Contributor: Kristen Fricks-Roman
Company: Morgan Stanley Wealth Management
Title: Financial Advisor
As a financial advisor, I keep a finger on the pulse of my clients’ spending and saving habits as well as national trends. Since the recession a decade ago, I’ve witnessed a shift from streamlining spending and paying down debt to taking on significant car loan debt (which now surpasses $1.2T). Although we’ve been in a mostly positive market environment for many years now, and consumer confidence and a healthy job market are currently positive aspects of the economy, it’s important to get back to basics by monitoring spending and saving.
That’s because doing so is the key to financial security and freedom. And one thing I’ve never heard a client complain about is saving too much money, especially for their golden years.
So, how do you get started with a wise spending and saving plan? Suggestions about forgoing your morning latte abound on the internet and even among financial advisors. But during my end-of-year reviews with clients, I’ll ask them to consider items in their budget like the power bill, car payment and streaming media subscriptions.
It’s important to note that the earlier you start starting, the better off you’ll be. For example, if you start building your savings in your 20s, you not only have to put less aside each month than you would if you started in your 30s or 40s, but you also reap bigger benefits from compound interest. Compounding is a financial principle where the interest you earn each year contributes to future interest earnings, which can lead to exponential growth over time.
Here are three specific tips that help you evaluate your spending and saving habits and determine where you might need to make changes.
Keep it basic. There are some fundamentals you’ll want to make sure are covered, like having available funds in your checking account to pay for at least two months of expenses. Also, make sure you have overdraft protection on your checking account so you can avoid unnecessary fees if you accidentally overdraw the account. And if you’re interested in finding more ways to save, pay off credit card debt before increasing the amount you set aside for savings.
Create an emergency fund. I’ve said it before, and I’ll say it again: Life happens. From the economy taking a downturn to losing your job unexpectedly to incurring medical bills after an accident, you may be better able to weather the storms that come along if you have an emergency-fund cushion of three to six months’ worth of expenses.
It’s best to ensure that you have quick access to your emergency fund if you need it.
Look ahead. Once you’ve got the previous two items covered, you can focus your attention on long-term savings for retirement. I suggest that my clients save at least 10 percent to 15 percent of their post-tax income. Tax-deferred accounts, which enable you to wait until a later date to pay taxes on money you earn from interest or growth in the account (presumably when you are in retirement age and thus have a lower tax bracket), help with this goal. Also try to take full advantage of any matching-funds programs your employer offers, like for a 401(k) plan.
Life not only happens, but it also can be expensive. It’s a lot easier to start saving when you’re young, and when you know what you’re saving for. Get specific about your goals, calculate how much you’ll need to cover expenses and work with the time horizon in front of you. The future you will thank the current you for the planning you do today that benefits you both down the road.
Kristen Fricks-Roman is a Financial Advisor with the Wealth Management Division of Morgan Stanley in Atlanta. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home state 529 college savings plan. Investors should carefully read the Program Disclosure statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences before purchasing a 529 plan. You can obtain a copy of the Program Disclosure Statement from the 529 plan sponsor or your Financial Advisor. Morgan Stanley Smith Barney, LLC, member SIPC. CRC 2235406 09/18 NMLS# 1279347