What Issues Should I Consider When Starting Out Financially?
Updated: Jan 9
While parenting is not a core focus area in financial advisory services, we are uniquely situated to provide valuable support to our clients who are teaching their children to become financially responsible.
Financial literacy is fundamental to financial independence and prudence. However, financial topics and skills are often omitted from a traditional school curriculum, leaving the teaching responsibility to parents. In addition to leading by example, our clients may wish to engage their children in structured conversations regarding financial responsibility. To help guide these discussions, we have created this checklist to address many of the planning issues that young people face when first starting out financially. It covers basic financial topics, including:
Cash flow management
Credit and debt management
Hi, Todd Pouliot, Gateway Financial. Feel free to visit us at mygatewaymoney.com. So, while parenting is not a core focus in the area of financial advisory services, we're uniquely situated to provide valuable support to our clients who are teaching their children to become financially responsible. Financial literacy is fundamental to financial independence and prudence. However, financial topics and skills are often omitted from the traditional school curriculum, leaving the teaching responsibility to the parents. In addition to leading by example, our clients may wish to engage their children in a structured conversation regarding financial responsibility. To help guide these discussions, we have created this checklist to address many of the financial planning issues that young people face when first starting out financially. It covers basic financial topics that include goal setting, cash flow management, saving strategies, credit card, and debt management, and risk management. Just wanted to take a moment and say, “Thank you to those that asked us to do this because the workflows and checklists and all these things are really great but unless you have a clear goal of what is going on we're not ultimately sure where we need to get and clarifying those goals is a big part of that.” So, as usual, we're going to share our screen here. And, we're just going to talk at a very high level about some issues. So these threshold issues. Do you need to understand the basics of personal finance? We want to look at reviewing a balance sheet. Understand the differences between assets, liabilities, and net worth. So those clients that work with us, that is something that we – first thing in a meeting we go through their balance sheet. Every individual home is like a business. You need to know what the revenues are – expenses are. So with profit and loss or P&L statement and look at that balance sheet. What do you own? What do you owe? And, what do you have left over? Review cash flow statements – the P&L. And, understand factors when used to project those financial models such as inflation, growth, and yield. Obviously, that inflation conversation has become quite a significant conversation this year so far. Do you need different various types of assets and forms of ownership? Do you need to identify and prioritize your financial goals? So, look at these things called SMART strategies – these SMART goals. Specific, measurable, attainable, relevant, and time-based. Do you need to compare funding strategies to meet the time horizon of your goals? You know, maybe it's a purchase of a house. Set those parameters that are specific, measurable, attainable, relevant, and time-based. So, I want to buy a house and I want it to be this much. Is it something that I can attain for a dollar amount and a certain goal? And, is it relevant? Do you really need to own a home? Well, it's relevant because I'd like to choose a location for my family in a certain area and the time is within two years or five years or whatever that timetable is. That would be a SMART goal. Not just a goal but a SMART goal if it's specific, measurable, attainable, relevant, and time-based. Cash flow issues. Do you receive income? Manage your spending so it aligns with your income amounts and intervals. And, if you have earned income, review your pay stub to understand how your total earnings are reduced to net pay. Go check out our video, “Pay Stub Review” a great flow chart in there. And, one of those things about aligning income amounts and intervals, will help you with your budgeting. Are you experiencing any gifts or other financial windfalls? Do you need to create and monitor the budget? Organize spending categories, and prioritize necessary recurring expenses over discretionary expenses. And, sometimes there's some great software and apps. And, we help our clients do that when we link their accounts to our financial planning software. And, one of the things that we always tell people or ask people, “What does money do for you, and what's important in your life?" And, sometimes we can look at those expenses and say, “You told us this was important but what the money shows are you are placing a much higher value in this area. Does that align with your goals or not aligned with your goals?” And, if it does not align with their goals we need to change the spending from this area to this area to align with those goals. So, more of a behavioral finance discussion but definitely a discussion that needs to happen. Do you need to distinguish your financial wants and needs? And, do you need to establish an emergency fund? Consider saving enough cash to cover at least three to six months of expenses. Now, mind you, in this rising inflationary environment that three to six months pool that you have possibly set on the side may need to continually be topped off because we are in a rising inflationary environment. Do you need to save for college or major purchases – car, first home, or wedding? Are you able to start saving for retirement? Consider saving in the following order. And, this is not true for everyone but we want to make sure that this is kind of a standard plan. Contribute to your employee's retirement plan to take advantage of any employer match. If your company does not offer an employee match, look at the plan closely. Have your financial advisor look at that plan and figure out – is that a good plan or a bad plan? Normally, a good plan has low expenses but I've seen some with very high expenses so you want to make sure you have that figured out. HSA contributions if participating in a high deductible health care plan. I love HSAs. Triple tax benefits there. Pre-tax going in, grows tax-free, and comes out without any tax as well if used for qualified medical purposes. Love HSAs. Max out employer retirement and IRA contributions and save in taxable accounts. Again, that's standard. We didn't talk a whole lot about Roth differentiations and tax brackets and so forth but that's a pretty standardized plan. Do you need to understand different payment methods? Cash, checks, debit cards, and credit cards, and understanding when each form of payment may be prudent. For my wife and I, we use a lot of credit cards because of the cashback options we get and then we make those monthly payments it helps us organize our budget and know where things are going, and utilize the right form of payment. Sometimes, cash is better if you can get a discount from a vendor or other areas that might work. And, compare the timing of any fees with different types of payments. So, in our state, they do charge you a credit card fee sometimes and that's when my wife and I will make a decision not to pay with the credit card. I don't want to pay additional fees. And, do you have any charitable goals? Obviously, if you've listened to my YouTube channel you know we're very interested in the cystic fibrosis foundation and we choose that as a charitable goal for us. Do you need to review the tax policies and rules that apply to you? It is certainly a big pill to swallow to understand the entire IRS revenue – tax revenue code but just understand what's relevant to you. Work with a great CPA as we have here in our office or somebody that understands you personally. Basics of federal, state, and income tax systems. Also, along with that, understand what tax planning is. “Why am I doing this now versus what my goal is in the future and the long-term future?” So, break it down into different tax goals. Other common types of tax such as sales tax, property, and payroll taxes. Do you have employment or investment income, interest, dividends, or capital gains? May need to pay taxes and file federal and state income tax returns. These payments and filings are generally due around April 15th unless extended. So, make sure you understand what those rules are for filing a tax return. And, if you are able to save, are you looking for strategies to reduce your income tax liability? Maximizing savings in 401k, 403b, 457, traditional IRA, HSA, FSA, etcetera – the list goes on and on. Also, some things I did not list here were things like deferred compensation plans and stock option plans. There are tons of ways to look at strategies to reduce your income tax liability. Asset and debt issues. Do you need to open a bank account? Compare the different offers that are out there. And again, this is for a young person. You may need a parent to co-sign for you if you are a minor. Do you need an introductory – introduction – excuse me, we do these all on the fly without any editing so if I trip over words it's okay. Do you need any introduction to investing? And, do you need a credit card? Understand how those work and different types and have the plan to repay credit card debt before incurring it. So, that's part of that budget area there. Understanding and monitoring your credit score, especially for young people. Start out with a fantastic credit card score and get ahead in the game. Do not pay more than what you should be paying for having bad credit scores which can really hurt you in the long run. So, do you need to establish good credit? Make regular payments on any existing credit card accounts. And, use a reporting service to have rent and utility payments reported. And, become an authorized user on someone else's account – so if you have a parent or close relative. And, another option is a secured credit card if you have no credit card history. The days of old – when I was in college they were handing out credit cards and they would give you a free t-shirt and everybody would sign up just to get that free t-shirt. Well, those things have changed. And, are you considering borrowing funds to finance a major purchase – a car or even college tuition? Consider, review, and compare potential lenders and payment terms. Don't just go with the first person that comes to you. Look for the best terms you can get and review the full amortization schedule in order to understand your total obligations over the life of the loan. So, that is highly important for home loans. Discussions around these and how different they are. How much money is going towards your principal versus interest early on in the loan makes a difference in the long run? Do you need an introduction to personal liability insurance, property and casualty insurance, and home and auto insurance those types of things? And, are you prepared to assume your own automobile insurance coverage? Boy, a lot of parents would be great if you would get off their auto coverage to help lower their own premiums. And, do you need future health insurance for a plan? Make sure you work with somebody who has those connections in different areas. So, we've got some contacts in the personal liability issue and talking about umbrella insurance and P&C. We also have connections on auto insurance and connections on health insurance. We can make sure we understand all the different options. So, generally, you are able to be covered under your parent's health insurance until age 26. And hopefully, you're in good health at age 26 to move out on your own health insurance. Also, look at your employer or your spouse's employer. And, there's also coverage through the health insurance marketplace, healthcare.gov. Those plans have been getting much better recently and we're sending more and more people to that health insurance marketplace for health insurance coverage. And, you may also qualify for free coverage under Medicaid if you meet certain requirements. Do you need renters insurance? Do you need disability insurance? And, should you explore life insurance coverage while you're young and healthy? That is a big conversation most people don't want to have. They usually wait till it's too late and are not healthy before they get life insurance. Do you have appropriate emergency contacts on record? Again, I've always talked about this book, In Case You Get Hit By A Bus and it talks about a lot of those emergency contacts. Do you need an introduction to estate planning basics? Again, another contact we have. We have an attorney here in-house. We just talk about those things. We have online tools now which are great and wonderful for people to do their own homework before they come in and sit with us. Will, trust, power of attorney, and living will assure your assets are titled appropriately and have your beneficiary designations for your non-probate accounts. Do you need to take steps to protect your identity or freeze your credit? And, a contingency plan regarding your digital assets. Now, this is not a list of everything but it is certainly a good starting point for most people to sit and have a discussion about, “What Issues To Consider When Starting Out?” And, if you set a good baseline or a good foundation for your financial plan, that will help you so much later on. For us, we like to target clients that are in their 30s or 40s because they really haven't figured it all out yet and some of them come to us and we just say, “You know what, you've done a great job getting yourself prepared to work with a financial planner like us and you make our job so much easier which in turn allows us to lower the cost to you.” So, make sure you have proper plans set up when you're young, and boy, those life lessons will carry you so much farther through life. So again, thumbs up. We’ve got to get as many thumbs up as we can. Our subscribers, again, thank you so much for being here and we look forward to you coming back with more suggestions. I hope you enjoyed this checklist and we'll see you next time, and have a great day.