INVESTING EARLY ON IN YOUR PROFESSIONAL CAREER–OR BELATEDLY CATCHING-UP

There was an interesting article in the Chicago Tribune recently about Sophia Bera, a young woman, who changed her career path, and became a Certified Financial Planner, rather than an actress.  It is linked as follows: http://www.chicagotribune.com/business/yourmoney/sc-cons-0212-started-20150209-column.html.

At age 21, she decided to buy a house.  After that, a number of friends sought her advice on financial matters and she became so fascinated by “money questions”, that she decided to become a Certified Financial Planner.  Ten years later, she decided to open her own financial planning firm, focusing on “Gen Y” (born in the 1980s and 90s) clients, who seem to be mostly overlooked by the financial services industry.

The article doesn’t identify the amount of her experience, or whether she focused on merely general financial planning–taxation, paying-down debt, estate planning, insurance, retirement planning, etc.–or investments, or both.  So, I will address my remarks to the common sense ideas that are noted in her book.  Besides young professionals, these points may be of interest to others who are belatedly starting to get their finances in order.

Now, the CFP by itself doesn’t denote anything other than that the possessor has, at least, a minimal amount of financial services experience, and has passed a test on quite a broad range of various topics.  But for most people, who already have access to a CPA and attorney, their real financial advisory needs are normally limited to one or two specific areas.  Also, real experience is generally necessary, since an advisor needs to properly understand what the problem or question is, in order to solve or answer it.

I will paraphrase Ms. Bera’s key points as follows:

1.  Rather than focus on what is going on in the stock market or the overall economy, focus on what she calls “your own economy”.  It’s a very valid point.  Early on in any sort of a budding career, the time to set money aside is whenever you can.  Adding just a little more to your monthly 401(k) or IRA savings can add-up, especially when compounded, over a long-range horizon. Or, paying-down loans or saving emergency funds.

2.  Along the lines of one of her points, just ask a financial services firm to run a “HYPO” (hypothetical illustration) for you of how the same lump sum that was invested, in the S & P 500, both before and after some momentous incident–perhaps the WTC Attacks.  The current value of each investment, after some 14 years, would be remarkably similar even the the two beginning markets were not, when compounded over time.  Also, the two final values would be even closer if additional funds had been invested on a systematic basis.

3.  When you are starting to get your financial plan started, don’t try to do too much at one time.  Consider what your regular income is and, likewise, what your regular cash out-flow is.  If you are trying to reduce, let’s say credit card debt, get that stabilized before you try something else.  Adding as little as one percent more to your 401(k) contributions could be doubled if your employer adds matching funds.  Once again, that increased compounding over the long-term can really add up.
4.  If you do not have, let’s say, three-to-six months income built up in your emergency funds, add some one month, and next month you might consider paying-down any loans.  And then, perhaps alternate these two approaches. Remember that a reduction in loan principal further diverts more of future loan payments from interest toward principal–further accelerating principal reductions.

5.  There is only so much that a young professional can do to cut expenses, put emergency funds aside, pay-down debt and add to investments.  Once they start to look-up from these tactics, they often realize that if they can increase their regular income, perhaps by working harder or smarter, they might have more funds available, in turn, to enhance their overall financial plan.

These points are not really new or exotic; however, many people in the financial services industry prefer to focus on mysterious strategies that even they don’t really understand.  I personally have always embraced the “KISS” Theory, Keep it Simple Stupid.  And, apparently Ms. Bera has realized the value of that approach–perhaps that works best with her
Gen Y Target Market.

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  1. #1 by Marissa Huber on March 12, 2015 - 6:04 PM

    I subscribed to her blog and read the Chicago Tribune article, both interesting. I liked what you paraphrased, and seeing your thoughts as well.

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