November Insights: Are You Well?

Are You Well?

Today, most employers have wellness programs. They started largely to give employees an incentive to stop smoking. By quitting smoking, they could save money on health insurance. They quickly expanded to other healthy habits like diet and exercise, again with the incentive to save some money on insurance.

In the last several years this has spread to financial wellness – trying to get employees to improve their financial health along with their physical and mental health. The idea is fantastic, but unfortunately it falls under the category of, “You can lead a horse to water, but you can’t make him drink.”

Cerulli Associates, a Boston-based financial industry research firm, recently conducted a study on financial wellness programs. Cerulli found that 90 percent of retirement plan providers offer financial wellness programs, and 71 percent of plan sponsors have included these programs in their plans. That is where the good news ends. Fewer than 20 percent of the employees have actually used these programs, and those who have used them do not rate them very well. Only 41 percent say they were helpful, which isn’t very good.

It may be helpful to explain what experts mean by financial wellness. In the same way that physical wellness begins with diet, financial wellness begins with budget. No one likes to talk about these things; it is our nature to just want a pill that allows us to eat whatever we want and still be thin. Likewise, we would like to spend on whatever we want and still be financially sound. Unfortunately, that isn’t how life works. Being physically healthy starts with a good diet and being financially healthy starts with a budget.

When you’re young, there is often the idea that if I exercise enough, I can eat whatever I like, but as we age, we learn the hard way that you cannot out exercise a bad diet. Similarly, we often think we just need to make more money, but many people learn the hard way that one cannot out earn bad spending habits. Just look at professional athletes. These individuals make millions of dollars while playing their sport, and yet it is not uncommon to hear of broke former athletes.

If you want to lose weight, then you must burn more calories than you consume. Similarly, if you want to gain financial wellbeing, then you must spend less than you make. There are no short cuts and no magic pills, and unlike dieting there is no magic shot either. That is the bad news.

The good news is that what is needed is a good diet, but not necessarily a perfect diet. Similarly, we need a good budget, but this doesn’t mean the budget has to be perfect. In fact, for the vast majority of us, “perfect” is unattainable and the idea that one must be perfect is what keeps a lot of people from ever trying to be better to begin with. How do we put ourselves on a good budget?

The first step is knowing where the money is going in the first place. Peter Drucker said, “you can’t manage what you don’t measure.”1 There is a great deal of truth in that. The first step is simply figuring out where the money is going in the first place.
 
This can be done, and has been done for centuries, with pencil and paper. It does not have to be fancy; it just has to work for you. Today we have lots of resources at our fingertips, and there are many budgeting apps that can be put right on your phone. However you decide to do it, the step is necessary. For some, this needs to be done only for a few months. Once they see the real picture, they can go from there without tracking every dollar. Others need to continue this indefinitely; it just depends on your personality.

Once the spending has been recorded, then we can make a realistic budget. You should be able to see where overspending is occurring and simply correct by becoming more intentional. The goal of a budget is to calculate how much money you can set aside for your future. Once the number is calculated, the next step is to pay yourself first. That amount should go towards your future before any other expense is paid. This is step one on the road to financial wellness.

Step two is to build an emergency fund. Why? Because stuff happens. Life rarely goes as planned. There is a horrible statistic from Bankrate which says that 56 percent of Americans lack the ability to pay for a $1,000 emergency. It does not take a lot to have an $1,000 emergency, especially if you own a house or car. How much should you have in savings? We would suggest anywhere from 3 to 12 months of expenses, and the difference would be based on risk tolerance. If you’re on the lower end of this scale, then you may have to tap into longer term investments if a serious emergency were to take place, which is why we consider this part of risk tolerance. I would say that less than 3 months is probably not enough, and when you get over 12 months, then you’re not allocating funds wisely.

What if there is a lot of debt? Debt is to the budget what sugar is to the diet. It needs to be kept under control. There are those who claim that no one should ever have any debt, but that doesn’t seem very realistic. Mortgage debt is perfectly reasonable as long as it’s kept within your budget. Using debt to purchase a car is more debatable; it may be necessary or a more efficient use of assets depending on interest rates. There are few things that help a budget as much as not having a car payment.

Today, we have to discuss education debt. The cost of education today is criminal. If the education industry were any other industry, they would be accused of price gouging, but for some reason we as a society have put up with it because it is education. The truth is there are very few academic degrees worth going into debt to earn.

The biggest debt issue is the credit card. It is often the frequent snacking that ruins a diet, it is almost always the credit card spending that ruins a budget. Credit cards should be paid off in their entirety every month. If you lack the discipline to do this, you need to cut your cards up and close the accounts. Regardless of the form of debt, you have to balance paying off the debt while building savings. 

The next step is to start investing. For most that begins with contributing to a retirement plan at work. If your employer matches contributions, then you should contribute at least up to that match. The most common example would be an employer who matches 50 percent up to 6 percent of income. Many get confused by percentages, so I prefer to talk in dollars and cents. This means that for every dollar you contribute into the retirement plan, your employer will add 50 cents. If you do not contribute the full 6 percent, then you’re leaving money on the table.

However, that amount is probably not enough to fully realize one’s retirement goals. Many experts will say that you have to contribute 15 percent of your income in order to fund retirement; I disagree. I would suggest contributing 10 percent of your income. Of course, there is no such thing as too much money to retire, but I have never had a client who saved 10 percent fall short of retirement. I have had many clients have a non-retirement related goal which they couldn’t fund because they put all of their investments into retirement. Life happens and to be honest, many people find that retirement is not all it is built up to be.

The key is balance. If you can save more than 10 percent, then the excess should probably go into a brokerage account. This may not be as tax advantaged as a retirement account, but it provides the one thing that is often missing in financial plans: flexibility. The future is always uncertain, and it is hard to overstate the value of flexibility.

These are the steps to financial wellness. Like physical wellness, they are more of a journey than a destination. In both cases it is an ongoing process, and there will be ups and downs, forward progress, and setbacks. When the setbacks happen, brush yourself off and get back on course.