I regularly assign my clients money-related homework assignments, and I’ll be the first to tell you that it’s hard to deal with your money. I struggle, too! (That’s why I hire a financial planner myself.) I also try to help my clients knock out a few tasks during their meetings so they feel accomplished after our calls.
Even when you know it’ll only take a few minutes, or that it’s a smart move, or that you’re taking risks by procrastinating … you’d rather do literally anything else. It’s why people frantically clean their house when they have a work deadline. It feels good to make any kind of progress, even if it’s not actually the kind of progress you need to make right now.
Sometimes you do make progress with your finances, but it’s not the most optimal progress. We have lots of money choices to make — save or pay off debt? Roth IRA or 401(k)? — and sometimes we talk ourselves into taking the wrong action for our personal situation.
Here are some of the ways I see people putting off dealing with their money, and what to do instead:
You put off paying down debt to invest your money elsewhere
No one wants to miss out on a hot stock tip. I frequently hear of people with debt, especially high-interest credit card debt, getting by on making minimum payments while allocating other money toward investing.
Here’s the thing: any dollar you put toward the principal on a debt will earn you a return equal to the debt’s interest rate. So if you have a credit card charging 20% APR, paying down your debt earns you a 20% return! You’re likely not going to see returns like that on your investments.
If you have low-interest debt, like a mortgage, you can tackle both debt repayment and investing at once because in the long term, you’ll ideally earn higher returns on your investments than the interest rates you’ll pay on debt. But get rid of that high-interest debt before you start investing!
You put off contributing to your 401(k) to invest in a taxable brokerage account
You’ve made it! You’re earning a comfortable salary, contributing enough to a 401(k) to get your full employer match, maxing out an IRA, and you still have money leftover to invest. Pat yourself on the back!
Before you open a taxable brokerage so you can start investing outside of your retirement accounts, consider maxing out your 401(k) first. Beginning in 2019, you’ll be able to contribute up to $19,000.
Why focus on the 401(k)? The money you contribute is pre-tax, meaning you can lower your taxable income now, while you’re earning more. You’ll owe income taxes on withdrawals when you’re retired, but you’ll likely earn less at that point if you’re no longer working, so you’ll pay less tax on that money in the future.
Here’s an example to show you how much you can save. Let’s say a married couple earned $200,000 in 2018, filed jointly, and each contributed the 2018 max of $18,500. They’ll pay $8,360 less in taxes than if they hadn’t contributed at all! What if they each contributed $10,000 and put the rest of that money into a taxable brokerage? Their tax savings would drop to $4,620.
Check out this calculator to run a few scenarios for yourself.
You put off hiring a financial planner, accountant, or other professional
Why pay someone to do something you can do yourself? Because bringing in the pros will actually save you time and money in the end. Your time is has monetary value, and financial tasks like doing your taxes and mapping out your financial plan take a lot of time.
Financial professionals often end up paying for themselves, not just in saving you time, but also in helping you identify ways to save on expenses and taxes. They can run projections that will let you know when you can realistically retire, how your tax burden may shift as your situation changes, and more.
Ultimately, I want to help you use your money, to match your values, so you can live an amazing life. If you’re ready to work with a financial planner, I’d be happy to help! Apply to work with Gen Y Planning.
You put off, well, everything … because you just don’t have the time
Not only is your time worth money, it’s also hard to think long-term when so many short-term tasks are staring you in the face. Your dishwasher is leaking, your child forgot their lunch this morning, your electric bill is due, and you need to stress-clean your house before a judgemental family member visits for the weekend. Who has the time to think about taxes, investments, budgeting, and negotiating a lower cable bill with so much on their to-do list for today?
It can help to break down big financial goals into smaller, more attainable tasks. A nebulous goal like “start investing” is never going to get accomplished. However, you can easily open a brokerage account online in just a few minutes (I’m a fan of Vanguard, Schwab, Fidelity, Ellevest, and Betterment). Then tomorrow when you have a few more minutes, link your checking account to your new brokerage so you can transfer money in to invest. Then, another day, choose one or two low-fee index funds to allocate your investment dollars to.
So, when is it time to deal with your money?
Any time you experience a life change, it’s time to reevaluate your finances. Deal with your money when:
- You switch jobs or lose your job: New jobs mean new employee benefits to select, and losing your job means you’ll need to adjust your budget until you earn an income again.
- You get engaged, married, or divorced: Any time there’s a change in who you share expenses with, your financial situation is going to change. Divorce especially can have huge ramifications for your money.
- You have a child: Suddenly you need to factor in child care, college savings, and a bigger house. Plus, it’s important to create a will so you can name guardians for your child.
- You receive an inheritance or settlement: Coming into money suddenly is the perfect time to begin working with a financial planner, estate attorney, and accountant.
- You get promoted: A bigger salary makes lifestyle inflation way too easy.
- You start your own business: There are lots of financial and tax issues to consider when you start a company.