have used both, and I must tell you, I will look amazing. Let’s hope you will too. When you can picture yourself as older, you feel more of a responsibility to your future self.

In fact, a recent study indicated that when participants in an employer-sponsored retirement plan saw themselves in the future, they were twice as likely to participate in the plan and saved more.¹ I find that fascinating. Why would a person behave differently by seeing a fictitious representation of themselves on a free phone app? Do they feel a greater responsibility, as if it was a different person they were now fretting over? Do they have more empathy for this version of their future self? I suppose it doesn’t matter, because in most cases, they will have prepared a greater nest egg, giving them much more flexibility and independence whether or not they end up looking as good as I apparently will.

I remember being young. I could not fathom what it would be like to be older, and more important, I thought I would never get old. Here I am—reasonably old (at least compared to you) and grateful for the modest efforts made by my younger self to put me in the position I am now. Give that future self every opportunity to be as successful and independent as you possibly can. Believe it or not, that self will be here before you know it.

To do that, you need to think long term. I am not talking about 5–10 years in the future; I am talking about 30 or 40 years. I know it’s really hard to think that far out, but it’s required to gain some semblance of financial independence.

Table 1.1 shows the importance of long-term thinking and planning. Jarrod graduated from college, got a job, and read this book, so he was obviously enlightened and super smart. Upon starting his first job, he committed to investing at least $5,000 per year. He started at age 22 and funded only for a period of 10 years at that rate; he never increased his contributions before he reached age 32. He managed to put away $50,000 over the 10 years and never added another nickel to his account. Why he stopped is a whole different story. Who knows? Meanwhile, Jarrod’s friend Gloria took the first 10 years off from savings and didn’t begin until she was age 32 (coincidently the same time that Jarrod stopped). She invested $5,000 per year every year from age 32 to age 65. Over time, her contributions totaled $170,000, a much greater sum than Jarrod’s.

Note: This table assumes a 10% rate of return and is a hypothetical scenario for illustration purposes only.

By the time Gloria reaches retirement, her $170,000 will grow to about $1.3 million. However, Jarrod’s smaller amount collected interest over a longer period of time. Between his last deposit and his retirement, his $50,000 will turn into over $2 million.

As you can see, the results are dramatically different. I can also assure you that there are no tricks here; it is all math. What we are seeing is the magic of compounding interest. This fascinated Albert Einstein so much that he called it the eighth wonder of the world. Who am I to disagree with him?

You can determine how many years it will take for your money to double through compounding interest with the rule of 72. Here’s how it works: Take the interest rate you are earning—in this case, we will use 10%, because the math is easy to follow. Take 72 and divide it by 10, and you get 7.2 years. It would take your money 7.2 years to double at 10% interest. If you earned 5%, it would take 14.4 years. You get the idea.

For ease of illustration, let’s round that 7.2 down to seven years. Imagine you are 22 years old and you invest $10,000. Again, your return is 10%. Seven years later, you are 29, and the account is now worth $20,000 (that’s pretty nice; it doubled!). Seven more years go by, you are 36, and the account is now worth $40,000. Seven years later, you are 43, and the account is worth $80,000. Seven more years, you are 50, you notice a few more gray hairs, you wonder where the time went, you are slightly alarmed by the fact that you need to schedule your first colonoscopy, you are busy taking your kids to college visits, and you realize that you are suddenly old. But how about that account? It is now worth $160,000. In seven more years, you are 57, and the account is now valued at $320,000. At age 64, the account doubles again to $640,000.

What I like to point out—again stating the obvious—is that during the first seven years, the account grew $10,000, and in the same time, with no extra effort on your part from age 57 to age 64, the account grew by a whopping $320,000. If I had a mic, I would drop it and walk off the stage, but I don’t, so you just have to imagine it.

Granted, a 10% return is considered historically high, even for the stock market. Seven percent is a more realistic investment number. But never doubt the power of compounding, no matter