Personal finance authors answer your questions
Manisha Thakor and Sharon Kedar (the authors of , read my here) answer your questions. Special thanks go to K.L., their PR rep, for setting this up, and of course to Manisha and Sharon for taking the time to do the Q & A.
1. How do you decide if you really need to see a financial planner, and what qualifications should you look for?
A: Unless your situation is very complex, a combination of taking personal responsibility by educating yourself on the basics of personal finance (by reading a solid primer like ON MY OWN TWO FEET!) plus working with a reputable discount brokerage firm for your investing should get most people where they want to go. The three largest discount brokerage firms - Vanguard, Fidelity, and Schwab - are great places to get started, as their staff will answer basic questions and help you set up a program of low cost investing.
If you have a very complex financial situation, simply want the hand holding, or have substantial assets, than consider a financial planner. Financial planners typically charge you two ways: either as a percent of your money that they charge on an annual basis or on an hourly basis. Our preference is for the latter. For a fee-based planner in your town that charges based on their time, check out garrettplanningnetwork.com, napfa.org, or fpanet.org.
2. If you could only give out one piece of financial advice to the women of the world, one which they would remember and make use of, what would it be?
A: Start saving now. Striving to save 15% of your gross (pre-tax income) is one of the best gifts a woman can give herself. The breakdown of that savings is roughly 5% for your emergency fund & savings for big-ticket items (such as home/car down payment) and 10% for your retirement. Even if you can only save a small amount of your income today, that’s okay. Knowledge is power. With an eye on your end goal you CAN get there.
The reason it is so important to start saving now is that the more time you have, the more magical your finances can become because your money can grow faster by earning profit on your profits. Take the simple example of Amy and Zandra. Both save $5,000 a year for 10 years and invest their money in a similar manner. The only difference is that Amy starts saving 20 years earlier, at age 21 compared to Zandra who starts at age 41. The result? Amy ends up with over $2 million in her nest egg while Zandra has $300,000. That is the power of starting early!
3. What are your thoughts on couples keeping their finances completely separate (aside from shared expenses like groceries, housing etc)?
A: This is a highly personal decision. The key to successfully balancing your heart and money is communication. We highly recommend getting “financially naked.” Both partners should know the other’s financial situation and you should be clear about who does what financial chores. An annual check up is also a must. When doing this check up, review what you own, what you owe, your budget, and your credit reports. Beyond that, whether you do the financial three-way (yours, mine, our bank account) or merge finances is up to you. One caveat: if you are questioning your partner’s financial abilities, the “three-way” may allow you to sleep better at night!
4. How do you think the media rates in terms of teaching women lessons about finance?
A: The big secret about personal finance is that it doesn’t have to be complex. Remember that the next time you turn on the TV and learn about a “can’t miss” stock tip or hear about some esoteric advice about using a “currency overlay strategy.” It has often been said that “we are drowning in information and starved for knowledge.” Nowhere is this truer than in the realm of personal finance. The best personal finance strategies more often than not are the simple ones. That’s not sexy TV!
5. What advice can you give to people who do not want to be homeowners? It seems like very personal financial articles (and blogs) out there says one of the only ways to financial security is to own a home. Is there an alternative? Do you have any sound advice for someone that doesn’t want the headache of being a homeowner but still want to be financially secure and independent?
A: Actually, while homeownership can be a great thing, we don’t believe it’s “one of the only ways to financial security.” The big key to financial security is to save your money early and often and invest wisely. The reason everyone touts the benefits of homeownership is that, using a traditional 30-year mortgage, historically buying a home was a great way to have “forced savings” (i.e. every month you pay your mortgage, and thus you are slowly building up equity or “savings” in your home).
However a home isn’t the only place you can save - you can also save in a 401(k), IRA, or taxable brokerage account. Our rough rule of thumb is to set aside 15% of your gross income in savings. Of that, about 5% will be earmarked for your emergency fund & big-ticket items and the remaining 10% for your retirement. (Note, you will have to save more than 10% for your retirement if you are in your 40s and haven’t yet started saving.)
6. If you have money in a Roth IRA (say, 3-5 years’ worth of contributions) and you want to buy a house, is it worth taking the money out of the Roth in order to make a larger down payment? Or is it better to leave the Roth alone and just put down whatever cash you can? What assumptions would sway you toward one option vs. the other?
A: We’d STRONGLY suggest you leave your Roth alone. Remember, the money you save early on for your retirement is the most valuable as it has the most time to save and grow. Our feeling is that if the only way you can afford to make a down payment on a house is to raid your Roth, you are not financially ready to have a house.
7. This is career related - how do you sell yourself in an informational interview or any interview (I’m calling up a few places, showing them my work and what I can offer them when you took a short break from the industry but just recently gained new experiences that would be relevant to the company)?
A: While career advice is not our area of expertise, we have a dear friend who just wrote a wonderful book on the subject. It’s called GETTING FROM COLLEGE TO CAREER by Lindsey Pollak. It’s available on Amazon, and is an inexpensive paperback book chalk full of good suggestions on this subject. While the author (a dynamic Yale grad) is targeting the newly graduated, we are both in our 30s, over a decade out of college, and still found ideas for improving our career potential in the book that we hadn’t thought of before.
8. On the topic of emergency funds: how do you decide where on the spectrum of “3-6 months’ expenses” your emergency fund should fall? Who needs to save three months’ expenses, and who needs to save six months’ expenses?
A: It depends on two factors: (1) are you part of a one-income or a two-income household, and (2) what’s your risk tolerance. For people who are part of two-income households, you can aim for 3 months because if one of you loses your job, there’s a bit of a safety net with the second income. If you are part of a one-income household, you’ll want to aim for the 6 months. As with most things financial, these are rough guidelines, not absolutes and thus your personal risk tolerance also comes into play.
9. Why did you recommend a S&P 500 index fund instead of a target retirement fund or lifestyle fund (where the fund is more diversified in terms of small-cap, international, bonds, etc.) for investors who want a one-stop fund?
A: To be clear, the S&P 500 is our first choice, but a VERY close second is a target retirement or lifestyle fund. We’re splitting hairs here as they are both great options. On the margin our bias it to the S&P 500 because it has lower fees and some (but not all) target & lifestyle funds have a higher ratios of bonds and cash than we like to see for a younger person’s portfolio. Also, in terms of diversification between small cap, international and so forth, studies are showing that in an increasingly global market place one of the key benefits of such delineation - lower correlation - is breaking down. As large companies in the S&P 500 increasingly do business with small companies and in overseas markets, the behavior of all the asset classes over the long run starts to converge. That said, one really can not go wrong with either option!
10. What role do you see personal finance or investing blogs play and how do they affect/compare with traditional media?
A: We think personal finance blogs are GREAT! The number one thing we like about them is that they encourage people to talk and communicate about a subject that all too often goes ignored. The more people realized how overwhelmed other people feel in trying to take charge of their finances, the more it help increase people’s receptivity to asking the basic, important questions about finance. We also think bloggers serve as a wonderful “checks-and-balances” system to make sure the most important personal finance issues are getting the airspace they deserve.
Leave a Reply