planning your way to better financial health

Planning your way to Better Financial Health

John Brennan and Rick Ciolino from Cape Ann Savings Bank sit down with John Maher to talk about financial planning. They look at financial strategies that can carry people from college graduation to retirement, and they talk about the unique financial concerns people face at different stages in their lives.

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Transcription Disclosure: Below is a transcript of the conversation between John Maher, John T. Brennan and Rick Ciolino. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, senior Vice President of Trust and Financial Services, and Rick Ciolino, Trust Investment Officer at Cape Ann Savings Bank in Gloucester, Massachusetts. Today our topic is Planning Your Way to Better Financial Health. John and Rick, welcome.

John Brennan: Good morning.

Rick Ciolino: Hi there. Good to be here.

What Is Personal Financial Planning?

John Maher: Yeah. So what is personal financial planning? What does that mean?

John Brennan: Well, personal financial planning basically relates to all financial decisions and activities of an individual or a family, that includes budgeting, insurance, savings, investing, debt service, and mortgages. Financial planning involves analyzing your current financial position and predicting or planning for short term or long term outcomes and, or needs. And to put it much more simply, it's the economy of your home and your personal life. Just as the nation has its own economic status. This is microeconomics rather than macroeconomics.

Financial Planning Tips

John Maher: Okay. And so what are some financial planning tips that people should follow in general?

John Brennan: Well, the first is to have some plan, period. Okay. Try to approach your financial life with some plan of forethought and don't just react to what's going on. Some very basic things are having some level of organization in your life, having some way where you track bills, where you collect mail, where you have a sense of what the money is coming in and going out. So in this seminar, hopefully we can just apply some of these tips and provide some of these tips to the listeners.

John Maher: Okay. Yeah. So why don't you walk through some of the tips that you have for people in terms of their financial planning?

John Brennan: Okay. Well first of all, let me sort of point out one of the things that is sort of in the American ideal is each individual is independent and their success sort of depends upon their labor. This is a notion that's a core American identity myth, where it goes back to the notion of a farmer whose success depends upon their labor. The sort of notion of a Horatio Alger character whose hard work leads to benefit.

However, one of the things I'll point out is that since the day where this sort of myth has come to life, financial life has become substantially more complicated. Typically, it's not taught in school. People learn it over the course of their life. And sometimes there can be cultural or even emotional factors at play. We all sort of have the notion, I think as it's a very American notion I'll point out, but the notion that hard work equals success.

Okay. And that following up on that, one of the things that applies to personal financial planning, and I sort of articulate this because I think it's good for people to just think of, is money sort of speaks to values. How you spend your money reflects your values, and what you are planning for. By and large people plan for three big things in their life. They're planning for their eventual retirement where they separate from work, they're planning for the education of their children if they have them. And then the other thing they're planning for is healthcare.

Some of these are partially provided for by the government and government entitlements, but the degree to which the comfort of your retirement, the quality of your healthcare and your education will depend on the assets you bring to bear. So, here's some tips that I recommend people follow after college, especially after college and when they get launched in the world.

1. Be Organized

Number one, be organized. Okay? It's not hard. I know a lot of people resist organization, but at the very basic, at the beginning of each year, and this is me following my own advice, I get an accordion folder that is a folder that opens with a bunch of big pockets and I put in tabs for each month, and then I use that as the basis of organizing my own personal financial life. So, if I get something important, maybe something I need to add to my taxes or an insurance policy, it goes in the front pocket. All my bills for January go in the January file. All my bills for February, go in the February file. So, these little receipts or bills, they all get organized by month. So, if I do have to refer back to them, they're there. Okay. That's being organized and that system applies for right after college because that's a good time to get organized.

Oftentimes, young people are experiencing their first experience in the workforce. They're discovering that the paycheck they receive has some deductions taken out of it, but they also have workplace benefits such as a retirement savings account, perhaps some kind of healthcare benefit, and to get on track with that, it helps us start early. Part of getting on track with that and starting early is one of the things we've talked about in some of the prior webinars or podcasts we've had here, is the power of compounding interest.

2. Start Saving Early

And one of the things you should do as soon as you are eligible for some kind of retirement system, it makes sense to put a little bit of money away. And then I say a little bit of money, there's really two avenues. One is for a qualified retirement account where you're putting money in, say a 401(k) or IRA, the advantage of this is that money then does not get taxed by the government. So, if you get paid $30,000 a year, you put $5,000 of your salary into a 401(k), that 25,000 is what appears on your taxes. Now, 5,000 is invisible to the government so long as it stays within a qualified plan, and it compounds, hopefully.

And you don't touch it until you're age 60 or 59 and a half. So, that's a good deal. The other thing too is employer matches. We talked about that in another podcast where we talk about how, if an employer matches some kind of retirement plan, you should take that because it's a layup, it's very easy, meaning it's a no-brainer, it's really free money. If they match up the 3% of your salary, put away that 3%, bingo, you've got 6%. So these are ways where it makes sense to get started early.

3. Pay Down Debts

The other thing too is that a lot of kids are graduating with student loans and makes sense to attack that debt as much as possible because once you are paying off debt, one of the savings cycles, typically it's not unusual for people to start their careers in debt, but once you pay that debt off, you can start accumulating assets and start truly saving and building your wealth, however modest that be. So, once you have these retirement pieces set up, it also makes sense to just have some kind of rainy day fund.

Put 50 bucks aside. Now, the reason for this is it's just ballast. If you're working, and I usually tell people, keep it simple. One checking account, one savings account, and one credit card. We can get into credit a little bit deeper later, but the checking is really your operations. This is where your salary goes, this is where you spend and pay from, you do your grocery shopping from, you pay your rent, et cetera. But you have a corollary savings account where you're trying to build something, even if it's something you have to tap into when you need it and then, well, you start again. It's always good to have some kind of savings account or rainy day fund in case of disaster, in case you have a car problem, in case the heating goes out, in case you have a big bill. Having some kind of ballast insulates you from financial shocks that show up in people's lives. It just happens and it helps to have some kind of ballast. So, those are my sort of starting out tips.

Importance of Saving Early

John Maher: Right. Rick, do you think that it's important for people to start saving early and why?

Rick Ciolino: Well, certainly. John mentioned the aspect of compound interest. Certainly if you think about letting your money grow over time for whatever your goal is, whether it be as John said, could be for buying a house, could be for college, could be for retirement, and especially for retirement because I think a lot of people forget about retirement in the end, trying to live day-to-day.

The earlier, you start putting away the longer time period you have for that money to grow. So, if you grow a certain amount over time, and for 30 years, you're going to be growing that every year for 30 years. You may decide that you're going to wait till you're a little bit older because you like the spending money when you're younger, which is unfortunately a lot of people end up doing that, and what they find themselves doing is they're putting more money in each year, just to try to make up for what they could have put in if they started earlier because they have shorter time before they need to start using the money.

Rule of 72

John Maher: Right. Related to this is something called the rule of 72. Can you talk a little bit about that and explain what it is?

Rick Ciolino: Yeah, it's a fun little concept, actually. Basically, the rule of 72 applies to the compound growth of an investment. It's math, so it applies to compound growth of anything. It could be in talking about expenses and credit card bills just as easily as it can be for an investment. But the way we like to look at it on the investment side, is it's a way to calculate a return over a time period.

So, if you calculate the projected time period for investment and you want to know when that will double, so you would simply divide 72 by the expected rate of return. So, an easy example of that would be if you expect to earn 10% a year, divide 72 over 10%. In 7.2 years, your investment will double. Also, you can look at that backwards too. If you're going to earn 7.2% on your investment, if that's what you project, that's going to take 10 years to double. So, it is a fun little concept, but it makes a lot of sense and it's worth watching and a good way to judge what you think you can earn in the future.

The Importance of Credit Scores and Insurance

John Maher: Okay. And John, what comes next as people are starting to get older, you know, mentioned starting to save money right after college and putting money into a 401(k), and rainy day fund, and starting to plan for your retirement. Now you're starting to get a little bit older and what are some of the newer things that people need to be thinking about in terms of their financial health?

John Brennan: Well, a couple of things. One of the things I mentioned earlier was the notion of having some kind of credit card, the upside of having some kind of credit card — where you have to be careful and you have to avoid overspending and try and pay it off as quickly as you can — is it builds your credit rating. So, as you go forward and as you hopefully get to the point where you can potentially buy a house, that's the big purchase really, a good credit score would potentially help lower your overall interest rate when you borrow that money. A good credit rating is usually a good thing to have just in terms of even applying for certain jobs or going to try and sign a lease for an apartment. So, it's sort of one of those qualities of adult life that helps. Okay. So I do recommend that.

The other thing too, you do have to think about is insurance. Because as you have money, as you have assets, you need to protect yourself from catastrophe. And the way you do that is insurance. It probably starts out as renter's insurance. When you become a homeowner, you have a homeowner's insurance. If you have automotive, you want automotive insurance or auto insurance, and of course health insurance. What insurance does, is it insulates you from catastrophic risk. Okay. And part of personal financial planning is managing that risk. Insurance is a tool which does that. So as life goes on, likely you'll have the complexity that comes with needing to ensure yourself well. So, these are things that you kind of have to start to think about as you age.

Aligning Your Goals for Retirement

John Maher: And then what else should you be thinking about as you're getting even older and you're getting close to retirement age?

John Brennan: Well, two things I always tell people, if you want to work with a planner, it usually makes sense to do it five to ten years before you're actually retiring. So, you can start to align some of these benefits because that's the kind of thing where maybe you can go to your HR or get a sense of what is potentially coming your way. And then also it makes sense to know what your social security benefits are. That's a biggie. Just some sort of stats on social security.

Social security, I probably don't need to define it for people, but it's essentially it's a government income for retirees. And social security, while it's diminished somewhat in its importance, it's still very important for retirees. For instance, in 1985, social security was 65% of someone's pre-retirement income. It's down to 41%, but it's still a pretty important 41%. So, that's something you kind of want to line up.

Now, you might want to line up potential healthcare costs, at least know what it is. Hopefully you can get to the point where you pay off your mortgage. I think it's great if you can go into retirement without that kind of debt. And then the other thing to do, another contingency along the lines of insurance is estate planning. Estate planning is planning for assets following the end of your life. But the other piece to that is it is planning for potential disability, which is honestly, more people use that. More people need that 30% of people need that prior to, in the last stage of their life. So, it's a pretty important thing to have covered.

Role of a Financial Planner

John Maher: So now that we've talked about all of these different things that people should be thinking about in terms of their financial health over the course of their lifetime, or at least their adult lifetime, for sure. What is the role of a financial planner when it comes to organizing and looking at all of these different aspects?

John Brennan: A financial planner helps you harmonize all of these assets, aspects. The other thing a financial planner can do, one of the things that I provide, I know for customers is sometimes just a sounding board. They think they're behind or they're concerned about where their position is at their life stage. We all approach retirement with the assets we have, not the assets we wish we had.

So, one of the things a planner can do, sometimes it's small moves over time that make a big difference. So, it's good to have some kind of plan, try and make your savings automatic, try and put away some assets so you have the power of compounding interest, working at your bag. But the advantage of a planner is that hopefully can create some insight into your situation, harmonize what you've got and help make sure all the pieces fit together.

Contact Cape Ann Savings Bank to Talk About Your Financial Health

John Maher: All right. Well that's really great information, John and Rick, thanks again for speaking with me today.

John Brennan: Sure thing.

Rick Ciolino: Thank you John.

John Maher: And for more information, you can contact Cape Ann Savings Trust and Financial services at 978-283-7079 or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings, Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed and may lose principal value.