5 Basic Financial Steps Too Simple Not to Take

5 Basic Financial Steps Too Simple Not to Take

Financial professionals and novices alike often make money harder than needed. Taking charge of your financial life can seem daunting only because there’s so much to consider.

Save three to six months’ worth of living expenses in an emergency savings account. Contribute enough in your 401(k) to earn your company match. Set up 529 Plans for the little ones. Get life insurance, a will, long-term care insurance and advance medical directives. Oh, and review your beneficiaries every year.

It’s a lot, but we can make it easier. That’s why these five basic financial steps from this Queer Money™ podcast episode will help LGBTQ individuals and our families take major steps toward achieving that lofty goal of financial security.

Lisa Campbell and Stephen Brokaski are marketing consultants with Massachusetts Mutual Life Insurance Company (MassMutual), a life insurance and financial services firm dedicated to supporting all policy owners and clients in achieving their financial goals. Campbell and Brokaski joined us to discuss MassMutual’s State of the American Family Study and LGBTQ Retirement Risk Survey.

The combination of this research, while seemingly disparate topics, takes an interesting snapshot of the financial state of the LGBTQ community as adults from parenthood through pre and post-retirement.

The state of the queer American family

America’s queer families are stressed when it comes to their money. For this study, queer families were defined as same-sex couples between the ages of 25 to 64 with household incomes of at least $50,000 a year and at least one dependent under the age of 26. Currently, nearly 40% of LGBTQ families no longer believe the American Dream is possible, while only 33% agree, leaving 27% unsure.

Broken down further, it comes down to money confidence. LGBTQ families have less confidence than non-LGBTQ families that they can achieve financial security, 36% and 46% respectively, meaning over 6 in 10 LGBTQ families lack financial confidence. This study also shows that queer families have a lack of confidence in achieving other important financial goals, as well. With 37% of American families having less than one month of living expenses saved in an emergency savings account, many queer families in America feel like they’re walking on the edge of a financial precipice.

Achieving financial goals, on the other hand, can feel like an uphill climb with the average LGBTQ family having $12,065 in credit card debt, not including other kinds of debt. With average credit card interest rates at about 13%, queer families are incurring about $1,500 in interest on that debt. This is why a step-by-step plan to help LGBTQ families and individuals pay off their debt could be their best next step in achieving financial security.

The state of the queer pre-retirees and retirees

By the time queer people near retirement, however, we seem to grow more money confidence. MassMutual’s survey shows that many LGBTQ pre-retirees and retirees are more confident than the general population in their retirement preparedness, in taking market risk, and in understanding investing. This study also shows, however, that LGBTQ pre-retirees (those within 15 years of retirement) plan to retire later than the general population, which may inflate our money confidence.

The study, also, showed that many LGBTQ pre-retirees and retirees tend to invest more aggressively than the general population. This may be a valid investment strategy for many LGBTQ people, but it’s contingent on each individual’s investment goals and objectives. The problem, however, is LGBTQ survey respondents were less likely to be working with a professional financial advisor. Thus, their portfolio allocations may not align with their stated investment goals and objectives.

Regardless, LGBTQ pre-retirees were more inclined to presume that their retirement incomes will outlast them and felt they’d need only between 75% and 90% of their pre-retirement income to live comfortably in retirement. Queer respondents who were recently retired, on the other hand, reported needing less than half of their pre-retirement incomes in retirement.

After sifting through the data, Campbell and Brokaski shared financial suggestions for the queer community, suggestions that apply to everyone.

1. Create a budget and stick to it

A budget should break down into three buckets. They are budget to achieve day-to-day financial goals, a budget to achieve short-term financial goals achieved within three to five years and a budget to achieve long-term financial goals that take five or more years to achieve. The daily budget should support the short-term budget that supports the long-term budget. You can start with a simple daily financial plan. (link to daily plan post)

A strategy for creating your budget is the bucket with rocks, pebbles and sand strategy. If you fill your bucket with sand first, it’ll be hard to add the pebbles and rocks. If you do the opposite and first fill your bucket with rocks, and then pebbles and then sand, you’ll get all three into the bucket.

The rocks are synonymous with your biggest or long-term financial goals, such as preparing for retirement. The pebbles represent smaller financial goals, such as qualifying for 100% of your employer’s 401(k) match. The sand represents your smallest goals, like sticking with your daily budget that lets you qualify for 100% of your employer match.

2. Reduce household expenses

Contrary to popular belief, most of us have a spending problem and not an income problem. The only way to be financially successful is to live below your means. Keeping more of your money and saving for financial goals requires a financial plan. Reducing household expenses is a critical step in that plan. After you’ve analyzed your spending in creating your budget, manage your spending with the help of a spending analysis to avoid budget creep or the increase in spending beyond your budget that happens so slowly you don’t even notice it. Therefore, a spending analysis should be done a couple of times a year to keep your budget aligned with your financial goals.

3. Build an emergency fund

Rather than focusing on saving three to six or six to twelve months of living expenses in an emergency savings account, set up a system to save a little bit of money in an emergency savings account with each paycheck. Over time, you’ll accumulate the financial security and confidence you desire.

To do this, open a basic, no-frills savings account at a separate bank or credit union from all your other accounts. This keeps your emergency savings “at arm’s length” and minimizes the chances you’ll tap it for non-emergencies. Set these contributions on auto-pilot by establishing a recurring direct deposit from your employer in this account with each paycheck. Finally, increase your contribution into your emergency savings account in proportion to pay increases and bonuses to expedite achieving your emergency account savings goals.

4. Find a trusted financial advisor

A study done by Prudential showed that LGBTQ people who use a financial advisor are more affluent, have nearly double the household income of those without a financial advisor and use more financial products, including life insurance, long-term care insurance and savings accounts. These same people are more likely to have an employer-sponsored retirement account, such as a 401(k) or 403(b) and are more likely to have an Individual Retirement Account (IRA). Likewise, they tend to have more money saved and invested.

It’s not entirely clear if having a more robust financial plan and more money saved and invested is a cause of or a correlation to having a financial advisor, but it’s worth considering hiring a financial advisor to get you started with a financial plan. As your assets grow and your financial situation becomes more complicated, hire your financial advisor to do more for you.

5. Build a retirement nest egg with a goal of 15 times your annual income

Finally, Campbell advises, work to build a retirement nest egg with 15 times your annual income. This may seem like an out of reach, even out of touch number for many, and that’s why we recommend the rocks, pebbles and sand strategy to financial planning above because it lets investors regularly take small steps that compound over time.

An interesting question that MassMutual asked participants of its State of the American Family Survey was “What is your biggest financial regret?” The reply was “Not starting early enough.” The solution, then, is to start today regardless of how early today actually is.

While financial planning may seem easier said than done, it doesn’t have to be as hard as we make it. Start with these five basic financial steps, and then advance to more advanced steps one step at a time.

Source: Forbes
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