Setting Your Career Up for Financial Health – Interview with Dan Koblin
So you’ve got the job — now what are the first steps you should take to get your finances on the right track?
When you’re just getting started in your career – maybe you’re finishing up college, or you’re beginning your first “grown up” job – navigating a path can be challenging. Making decisions about your career is one thing, but when you’re first starting out there’s health and car insurance to think about, apartment rentals, student loans, and so many other pieces to figure out that you may not have learned about in college or high school. Finances are a huge part of this, so we sat down with Dan Koblin, founder and partner of Continuum Consulting Group, for advice on financial first steps for young adults.
Q: When you’re planning for life after school, there are tons of decisions to make. Adding on the need to figure out a financial plan seems overwhelming – where do we start?
A: First, don’t make it more complicated than it needs to be. Having a plan on what to do with your money is like having a solid foundation for your house. It’s not the part that you see, it’s not the sexy part of the house – but it’s the base of everything that you’ll do.
The point of a good financial plan is to give you the power to make the choices that you want. So getting a sound one in place will give you power.
Think of your financial plan in a set of layers like a cake.
- First: Open a savings account and have an automatic transfer to put money away for an emergency. Work toward having up to 6 months of household expenses set aside. Having money doesn’t make you happy but it does give you the flexibility and power to make decisions. Just start small – the automatic transfer will grow over time and give you the flexibility to make choices that fit you down the line.
- Why automatic? It’s not something that you have to remember to do each month and it’s more likely to actually happen. It’s about paying yourself first before you spend it.
- Which bank? You’re likely to get a much better interest rate if you go to online banks. Sites like bankrate.com offer banks that have high yield savings accounts with some paying 4-6x the interest of the more well known banks and they’re still backed by the FDIC (the agency that guarantees your money will be safe).
- Second: Pay down ‘expensive’ debt. What qualifies as expensive? Like most financial advice ‘it depends’ – but in general anything with an interest rate over 6% is debt you should pay down.
- You’ve heard it before but it’s true: credit card debt, which often carries interest rates of 15% or higher, should be the first to go.
- As a rule of thumb, if you have debt but can earn interest in a savings account that’s higher than the interest rate on your debt, you actually may not want to rush to pay the debt off.
- For example – if the interest rate on your debt is 4% and you’re earning 6% in interest on the money you’re saving at your bank, it’s not a bad idea to hold onto that debt.
- Here’s why – it gives you a chance to build credit while earning some money.
- Let’s say you have a loan of $1,000 with an interest rate of 4% and you have that $1,000 which you could use to either pay off that debt OR invest.
- If you can earn 6% interest by investing it, you would make $20 by investing your money rather than paying off your debt ($60 earned in interest vs $40 owed in loan interest).
- Meanwhile, you’re building your credit history.
- Third: Spend a month or two getting a handle on your expenses. It’s not as onerous as it sounds with apps like mint.com. Once you know what you owe, you’ll know what’s left over to actually enjoy.
Q: What else should I know about building a credit history?
A: It makes sense to start building over time. You can do so by getting a credit card – but remember to pay it off every month. We tell clients that the purpose of a credit card is for convenience and to build a credit history, NOT to carry credit from month to month – because the interest rates are typically sky high. Misusing credit cards by building a balance that’s carried month to month can truly bury you financially.
It’s also a good idea to take a look at your credit history occasionally – and you can get a free credit report each year either online or from your bank. Landlords or sellers of big purchases will often want to see your credit history. Checking your credit report annually lets you see what may be driving your score down with time to make changes to improve it.
To 401(k), or not to 401(k)? That is the question (well, one of them anyway).
Q: Once I open a savings account, can I just skip the 401(k)s I hear about? Retirement is a long way off.
A: We’d advise you to take advantage of a 401(k) plan. If you’re working for a company, most of them offer a match: if it’s a 50% match, when you put in $1.00 the company gives you $0.50. That’s a 50% rate of return, not too bad.
You’ll also get tax benefits because the money in a 401(k) decreases the amount of your ‘taxable income’ and that’s the basis of what you pay taxes on.
- For example, say you’re making $30,000 a year and you’re considering putting $2,000 of it into a 401(k). If you decide to, you’re only responsible for taxes on $28,000, but if you don’t, you have to pay taxes on the full $30,000.
- In that example, you’d save roughly $260 in federal taxes that year (not including state taxes, which vary by state) just by putting $2,000 into your 401(k) – on top of any company match you might get. That’s real dollars.
Q: What if I have to choose – pay down my student debt or put my money into a 401(k)?
A: Again – it depends on the situation. If the interest rate on your debt is pretty low – say around 5% and your company offers a 1 for 1 match (which means they put in $1 for every dollar you put in), you’d benefit from putting the money in your 401(k) before paying down your debt.
But if you’re paying 25% interest on your loan, you’re probably better off paying that off before putting money into a 401(k).
Q: If the money is for retirement though, then I can’t get to it if I need it in an emergency. So does that really make sense?
A: It does – based on the tax benefits we just talked about and because most 401(k)s have a loan provision called a hardship withdrawal in which you can take out a loan on the money in your 401(k) and pay yourself back over time.
Q: I’m freelancing so I’m my own employer. So 401(k)s don’t apply, right?
A: They do. You can put your own 401(k) into place – they’re usually called single or solo 401(k)s. You’ll still save on taxes and if you need to get access to the money you can take a loan out and in some circumstances can take a penalty-free withdrawal.
Q: What else should I know about finances when freelancing?
A: When you work for yourself, the tax system is your friend. Anything you use to run your business can be a tax deduction. For example:
- Auto expenses
- Internet access
- Office supplies
- Meals & entertainment when trying to market
- Health insurance benefits and expenses
These are the same types of expenses a company deducts when you’re working for them. When you’re the business owner, whether that’s leading a team or as a solo freelancer, you can generally deduct them as well. Of course, it’s best to check with a tax pro to be safe.
Q: How about if I’m freelancing while looking for another job – can I still claim these deductions?
A: Yes – even if you’re working full time and have a business on the side you can claim tax benefits. Of course good practice always to be above board with your employer about any other business you’re involved in!
There are some restrictions though – the IRS wants to be sure it’s a legitimate business to be able to take the tax deduction. If you’re losing money every year for four or five years running it may appear to be more of a hobby – in which case you probably can’t take the deductions. You’ll need to show it’s a legitimate business – that you’re looking for business, have incoming revenue, etc., and it’s not just a hobby. A good CPA can help here. Key point – you don’t need to be a ‘good business owner’ to take the deductions, you just need to be a legitimate one.
Q: How does your advice change if I’m considering a career change?
A: That’s exactly the reason to do what we’ve just talked about. Once you do, you’ve got the power and flexibility to make decisions – whether you’re forced to or if you choose to. You’ll have the ability to make a job change, take the trip you’ve been dying to or buy the condo that comes available.
The point of all of this planning is to put you in the driver’s seat regardless of your situation.
Is there a doctor in the house? When should I get a check up for my finances?
Q: We often see ‘it depends’ and ‘ask your advisor’ types of answers on this topic. If I’m having trouble paying for the things above how can I possibly afford an advisor? How can I figure out a good strategy for me?
A: We are perhaps biased but are big fans of reaching out to an advisor. BUT – not everyone needs it right away.
If you’re single and working for a company with a 401(k), the company that manages your 401(k) should be able to give you solid advice how to make it work for you – on investment choices, considerations on how much to deduct and so on. In this situation, your taxes are likely pretty straightforward so you may be able to do them yourself without consulting an accountant.
If you’re working for yourself though, it can be well worth your while to get expert advice. A good CPA should be the first expert you want to consult, as your tax strategies will be critical so you’re not missing legitimate deductions you could be taking.
As your life gets more complicated – getting married, having kids, perhaps having elderly parents to care for – when anyone is reliant on you financially – it’s a good time to have a financial and estate planner and buy basic life insurance. Estate planners aren’t just for people with big estates or lots of money. If you have a 401(k) and a house, in some states like California you need a basic estate plan. Life insurance is like other types of insurance: you don’t want to buy it until you need it – and then you really need it. The good news is it’s not expensive when you’re young.
A final point on advisors: you can be your own advisor by learning the ins and outs of financial planning. If you’re not, find a good one to help you create and deliver on a strategy that fits for you. It’s like going for a checkup to your doctor and dentist – they are there to keep you healthy. A worthy advisor is far less expensive than the cost from mistakes made.
Q: Any final thoughts?
A: If you invest money, let time do its job. Don’t try to time the market or rely on tips from friends. Create and stick to a strategy that fits your situation. And ‘be lucky’ isn’t a strategy. Good investors buy quality and sit on their investments long term.
Lastly, don’t get caught up in the media hype around stock trading. The media’s job is to sell advertising, and sensationalizing is a good way to do that.
You can read more about Dan and personal financial planning on his website www.continuum-cg.com.
Daniel Koblin is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc.CRN – 2387151-011719