Mark Albers knows his finances; in addition to his experience as an accountant, he's a senior associate consultant at Hewins Financial and is a master of taxes. No, really: He holds a Master's of Science in Taxation, so he not only knows what he's talking about, he's got the degree to prove it.
Mark took a few moments from his busy schedule to speak with us about financial literacy and overhauling your finances.
What are some financial challenges many of us don't think about and really should?
A challenge many people face without realizing it is thinking that financial planning and investing needs to be really complicated. One way this is a challenge is by causing people to freeze and not do anything. It seems overwhelming to do a complete review of their financial picture, so it's easier to leave things as is. Even if you are only taking one or two steps at a time, at least you're moving forward. These first steps can be as simple as beginning to categorize and track your spending or increasing your 401(k) contribution by 1%. Another way this presents a challenge is if people create an overly complex investment strategy. Investing in things you don't fully understand can create problems with monitoring the investments, as well as increase the probability that the investments aren't a good fit for your goals. Simple is often better, and it lets you lay the foundation for gaining future financial knowledge. A simple target-date fund that aligns with your time horizon is often a great place to begin.
Another financial challenge we face without thinking about it is the very fact that we don't think about it. Do you remember how much time you spent making investment elections in your 401(k) plan? Was it more or less time than you spend browsing a restaurant menu for dinner? How about the time you spent researching your last car purchase? The point is, this is your financial future and is a big part of your life. You should make sure to dedicate as much time to decisions regarding your financial health and well-being as you do to any other important life decisions.
How can we improve our financial literacy?
People often think that the more they read about and listen to, the better. However, there is a quality versus quantity consideration. Sitting down with a qualified financial advisor can help you understand what information is important to focus on and what is just noise. Always remember to use your own critical thinking skills to evaluate the merit of the content because not everything you see and read will be true and useful. Beyond yourself, it is also important to begin developing the financial literacy of the next generation. Teaching children early on the value of a dollar and the prioritizing decisions that need to be made when it comes to spending money will have a tremendous impact on how they manage their own money someday. I know of some parents that have two piggy banks or bank accounts for their children, one for savings and one for spending money. From the start, they teach them to put a certain amount into savings first before adding to their spending money. Charitable minded people can also add a third category for giving.
What should we all be doing to improve our finances?
Tracking spending and having a budget are invaluable in showing people where they actually spend their money. More often than not, when we go through a financial planning process with clients, they do not track spending or know how much they spend in an average month. Once they begin tracking their spending, they are often surprised by how much of their money is going certain places. Creating that understanding of the current situation is the necessary first step before identifying and executing action items to work towards long-term goals.
When investing, what's a good timeframe? Should we be thinking years? Decades?
There is no one-size-fits-all answer to that question. Each investment goal has its own timeframe, and that specific timeframe will help determine the appropriate investment allocation. When the investment goal is in the near-term, such as saving for a house down payment in the next year or two or college saving plans for students in high school, you'll want to be quite conservative. Investing in cash and shorter-term fixed income should provide a slight return along with the more important preservation of capital. In those cases, you do not have the time to wait for a market recovery if your assets dropped in value before you used them.
If you have an account where the goal is 10, 20 or more years away, such as a 401(k) account invested for your future retirement, then your investment allocation would be much different with most or all of your account in equities. With that long of a timeframe, you have the ability to accept more volatility in exchange for the higher expected returns from equities. The allocation and timeframe should then only change if the goal changes. This quarter's earnings reports or next month's interest rate projection should not change how you're invested for a goal that is decades away.
If you could go back to your younger self and offer one piece of financial advice, what would it be?
I would reiterate to myself the importance of starting early. Beginning to save as soon as you have an income does two important things. The first obvious thing it does is helps you begin accumulating wealth. We show a comparison chart with hypothetical savings scenarios to illustrate this point. Applying an identical, constant growth rate, a person could contribute a fixed annual amount for only 10 years (age 30-39) and end up with more money at age 65 than a person who waiting until age 40 to begin saving and then saved that same annual amount through age 65. So the person who started earlier could have saved for 16 fewer years (though of course we wouldn't recommend actually stopping at age 39) and still ended up with more money at retirement. The second thing that happens when you begin to save right away is that you get used to saving. Many people think they'll begin saving later when they have a little more money. But then later comes, and there's now a house payment, and then kids, and then college, etc. It is much easier to create the saving habit right from the start.
What trends in finance should we all be keeping an eye on?
One piece of the financial industry that has been getting more attention recently is the online or "robo" investment advisor. For a fraction of normal investment advisory fees, these "robo" advisors will create an investment allocation for you and performs some re-balancing along the way. While there certainly could be a niche for that type of service, it isn't a replacement for a comprehensive financial planner who will discuss your goals with you, construct and monitor financial and retirement projections, coordinate estate planning and tax advice into your investment strategy, proactively plan for life changes and more. At the other end of the spectrum from "robo" advisors, many firms are working to provide a more holistic approach to service by integrating a mix of in-house and external experts in estate planning, insurance, tax, financial planning and investment advisory.