Editor’s note: This story was originally published in July 2020.
If you’ve ever heard the saying an elephant for a nickel is only a deal if you need the elephant and you have the nickel, then chances are good that you probably have a solid understanding of the concept of need versus want, which is the foundation of financial literacy.
But if you didn’t grow up with a parent giving you smart advice on how to spend and how to save, then you might easily feel overwhelmed when talk turns to money.
Developing a working knowledge of financial literacy takes some time and experience, but Bangor-based financial advisor, Stephanie Oiler from Edward Jones, said that baby steps are the smartest way to get started toward learning about money, saving and planning for retirement, no matter your age. With 20 years of experience in the financial industry, Oiler is an expert at helping people to create clear objectives and to implement plans that allow them to work toward achieving financial goals.
For many Mainers who live paycheck to paycheck, however, the skills of financial literacy can seem like a concept that simply doesn’t apply. Why bother learning about how financial markets work when you don’t have any money to invest in them, right?
But it turns that having some working knowledge on how to save can fundamentally alter the way money works for you, no matter what tax bracket you find yourself in.
According to Investopedia, a growing digital resource for explaining the world of finances, the concept of financial literacy is incredibly important for those looking to build wealth.
What is worrying, however, is that only a fraction of Americans have a basic understanding of how finances work to begin with. For example, every year the National Financial Capability Study, by the FINRA Investor Education Fund, collects data from test responses about consumers’ knowledge about financial topics such as interest, inflation, diversification, bond prices, and more. Surprisingly, only 34 percent of respondents pass the test.
What is even more surprising is that one in three Americans have zero dollars saved for retirement and a whopping 22 percent have less than $5,000, according to Northwestern Mutual’s 2019 Planning & Progress Study.
But before you get overwhelmed by the numbers or feel dizzy from the confusing jargon and intimidating concepts, let’s start with the basic idea of needs versus wants.
Needs versus wants
If you are living paycheck to paycheck, it can often feel like every expenditure is a need. But Oiler suggests looking closely at how you define the word ‘need’, because there may be some unexpected room for saving.
“We look at needs versus wants and we tell our clients to build up emergency savings to help out with unexpected expenses that may arise. This is where we talk about budgets and learning the difference between essential spending,” Oiler said. “People need to develop a budget to determine their needs versus wants. For example, food is a need that everybody has, but you should know within your budget how often you can afford to eat out while also being able to save.”
Budgeting is the smartest way to start learning about finances. According to the financial website NerdWallet, the 50-30-20 rule is a great place to begin. NerdWallet suggests allowing up to 50 percent of your after-tax monthly income for needs and breaking those needs down by rent, utilities, food, insurances, transportation, and child care. The site suggests leaving 30 percent for wants like gifts, travels, and entertainment – anything that is not considered essential for living. The remaining 20 percent should be earmarked for saving.
But if you’ve never saved money before, learning how to adopt new behaviors around spending patterns can be especially challenging.
Oiler said that it all starts with creating habits.
“Create a habit of saving so much from every paycheck no matter how small it may be,” Oiler said. “Your financial strategy should be based on you; there’s nothing more important than understanding what is important to you,” she explains. “Only then can you work with a financial advisor to build your personalized strategies and the specific action needed to achieve your goal.”
When it comes to saving toward retirement, Oiler said the strategy should be based on long-term goals, length of time to invest, and your comfort level with risk required for you to get there.
Build a nest egg
To begin creating new habits of mind when it comes to spending and saving money, it helps to start by building a nest egg. A personal financial safety net is incredibly important, especially in times of need. According to Oiler, “we always have to anticipate the unknown and start to build that emergency savings, no matter how small it may seem.”
Since each individual’s financial reality, lifestyle, and goals are different, it is important to know that there isn’t a one-size-fits-all approach to saving that can work perfectly. That’s why it is important to sit down and do some math to figure out what an ideal emergency fund – or nest egg – looks like for you.
“It all depends on the comfort level of the individual. Some people like to have 3 to 6 months reserved for their expenses, some like to have 6 to 12 months. It is all a matter of what is best for you and your family and your comfort level,” Oiler said.
“If you cannot have three months of expenses at least make sure you are creating a habit of saving so much from every paycheck no matter how small it may be,” she said. “Then once you’ve created that habit we can look at increasing the amount from every paycheck.”
Options for starting a retirement plan
While it’s never too late to begin saving for retirement, it can feel overwhelming to know where to begin. Oiler suggests that folks start where they, literally. If you have a job that includes benefits, then you might have access to a retirement plan already.
“We encourage individuals to participate in an employer-sponsored plan if available because oftentimes they have matching contribution amounts,” she said. “An individual may be eligible to contribute up to the lesser of 100 percent of their taxable compensation or $6,000, or $7,000 for those over the age of 50.”
But not everyone has an employer that offers benefits. The gig economy is a fast-growing sector of the workforce with more than 57.3 million freelancers and contract workers. For many of these workers, health insurance and 401K-style saving plans simply are not a reality of their working life. But that doesn’t mean that there are no options to get started with saving.
“For those individuals that are self-employed there are many other options to explore as well,” Oiler said. “A couple of potential options for business owners are SEP IRA plans or Owner-Only 401K plans.”
Another option is a Simplified Employee Pension (SEP), a type of business retirement plan that allows an employer to contribute tax-deductible dollars to the owner and the employees’ retirement account, Oiler said.
Talk to an expert financial advisor
Once you’ve begun the process of developing new habits around how you define needs versus wants, then you’ll be ready to start putting away some savings, no matter how small. The next step is to begin working toward setting clear goals to grow your wealth for future events like retirement. The good news is, no matter how close you are to sending your kids off to college or retiring, it’s never too late to begin saving.
“It is never too late to start, but of course the sooner you can begin saving, the better off you will be. There’s a lot of competing priorities for your money so make sure you are making that priority to save no matter how far away retirement may seem,” Oiler said. “We build personalized strategies based on what you value most, i.e. your lifestyle and goals.”
Saving for retirement is the biggest financial concern for many people. But it’s a little more complicated than tossing cash in an envelope, and that’s where an experienced financial advisor comes into the picture. It can be confusing knowing who to turn to, especially when the financial industry uses different titles to describe advisors such as financial advisor, financial planner, wealth manager, retirement planner or money manager.
Different advisors have different specialty skills, so it helps to know what your goal is before you hire someone. Are you looking to save for college, pay down debt, generate an income from investments or prepare for retirement? How you answer that will help you find the right expert for you. For example, some advisors will help you focus on how to navigate risk while investing, while others will help with estate planning and life insurance. The safest bet is to look for a certified financial planner who is a registered fiduciary. This means that the advisor is required by law to work on behalf of you and your interests and not the interests of anyone else.
An excellent financial advisor will help you set goals and create plans, and then help you to make the smartest choices for your money. They will also help you understand the reasons for the choices you make. Remember, hands-on experience is the best way to increase your financial literacy, and your financial advisor should be there to help you learn as you go.
Try signing up for a seminar
If you find that you’re not quite ready to hire an advisor but you’re definitely ready to learn more about managing your finances, then consider signing up for a seminar.
Local experts might better understand life in Maine. So consider looking into local seminars by financial advisors like Oiler.
“There are several different seminars that I am able to offer including one called ‘Rules of the Road Seminar’ that teaches fundamental concepts of investing and a potential strategy to help build wealth,” Oiler said. She adds that another seminar called, ‘Simplify Your Spending and Saving Strategies’ could be a great fit for those looking to develop a working knowledge of financial literacy. “That one encourages developing a budget, identifying financial goals, understanding the balance between spending, saving, and borrowing, and having a strategy.”
There are also plenty of online tools available to help you budget your money and track your spending, like Mint or Good Budget. Folks can also check out the U.S. Department of Treasury website where the Financial Literacy and Education Commission has set up a robust menu of information and trusted resources that anyone can use to learn more about finances, including how to plan for retirement.
Story by Sarah Cottrell.