OT: Advise about financial planning for a young adult

[jj410]

Why. He is absolutely right. We, and other western nations, have been foolishly devaluing our currency for the last 40 or so years. It is about to catch up with us, and it isn't going to be pretty.

Utter nonsense. The same ideologues have been predicting imminent runaway inflation caused by devaluation for the last 40 years, and they are always wrong. Inflation is very low. For example, for only the third time in 40 years there are no inflation-adjusted increases in SS this year. If anything, the bigger threat is deflation. In the US, high inflation has historically been caused by production costs, not a devalued currency. Our inflation is caused mainly by high wages and energy costs, which is the opposite of our economic problems now. And the US dollar is strong and rising in value, not falling, which also is a problem with exports.
So we need to be worried about low wages, the impact of low energy costs on employment, a strong dollar's impact on exports, and possible deflation/stagnation, not some vague ideological nonsense about "devaluation".

 

[dmk228]

A simple approach to start: spend less than you earn and invest the delta. For tips on investing the delta, buy, read, and follow the advice given in "A Random Walk Down Wall Street".

 

[anon_xdc8rmuek44eq]

Where should a young adult go to be advised about budgeting, housing, etc? My older daughter is making plans to go out on her own and I think it's critical for her to get some professional advice.

Not advice and certainly none of my business, but what do her finances look like now? Student loans, etc.? Or is she mostly 'debt free'?

 

[kjb32812]

IMO, you could give her a Christmas/Graduation/Birthday gift to spend an hour with a fee only advisor. Not a fee based investment manager, but a fee only financial planner. An hour would be more than enough time to get her headed in the right direction if she has all her information with her.

Another idea is that, if you work with someone, ask them to meet with her. I don't work with younger clients but I will always take the time to meet with my clients' kids pro bono. First, the parents are very grateful. Second, the kids are always grateful and the simplest of things often aren't something they have considered. Third, I'd be an idiot not to get introduced to high net worth clients' kids in order to begin to develop the relationship. It also makes me feel good to give back.

 

[LionJim]

Her bottom line just got a whole lot more black, let's say, and we're concerned that she take proper advantage of this one-time thing. It was something we should have seen coming but didn't and now here we are.

 

[psufan44]

I happen to love Dave Ramsey and his advice.
He helped set me straight. He has some books out there
And classes. He is faith based and I am not at all religious
But he really does t push that stuff

Just solid advice in my opinion

Highly recommend Dave Ramsey course which is offered in many locations- especially churches. Especially ideal for a young adult starting out!

 

[kjb32812]

Her bottom line just got a whole lot more black, let's say, and we're concerned that she take proper advantage of this one-time thing. It was something we should have seen coming but didn't and now here we are.

Where does she live?

 

[LionJim]

Where does she live?

Montgomery County, Maryland

 

[kjb32812]

http://www.feeonlynetwork.com/

Again, just a starting point. If you have a relationship with someone who knows what they are talking about, I'm sure they would be happy to help. A few things to consider:

• Contribute to 401(k) up to max
• Contribute to Roth if eligible
• Purchase individual LT disability insurance
• Consider purchasing term insurance to lock in insurability at dirt cheap rates
• IMO, budgeting is finding out how much you need to be saving to accomplish your goals (retirement, cash reserves, insuring against the unexpected). Once you have those goals covered, spend the rest on whatever you want.

If she received some type of lump sum, she could talk to someone about a rob Peter to pay Paul strategy where she would live off the lump sum while redirecting her paycheck to max out her 401(k). This can help get a good start on retirement and also be useful as a tax strategy. Depending on whether she is in the 15% tax bracket or a higher one would determine how she contribute to the 401(k) (Roth or Traditional). Also, if she has excellent cash flow, see if she has the ability to contribute AT dollars to her 401(k) and then do an In Service Distribution of those dollars to a Roth IRA. There are moving pieces to this strategy but a good planner knows about it and how to effectively use it.

https://www.irs.gov/Retirement-Plans/Rollovers-of-After-Tax-Contributions-in-Retirement-Plans

http://www.forbes.com/sites/ashleaebeling/2014/09/19/irs-issues-401k-after-tax-rollover-rules/

We've been looking at this for several years now but the IRS was cloudy on it and, therefore, BDs all had different rules. The ruling is now concrete.

Finally, I'm not a big Dave Ramsey fan. Anyone who is 30 years away from retirement in today's interest rate environment who doesn't think it is prudent to take a 30 year mortgage doesn't understand money, leverage or spread. JMO.

Good luck.

 

[Op2]

Is the problem that you don't know what to tell her to do or is it that she won't listen to Dad so you need another source to point her to? If it's the latter then if she won't listen to Dad's advice on how to manage the money then she may not listen to Dad's advice on which book to read.

It sound like she just came into a big chunk of money and the question is what to do about it. That's a specific question that people with more knowledge than I have can answer. But if you're thinking that she may be foolish with the money because she's young and impulsive then financial advice isn't really the issue.

 

[LionJim]

Is the problem that you don't know what to tell her to do or is it that she won't listen to Dad so you need another source to point her to? If it's the latter then if she won't listen to Dad's advice on how to manage the money then she may not listen to Dad's advice on which book to read.

It sound like she just came into a big chunk of money and the question is what to do about it. That's a specific question that people with more knowledge than I have can answer. But if you're thinking that she may be foolish with the money because she's young and impulsive then financial advice isn't really the issue.

I don't necessarily think she may be foolish with the money because she's young and impulsive, but rather because she wouldn't know any better. Sitting her down with a professional who can talk to her intelligently about this and also about general finances seems to me to be a good idea.

 

[sluggo72]

Is the problem that you don't know what to tell her to do or is it that she won't listen to Dad so you need another source to point her to? If it's the latter then if she won't listen to Dad's advice on how to manage the money then she may not listen to Dad's advice on which book to read.

It sound like she just came into a big chunk of money and the question is what to do about it. That's a specific question that people with more knowledge than I have can answer. But if you're thinking that she may be foolish with the money because she's young and impulsive then financial advice isn't really the issue.

OP2 asks some good questions. if there's enough money, buying a house on the water in MD wouldn't be a bad investment, probably do better than most, plus she has a place to live!! (and if its on the water, she will need a boat which is necessity btw)
other than that you could call up 2 guys/girls that work in the financial services industry and see what they say. At this point you are not obligated to anyone, they cant make you do what they say, but at least you'll get some ideas. Biggest mistake is to rush into anything.

 

[PSUSignore]

Financial planning isn't rocket science. For most people, paying an advisor isn't needed. Much of it is just common sense, a lot of which has already been posted. Examples:
- Learn the difference between "needs" vs. "wants" and spend the money accordingly
- Live below your means at all times.
- Maintain positive cash flow, always try to save something regardless of income. It's possible if you scrutinize expenses. Many consider expensive smartphone and cable bills to be "needs." These are "wants" and when money is tight they should be considered for cancellation or at least a reduction in service to save money.
- Stay out of "bad debt"' like credit cards. Mortgages, reasonable car loans, college loans are OK but make sure to put enough down to avoid ending up "upside-down" in terms of what you owe vs. the value of the item.
- Prioritize where to put savings. My suggestions is 1. Emergency Fund, 2. 401k to get company match (free money!), 3. Pay off high-interest debt, 4. Max out IRA, 5. Max out 401k, 6. Additional investments (e.g., low expense ratio index funds).
- Set savings goals and don't be afraid to spend some money when the goals are met (e.g., vacations). If you save everything and don't spend on yourself once in a while you'll be miserable. Any financially stable person should be able to spoil themselves here and there, just keep it under control and don't let it detract for your larger savings goals.
- Use credit cards to your advantage, if you are able. Spend only what you can pay off every month and max out on free credit card benefits like travel miles, cash back, etc.

Opposites do attract and make for a stronger healthier Union than two "like-minded" mates, provided each partner is willing the listen and learn from the other.

If you are in a relationship with an "opposite" in terms of financial planning that sounds like a recipe for disaster. I'm all for diversity and differing opinions, but major differences in finances could result in massive repercussions. What if you marry someone that spends all of your savings and can't stay out of credit card debt? Disastrous possibilities. I'll stick to people that are fiscally responsible.

5. Minimize your mortgage payment. Try to get by with a 15 year loan. Never take out a 30 year mortgage.

I disagree. I personally suggest taking out a 30 year and paying extra, enough to pay it off in 15 years. This gives you the benefit of the 15 year payoff, albeit with slightly higher interest, but it also leaves flexibility in case something unexpected happens and you need that extra money. Also, in some situations and locations it may actually be more reasonable to rent rather than buying a home.

 

[anon_xdc8rmuek44eq]

Two words: Bit coins. You're welcome.

 

[Victor E. Bell]

Two words: Bit coins. You're welcome.

Pioneer Aviation! Pioneer Aviation!!

 

[KnightWhoSaysNit]

Utter nonsense. The same ideologues have been predicting imminent runaway inflation caused by devaluation for the last 40 years, and they are always wrong. Inflation is very low. For example, for only the third time in 40 years there are no inflation-adjusted increases in SS this year. If anything, the bigger threat is deflation. In the US, high inflation has historically been caused by production costs, not a devalued currency. Our inflation is caused mainly by high wages and energy costs, which is the opposite of our economic problems now. And the US dollar is strong and rising in value, not falling, which also is a problem with exports.
So we need to be worried about low wages, the impact of low energy costs on employment, a strong dollar's impact on exports, and possible deflation/stagnation, not some vague ideological nonsense about "devaluation".

Yes, we are in a deflationary cycle right now, because the rest of the world continues to appear less attractive than the U.S. But, since we cannot balance our budget and appear to have no interest in doing so, the trend will eventually reverse itself. The problem is in knowing when. When it does there could very well be a bond crash. If republicans are in control I would look for more of the same -- deflation. If the democrats gain control there will be more public spending, which could ignite the inflationary side as investors ditch U.S. bonds. One of the problems with being unable to balance the budget -- in good times -- is that interest rates cannot be raised. That would just spiral debt problem. I see the whole thing as very tenuous and definitely unsustainable with an aging population and younger generations with less education and discipline.

 

[jj410]

Yes, we are in a deflationary cycle right now, because the rest of the world continues to appear less attractive than the U.S. But, since we cannot balance our budget and appear to have no interest in doing so, the trend will eventually reverse itself. The problem is in knowing when. When it does there could very well be a bond crash. If republicans are in control I would look for more of the same -- deflation. If the democrats gain control there will be more public spending, which could ignite the inflationary side as investors ditch U.S. bonds. One of the problems with being unable to balance the budget -- in good times -- is that interest rates cannot be raised. That would just spiral debt problem. I see the whole thing as very tenuous and definitely unsustainable with an aging population and younger generations with less education and discipline.

In other words, you have an empty theory with no evidence and lots of non-facts.
Words like "spiral the debt problem", "tenuous" and "unsustainable" sound "serious" but are meaningless as they have no basis in economics or current reality:
Investors are fleeing to US bonds, not "ditching" them. The deficit is not ballooning - the 2015 FY budget has the smallest deficit in 8 years and is 25% lower than 2009. The younger generation is not "less educated" - high school and college graduation rates are rising, not falling. In the US inflation has never been caused by government spending. Interest rates CAN be raised in good times, in fact the Fed is pondering that right now and they are not so much worrying about the deficit as they are wondering if we are in "good times".
I could go on, but you are just spouting the same nonsense we have heard for 40+ years, i.e, runaway inflation is just around the corner if we don't cut spending immediately. You may argue that it could be a long-term problem but exactly the opposite is on the horizon and proceeding based on misdiagnosis could make the real problem (economic stagnation, low wages) worse.
(Anyway this has little to do with the OP, except you would probably have people buy lots of gold and we see how that has been working.)

 

[dclionsfan]

1. Pay off loans
2. Invest minimum in 401k
3. Invest in real estate

 

[jj410]

1. Pay off loans
2. Invest minimum in 401k
3. Invest in real estate

#3 is great if you are very knowledgeable and are willing to invest sweat equity.
But it's not for most passive investors. According to the nation's top real estate economist Robert Shiller, houses have only returned an average about 0.5% a year over inflation. The average cumulative real return since 1890 is about 70%, which is much lower than stocks (over 2000% not even including dividends) and even long term bonds.
http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/

 

[doctornick]

Tell her to open a Roth IRA immediately - that should be step one for all young people, and contribute the annual maximum no matter what it is.

In general, that is great advice, but if you have a job with 401K matching, you should allocate money to that before opening up an IRA. (Of course, ideal situation is to put a bunch of money towards both a 401K and a Roth IRA.)

 

[ChiDoc]

My older daughter

Three words: Morgan Stanley Guy.

http://www.nbc.com/saturday-night-live/video/morgan-stanley/n11978

 

[tboyer]

Where should a young adult go to be advised about budgeting, housing, etc? My older daughter is making plans to go out on her own and I think it's critical for her to get some professional advice.

1) If you have a professional income, try to live on half a paycheck, and dedicate the other half to paying down debt and building up short-term savings.
If you don't have a professional income, at least try to build up a short term cushion in case the car dies.
2) Cook your own food. It's incredible how much money people spend on bad restaurant food and boxed processed food from the supermarket. It is really possible for a young person to eat for $50 a week if they cook from fresh ingredients. Young people should NOT be spending $4 for sweetened coffee from Starbucks.
3) Budget bars and entertainment. Young people have absolutely no clue how much money they spend in bars but it is a lot. It is really easy to spend $100 a weekend in clubs if you go out a lot.
4) Obviously if the job has a 401k match, do whatever is necessary to get the match.
5) If debt has been paid down and there is a short term savings cushion (at least 2 months expenses), THEN raise the 401k contribution to 10% of income. If there's no 401k do it as an IRA.

 

[bison13]

I know credit card debt/pay-offs were mentioned but I have a credit card that I use for all expenses. I pay it off every month, its great to look online to see what you have spent on each item and group them. If you can do this then you can begin to budget from your expenses and see where you should cut back.

 

[NewEra 2014]

I am late to this thread, but the best investment book I have read is David Swensen's book, Unconventional Success. Here is a little Wiki bio for Swensen:

David F. Swensen has been the Chief Investment Officer at Yale University since 1985. He is responsible for managing and investing the University's endowment assets and investment funds, which total $23.9 billion.[1] Realizing an average annual return of 11.8 percent on his investments over the ten years to 2009,[2] Swensen's consistent track record has attracted the notice of Wall Street portfolio managers. He is notable for inventing The Yale Model which is an application of modern portfolio theory. Swensen was listed third on aiCIO's 2012, a list of the 100 most influential institutional investors worldwide.

In 2005, Swensen wrote a book called Unconventional Success which is an investment guide for the individual investor. The general strategy that he presents can be boiled down to the following three main points of advice:

• The investor should construct a portfolio with his money allocated to 6 core asset classes — diversify among them and have a bias toward the equity sections.
• The investor should rebalance his portfolio on a regular basis (rebalancing back to the original weightings of the asset classes in the portfolio).
• In the absence of confidence in a market-beating strategy, invest in low-cost index funds and exchange-traded funds. The investor should be very watchful of costs as some indices are poorly constructed and some fund companies charge excessive fees (or generate large tax liabilities).

He slams many mutual fund companies for charging excessive fees and not living up to their fiduciary responsibility. He highlights the conflict of interest inherent in the mutual funds, claiming they want high fee, high turnover funds while investors want the opposite.

 

[PSUSignore]

I know credit card debt/pay-offs were mentioned but I have a credit card that I use for all expenses. I pay it off every month, its great to look online to see what you have spent on each item and group them. If you can do this then you can begin to budget from your expenses and see where you should cut back.

I don't think anyone is suggesting this is a bad thing. What you described is what most financial stable people do with their credit cards.. Whenever people mention to pay off credit card debit they mean to not carry a balance from month to month. I use my credit card for everything imaginable, because I know I will pay it off that month. The perks are a free benefit, I have made thousands of dollars in cash back rewards. But you have to be responsible enough to pay it off every month. People that don't have the discipline to do that, should stop using credit cards alltogether. The downsides far outweigh the upsides if you can't pay the balance in full.

 

[KnightWhoSaysNit]

In other words, you have an empty theory with no evidence and lots of non-facts.
Words like "spiral the debt problem", "tenuous" and "unsustainable" sound "serious" but are meaningless as they have no basis in economics or current reality:
Investors are fleeing to US bonds, not "ditching" them. The deficit is not ballooning - the 2015 FY budget has the smallest deficit in 8 years and is 25% lower than 2009. The younger generation is not "less educated" - high school and college graduation rates are rising, not falling. In the US inflation has never been caused by government spending. Interest rates CAN be raised in good times, in fact the Fed is pondering that right now and they are not so much worrying about the deficit as they are wondering if we are in "good times".
I could go on, but you are just spouting the same nonsense we have heard for 40+ years, i.e, runaway inflation is just around the corner if we don't cut spending immediately. You may argue that it could be a long-term problem but exactly the opposite is on the horizon and proceeding based on misdiagnosis could make the real problem (economic stagnation, low wages) worse.
(Anyway this has little to do with the OP, except you would probably have people buy lots of gold and we see how that has been working.)

You really think that because more diplomas are being handed out, especially at the high school level, that these kids are better educated? The fact is that America has been falling behind other industrialized countries.

You also miss-interpreted what I said about interest rates. Perhaps I did not phrase it well. What I meant to say is that the Fed cannot appreciably raise rates at this point because of the federal deficit and our inability to balance the budget. If they raise rates they would quickly balloon the deficit through increased interest payments and declining tax revenues (as taxable revenue growth declines). They have been unable to do it despite our perceived "good times," i.e., a rising stock market. They have cut rates with the hope of spurring employment, but that can go only so far. Money can move globally now quite easily.

The last time we balanced the budget was in the 1990s after the Clinton administration's deregulatory policies. That created a stock bubble (which enabled a rather brief federal balance) that was short-lived. It quickly burst in 2001. The government has effectively not been in balance during my entire 35 year working lifetime, certainly not if we average through each business cycle.

So we have been in a "deflationary" period since the 1980s -- defined by declining interest rates to induce "growth." But what is this growth? Have real wages increased relative to costs? The answer for most is NO, unless one's "wage" is tied to being an "owner." Growth has been in the (inflated) value of corporations (stock). Ours being a global marketplace, it unfortunately has to be this way. Money will flow to wherever it generates the highest return, which is often the cheapest labor pool.

Meanwhile, each American family is on the hook for a debt that is close to the cost of a typical house. Wars and social programs aside, Americans are on the hook to pay for what has amounted to stock inflation.

How does this debt get paid? Can the average American family afford two mortgages? Who is holding the debt? Ironically, much of it is held by the older generation (retirees) who were able to save through buying stocks.

As a nation bent on saving the world we have shown no ability, nor interest, in being able to balance the budget. What's more, the federal reserve really has no inflation fighting mechanism left should markets turn on the dollar. This will occur when markets consider America unable to service its debt.

What can turn this around if productivity doesn't rise through a more educated workforce? The answer lies in scientific discover and invention. What would happen, for example, if cold fusion were to become suddenly available?

For the sake of the Op's daughter (and my retirement comfort), I sincerely hope that some form of invention/discovery comes into being. I can see no other way out. Without it, things are very likely to get ugly. The current path is not sustainable. Anyone who thinks it is has their head in the sand.