Alumni experts offer advice on managing your money and planning for the future—whether you just graduated or are ready to retire.

By Gene Rebeck / Illustrations by Eric Hanson

Fundamentally, financial literacy isn’t complicated. Typically defined as the skills and knowledge that allow you to make smart decisions about your resources, financial literacy involves goals and plans for saving, planning, budgeting, investing, buying insurance, and so on—and sticking to them. Unfortunately, it’s not all that simple in practice, as America’s high levels of debt and low levels of savings evince.

“These things are simple to understand but hard to do,” notes Ed Deutschlander ’93, CEO of Minneapolis-based North Star Resource Group, one of the country’s largest independent privately held financial advisory firms. The problem, he adds, is “we think we have plenty of time. ‘I will get around to doing it. I will save more starting next year.’” As Meloni Hallock ’70, managing director and partner at Acacia Wealth Advisors at High- Tower, puts it, “Save more and spend less. You need to spend less than you make. It’s not rocket science, right?” So what makes it so difficult for so many of us? “There’s the lust for whatever you don’t have,” says Hallock. “We’re surrounded by innumerable objects of desire, and innumerable images of how the other half (or at least the top 1 percent) lives.”

Perhaps the biggest financial danger we face is our own optimism. Human beings tend to assume there’s always time, and that nothing bad will happen to us. Being financially literate involves more than good stewardship of our funds. It’s also about how we protect the well-being of those most important to us. That requires, among other things, building good habits—and planning for bad luck.

The First Steps

Your twenties are a time of professional and personal exploration. For most of us, it’s a time in life where we’re not making a lot of money. Still, as you’re getting established and starting to support yourself, you need to make a financial plan.

+ Don’t delay. Start saving and planning right away. Erik Jackson ’05, a Denver-based financial planner, suggests asking yourself questions such as these: What do I want to be able to do at certain points in my life? When do I want to retire? Although these aren’t questions you can answer definitively in your twenties, it pays to start thinking early.

+ Create a budget. It’s a way to create “a strong foundation,” says Diya Luke ’01, a corporate investment professional in the Atlanta office of global advisory and management firm Willis Towers Watson. After covering your monthly expenses, putting aside savings, and making loan payments, she says, budget “the more disposable forms of income” so that you’re living within your means.

“Several years ago, our family took a year off to travel around the world,” Luke recalls. “We were able to do that only because we had planned for it.” The planning she and her husband have done provides them with the flexibility to take on interesting opportunities as they arise.

+ Plan for retirement. “When you get your first paycheck, you should be thinking about how much you can allocate to retirement,” Luke says. There are plenty of opportunities to maximize your participation in workplace retirement accounts, especially if your employer matches contributions to a 401(k) plan or health savings account. “If you’re not taking advantage of those things, even in your 20s, you’re leaving money on the table,” she says.

Online resources can help you calculate how much money you will need for retirement. If you set aside $200 a month for retirement starting at age 25, with a return of 6 percent per year, you’ll have nearly $109,000 by age 65. If your employer matches that amount, of course, your money is doubled. Consider this a kind of “modest-case” scenario. As your income climbs, you’ll want to put aside more money. If you have a job without a pension—and that’s the case with more and more of us—you’ll need to do so.

The Middle of the Journey

As you enter your thirties, responsibilities increase. That often means home, children, and some new debt—and more opportunities to save and invest. There are also plenty of risks to face and manage.

+ Consider working with a financial advisor. As life gets more complicated, so too do our finances. To help sort through the options, it can be helpful to get outside expertise. Planners can assist with tax management strategies, kids’ education funds, and retirement investments. Deutschlander sees himself as “more of a life planner than a financial planner.” He helps clients understand how they can express their values through their money and how they can give back—to their community, family, and the world.

Many aspects of financial management can be confusing for non-experts. For instance: Wills are not the only option for designating beneficiaries for your estate. Wills are subject to probate, which can be slow and costly for your heirs. Trusts and transfer on death (TOD) plans bypass the probate process and can provide tax-reduction benefits, though these options also have their drawbacks. A financial planner can help you sort through the pros and cons of each.

STUDENT LOANS

Repaying student loans is one of the biggest financial challenges faced by many recent grads. Macalester’s Office of Admissions and Financial Aid offers advice on handling loan repayments.

Brian Lindeman
Brian Lindeman

Office staff spend at least an hour discussing with student borrowers their rights and responsibilities, says Brian Lindeman ’89, assistant vice president of admissions and financial aid. Mostly, he says, “we want them to know they need to pay attention.”

Most notably, Lindeman tells students to pay attention to communications from their lenders. And if they do find themselves having trouble repaying student loans, he says, they should communicate with the lender earlier rather than later. Late payments can lead to additional fees and lower credit scores. And being delinquent can be even costlier, in both senses.

Repayment options are plentiful, Lindeman notes. If you’re unemployed or otherwise in financial straits, there are options. In short: “Be proactive. Don’t avoid it, hoping it will go away.”

+ Take care of yourself. “Ultimately, no matter how much money you have, if you don’t have your health, you’re not going to be able to live life to the fullest,” Hallock says. Having a lot of money won’t overcome a lifetime of bad health habits. To Hallock, “physical and fiscal fitness should go hand in hand.”

+ Be attentive to the risks that could affect your family. But bad things, of course, can happen even to people in good physical shape. You can do everything “right”—and still have something go tragically wrong.

Think it can’t happen to you? Jackson tells of a client in his forties who died in a car accident shortly after his wife gave birth to twins. Fortunately, he had taken out a life insurance policy. “If that had not been there, it would have made it very difficult” for his family, says Jackson. Even people without children should consider life insurance because if one partner dies, the other can be left in dire straits.

But an even more likely occurrence among younger people is disability. People in their thirties, forties, and fifties can suddenly find themselves facing a cancer diagnosis or a careerending stroke. Death, disability, sickness—good financial planning, Deutschlander says, “factors these in” and helps you and your dependents manage those risks.

+ Build a cash cushion. You should have readily available an easily accessible sum of money, particularly in case you or your spouse should suddenly lose a job. People in their thirties and forties are advised to have enough cash on hand to cover three to six months’ worth of expenses. That will give you the time you need to find a new job or another income source.

In establishing that backup cache of cash, Luke suggests considering your livelihood and the volatility of your sources of cash. Do you have a salaried position, or is your main income less predictable? If the latter, she suggests building a bigger cushion to help fund unexpected expenses.

+ Take on debt—but cautiously. The daughter of Indian parents, Luke grew up in Egypt, India, Belgium, Japan, and the United States. The first debt her parents took on was the mortgage they took out when they moved to the U.S. As Luke puts it, “taking on debt was not mainstream,” for her family or for their culture. After she graduated from Mac, she was surprised to learn she had a terrible credit score because she had never taken on—and paid off—any debt. “I’ve learned since that low-cost debt can be good, especially when you’re using it for investments such as education or housing.” That’s why Luke recommends “embracing debt as your friend, as long as you do it in a measured manner, and understand the cost of the debt you’re taking on.”

STOCKS AND BONDS

Stocks, bonds, and investment funds are a key part of any personal financial plan. Joyce Minor ’88, the Karl Egge Professor of Economics at Macalester, teaches an annual introductory class on investment banking. She offers three pieces of advice for current and future investors:

+ Don’t overthink it. “For most of us, keeping it simple is the way to go,” Minor says. Most 401(k) and Roth IRA plans offer “set-it-and-forget-it” options, such as target retirement funds, that automatically rebalance the portfolio’s mix of stocks, bonds, and cash based on your age and other factors. “It makes it easy for most investors to achieve their investment goals,” Minor says, adding that these are good options for those people “who have no interest knowing a lot about finance.”

+ Have complex financial needs? Find a good financial advisor. If you have significant assets, a basic retirement account will not be sufficient. To protect those assets, you’ll want to look at a balance of tax strategies, trusts, charitable giving, and other options.

+ Don’t put many chips in the stock market. “Individual stocks should be a small part of people’s portfolios,” Minor says. Most of us should stick to investing in mutual funds, which put money into dozens of stocks in order to spread the risk. Indeed, Minor says, “you should dabble in individual stocks only with money you’re willing to lose.”

But how much debt is “good”? General guidelines are not always optimal, says Deutschlander, citing a common one, the 28/36 rule: Do not spend more than 28 percent of gross income on monthly housing costs nor more than 36 percent of gross income on total debt service, which includes car payments and student loans.

To that standard guideline Deutschlander adds this caveat: Debt enables you to receive something today, but will reduce your ability to spend future income. From his perspective, a “reasonable” amount of debt is defined as “as little as possible.”

That said, the one form of debt you absolutely should avoid is credit card debt. It’s not clear that Americans have learned this lesson. Data from the U.S. Census Bureau and the Federal Reserve released in August noted that the average American household has $16,425 in credit card debt, an amount that has risen 10 percent since 2013. A household with that level of debt, making a monthly payment of $500 a month, would rack up interest payments of $6,503. Immediate gratification has its consequences.

+ Regularly re-evaluate your financial position. Though she did not spend her career in personal financial planning, former corporate financial consultant Sharon Hewitt ’73 does see many parallels between the two fields. One example: Just as a company does, a family should annually evaluate its financial situation to see how its financial plan is proceeding—and how it might need to be modified. Having a financial plan is essential—but that plan needs to be flexible as your life changes.

+ Talk to your kids about money. Although Hewitt had a successful career in financial services and consulting, working with international banks before retiring in 2014, she still wishes her schoolteacher parents had talked with her about money and personal finance as she was growing up: “I would have started some good financial practices earlier.” For one thing, says Hewitt, she would have started saving as soon as she got her first job so she wouldn’t have had to catch up later.

Imparting good financial habits to kids is something close to the heart of Andre Lehmann ’71. After a 30-year career in banking and the leather business in New York and his native Brazil, Lehmann retired and now devotes his time to helping others, including at-risk kids in Florida. One of his goals is to guide them in developing good money habits, including budgeting and planning. “When they get into the workforce, [this financial savvy] does make a huge difference,” Lehmann says.

+ Talk to your entire family about money. As Deutschlander notes, “the topic of money is intimidating” to many families. But avoiding it can be financially and emotionally costly later on.

In middle age, many people are financially supporting not only their children but also their parents. What’s needed, Deutschlander believes, is “multi-generational planning,” something “unfortunately, very few people talk about.” Your parents, for instance, may one day require long-term care. (So might you or your spouse.) Though still expensive, it’s less costly to buy long-term care insurance as early as possible.

Towards Retirement and Beyond

Will you have enough money for a comfortable retirement? Many people are counting on Social Security—“an often misunderstood component,” Deutschlander says. “It was never designed to be the sole source of income for one’s retirement.” If you’ve saved and planned, working with financial advisors when necessary, you should be able to access needed income from such sources as retirement account dispersals and life insurance annuities. You might also want to continue working, at least part time. If you’ve planned well, you’ll work because you want to—not because you have to.

Death is another financial consideration. Keeping your will up to date is crucial. Factors such as the death of your spouse or partner, remarriage, and grandchildren could require you to change your beneficiaries. Not keeping up with these changes might mean that your money won’t go where you wish it to or could result in unintended familial enmity.

Financial literacy can help you live a good life. But to truly reach your goals, says financial advisor Hallock, “you will also want to share what you have, and prepare the next generation.” To achieve that kind of legacy, you need to prepare. And keep in mind that proverb about the best-laid plans.

Gene Rebeck is the Northern Minnesota correspondent for Twin Cities Business magazine.

November 1 2017

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