Financial Rules of Thumb Series: Invest No More Than 10% of your Total Savings in Employer Stock

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This post is part of the Financial Rules of Thumb series. Check out the rest here!

(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)

Some companies offer great deals for employees to invest in their company stock.  While it’s not exactly too good to be true, there are definitely risks you should be aware of.

The Upperline: Diversification is important. Having too much investment tied to the same place your income comes from can be risky.

It’s tempting, I know.  They’ll give you a match or a discount to purchase company stock.  There is nothing wrong with taking advantage of those options.  We strongly recommend that you guard yourself against putting too many of your eggs in one basket.

Single stocks are riskier and even more so if it is your company’s stock.

Single stocks mean you are relying on the performance of one company to earn dividends and interest.  If that same company pays you too, you run the risk of losing your investment and your job.

One day, you will no longer work for that company.

You are going to find another job or retire, they are going to downsize you, or you will die.  You know your job is not going to provide an income for you and your family forever.  You will have to rely on different sources of income at some point which should involve your investments.

If your company goes bankrupt and you’ve invested heavily in their stock you’ve just lost your income and your investments.  That’s not a good one-two punch.  Take the match or the discount, but don’t overload your investments in your own company’s stock.

Make sure you are spreading yourself wide enough that poor performance from any one investment doesn’t derail your financial goals.

How can you take advantage of employer stock benefits and remain diversified?

  • Choose diverse options in your 401(k) plan.  Your company likely offers 20+ investment choices on their retirement plan lineup.  Choose low-cost, well managed options that cover the broader market and fixed income landscape.
  • Diversify away from employer stock as soon as possible.  Every plan I’ve looked at has different timing restrictions on how long you must hold the employer stock.  Familiarize yourself with the rules of your plan and put a reminder in your calendar to move funds from your company stock to your diversified investment choices on a regular basis.

What questions do you have about your personal investments in employer stock?

 

Save for Retirement Before Saving for a Child’s College Education

Saving for Retirement and College

This post is part of the Financial Rules of Thumb series.  Check out the rest here!

(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)

This rule of thumb can trigger emotional response. It may seem selfish to begin your retirement savings without putting money toward your kid’s college education first. You want to do right by your children, but it is important to right by yourself too.

The Upperline: If you pay for your child’s college but haven’t saved for retirement, you’ll be depending on them or government care in your golden years. Retiring with dignity should take priority over college savings.

This is a rule of thumb that I agree with.  I want you to be able to save for your child’s college, but you should start your retirement savings first.  Both of these are important reasons to save.  College may seem more urgent since your child isn’t getting any younger and it is easy to delay retirement saving “until later”.  A key to retiring with dignity is taking advantage of the power of compound interest.  The best way to do that is to start saving for retirement as soon as possible.

It is ultimately their responsibility for their education. Your responsibility is your retirement.

Having their parents pay for college isn’t their only option.  Scholarships and grants exists for a reason.  They can work to pay their tuition (did you know that college students that work actually make better grades? See this NYTimes article on a study by Laura Hamilton for more on that topic).  They can also start their education at a community college to get credits for core courses at less expensive tuition rates.

We don’t want to encourage students to go into debt for their education. The number one reason people drop out of college is due to debt, not grades (see this great infographic for other reasons).

One note from Jude: Student loans can be a useful tool, but we have seen clients burdened with what amounts to a mortgage payment for their college educations.  Using debt is always about making smart choices, and it’s important to make good choices bout the potential return one can expect on borrowing money for college.

Doing both is great, if you can afford it.

Let me be clear that your goal should be becoming financially capable of saving for retirement and college.  If you are able, these two should be done concurrently. But while you are working toward that goal, your retirement takes priority over college savings.  Don’t forfeit your retirement in order to be a blessing to your child now only to become dependent on them later.  Refer to our post on how much to save for retirement and if there is more discretionary money to spend then you can begin funding an Education Savings Account (ESA) or 529.

We will cover education saving vehicles in an upcoming series, but be wary of using the following for college savings:

  • Insurance
  • Savings bonds
  • Zero-coupon bonds
  • Pre-paying tuition

These do not provide maximum growth or keep up with inflation well enough to be a good savings vessel especially when ESA and 529 plans exist.

What are your questions about saving for college?  Let us know and we may answer them in a future post!

100 Minus Your Age? – Financial Rules of Thumb Series

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Today’s rule of thumb is:

“100 minus your age equals the allocation you should have to equities in your portfolio”

The Upperline:  It’s far more important to know how much risk you’re comfortable with, than to use this as a guideline.

This rule of thumb is dangerous not because it’s generally untrue, as I think that this is often a reasonably appropriate guideline for many investors.  The problem is, if it’s not right for you, it could have huge consequences.  I often hear from investors that they’re taking more risk in their 401k because they’re younger.  Conversely I hear from investors nearing retirement that they’re moving their entire portfolio into bonds and Certificates of Deposit.

That may be exactly what they should be doing, but the problem is that those strategies don’t have value on their own.  Those strategies only make sense within the context of your personal risk tolerance and your family’s financial goals. [Read more…]

Financial Rules of Thumb Series – How Much Should My Car Payment Be?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

I’ve heard the financial rule of thumb:  “All Vehicle Payments should be Less than 15% of your take home pay.”

The Upperline: I don’t think it really matters whether you buy a new or used car, or what percentage of your take home pay it costs.

I think it’s far more important that you know
-How much you’re spending
-What your goals are
and
-If this spending supports your goals.

This feels like a rather unnecessary rule of thumb to me, and it reminds me of the reason I think people don’t often visit financial planners.

Jude’s theory – People don’t visit financial planners because they think they’re going to be told they can’t spend money on something important to them.

Yet here’s the thing.  It’s YOUR money.  You work hard to earn it, and I think you should spend it on whatever you like, as long as you’re conscious of the choices you’re making and you understand the tradeoffs.

From a pure dollars and cents standpoint, there’s probably some value to the two rules above.  Problem is, I rarely meet people that make purely numbers-driven financial decisions.  If you’ve got your finances well under control, and are saving the amounts you want for your goals, and the car of your dreams is going to cost you 20% of your take home pay, then who is to say you shouldn’t spend that money?

If your car is important to you because you –

a) have a long commute

b) always wanted a nice car

c) any other reason you can think of –

then I think that’s exactly what you should spend your money on, as long as you can afford it within your overall household spending.

Some other things to think about:

  • Once you’re done making the payments on a car (or any other loan), continue paying that money to yourself.  You’ve got the payments built into your budget, so start directing that money towards a new goal.
  • Leasing a car isn’t an inherently bad decision. I can hear some financial planners cringing as I type this.  If you want to try out a new car before you buy it, don’t drive a ton of miles, and like new cars, then leasing has a lot of pluses (including some nice tax features if you own your own business).  I’m particularly fond of lease takeovers, where you can assume a lease from somebody that wants to exit a lease.  Swapalease.com is a personal favorite.

What financial tips would you give somebody thinking about buying a car?

Financial Rules of Thumb Series – Is Saving 10% Enough?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Saving 10% of your income is often tossed out as a solid rule of thumb.  Is it a good rule of thumb?

The Upperline: Generally solid advice, but you should run the numbers to see if you need to save more, or if you can afford to save less.

If you’ve started saving at a young age and are spending within your means, 10% may be enough.  Use one of the tools online or contact a fee-only financial planner to help you get some clarity on what it will take to retire the way you want to retire.  Liz Weston suggests what I think may be a better rule of thumb, which is “Save 10% for basics, 15% for comfort, 20% to escape.

Now, some common misconceptions about saving:

I’m saving 10% in my 401(k), so I’m on track.

Saving in your 401(k) or other retirement plan at work is a great step in securing your financial future.  My main concern here is that while having tax-deferred savings is great, you’ll want to have some savings that you can get your hands on before retirement, in an emergency fund or some other investments.  Things happen, and you’ll need to replace your air conditioner, or pay some medical bills at some point, and you can’t (strikethrough) probably don’t want to raid your retirement to pay for that.  Stay on track with your retirement savings, and start setting some money aside in your savings account for a rainy day.

I can’t save that much, so why bother?  I’ll just have to work forever anyway.

It’s natural for us as humans to see a goal that looks far too far away for us to reach, and we get discouraged.  Frustrated by what we feel is a lack of progress, we do nothing.  Even if you can only save 1% of your pay, that’s magnitudes better than 0%.  Then, take a few more steps towards your goal by:- Paying yourself when you pay off other debts.  Have a car loan that you’re close to paying off?  Set up an automatic transfer from your checking to savings once it is paid off, in the amount of the car loan.  You’re used to making that payment, now pay yourself and set that money aside for the future.  When you get raises, set up an automatic deposit into savings  for part of that raise.  Take some to spend and automatically save the balance for your future goals.

Remember – additional debt payments count as savings

If you’re paying off debts on an accelerated schedule, remember to count that money in your savings total.  It’s money that you were going to have to repay anyway, but you’re paying it off sooner than you needed to.  Pat yourself on the back and be sure to credit those extra payments towards your “savings” target.  Just be sure you only count the extra portion not the part you’d have to pay regularly.

(Big thanks to my friend @RussThornton of Wealthcare Capital for giving me a 2nd opinion on this piece)