MP spoke with Dr. Jay Zigmont, CFP®, about how to master personal finance. Zigmont has a Ph.D. in Adult Learning from the University of Connecticut and is a Certified Financial Planner™. He is the founder of Childfree Wealth, a life and financial planning firm specializing in helping childfree and permanently childless people, and the author of the book “Portraits of Childfree Wealth.”
What is financial literacy, why do so many people struggle with it, and how can we become more financially literate?
One of the challenges is that people often view financial literacy as a one-time event and a one-size fits all program.
In general, we don’t learn well that way.
In adult learning, it is explained that adults learn what they want when they want it. To truly improve financial literacy, it must be a continuous process and reflect our unique situations.
For example, I work with childfree and permanently childless people.
A recent study out of Michigan found that 1 in 5 adults are childfree.
The problem is that most (if not all) financial education and rules of thumb assume you have children and therefore don’t fit childfree people.
I have built a unique financial literacy program to address this need and common problems for childfree people. It may be that other groups need a similar approach that fits their needs to make sure they are constantly improving their financial literacy.
How can we manage our money more confidently, and what would this look like in practice?
Confidence often gets mixed with competence.
We need to start by building our competency in managing money.
Competency starts with budgeting, getting out of debt, setting goals, investing, and saving.
The challenge is that there is a lot of shame, judgment, and regret about money, which may prevent us from asking for help on the basics.
The basics set a foundation for our entire financial plan, and once we have them down, we can start building confidence.
Start by giving yourself a break from the mistakes you have made in the past. We have all made money mistakes.
I made my first million before I was 21 and spent it by the time I was 25.
I learned from my mistakes that I can improve, but it takes time.
With money, especially on a budget, the key is not to get it ‘right’ but to improve each month.
Start reading more, ask for help, and get the basics set.
Then move on to saving and investing.
How does our health affect our wealth, and what can we do to ensure we’re on track to a prosperous future?
Wealth is not just about money.
Wealth includes being able to live the life we want, which is a balance of time, health, money, and more.
With health and money, we should focus on incremental improvements over time. The problem is that if you don’t have good health, then money does not matter, and if you don’t have money, it is hard in the US to get good healthcare (or even good nutrition).
The challenge is to start where you are and make just one small improvement each day.
I am much better at money management than improving my health, but I am still working on improving both.
Budgeting and Saving
What three out-of-the-box strategies can you share to help us improve our personal budgeting, and why these three?
1. Remove Your Credit Card From Apps and Stores
Remove your credit card from online stores and apps and move to a prepaid debit card. Using a prepaid debit card will prevent you from going over your budget as it will run out.
2. Automate As Much as You Can
Budget for all your monthly ‘musts’ (what keeps you fed and a roof over your head or you are required to pay) and have that money come directly from your paycheck to a separate account. Set up auto drafts to go with it, and you will never miss a monthly payment.
3. Force Yourself To Live on Less
My mother always said that leftover money ‘burns a hole in your pocket.’
Work on automating accounts, savings, and investing, and keep your bank balance slightly lower. We won’t bounce our account for most people, so it naturally cuts back on our spending.
What strategies should we use to save more, and why might these be the most effective?
It may sound odd, but getting out of debt will allow you to save more.
With rising inflation comes rising interest rates.
You will not be able to make more in a savings account than you can save by paying off your credit cards.
Make getting out of debt a priority, and then once you are out, you can save more.
What steps should we take to reduce our current debts, and why?
You need to make getting out of debt a priority and a goal, not just a nice-to-do thing.
Start by locking your credit cards so they can’t be used, and stop taking out any more debt.
Then make paying down debt a priority, not something you do with what is ‘leftover.’
Set a goal to pay off $6k of debt this year, and then put it into your budget (i.e., $500 per month).
You can follow either the snowball method (paying off the smallest debts first) or the avalanche method (paying off the highest interest account first), but the key is to make it a priority either way.
What are three commonly made debt reduction mistakes, and how can these mistakes be avoided?
1. Thinking Bankruptcy Will Help
Bankruptcy should be a last-ditch effort.
You can’t get rid of many debts through bankruptcy, including money owed to the IRS and student loans, and it may not change the behaviors that led to the debt.
2. Thinking About ‘Good’ vs. ‘Bad’ Debt
The concepts of good and bad debt are marketing tools.
All debt is debt.
Focus on getting out of consumer debt first; then, you can set a plan to pay off your house.
3. Using Debt Consolidation Companies
Debt consolidation companies are just moving things around and rarely making progress while charging you a fee.
You can negotiate down old, past-due debt just as they can.
What ‘rules’ should we follow when investing?
The only rule I encourage people to follow when investing is this:
Only invest in things you understand.
Understanding an investment includes understanding WHAT you are investing in, HOW it fits into your financial plan (and goals), and WHERE it should be held (which accounts, mainly regarding taxes).
Take the time to learn about investing.
Your investments do not need to be complex to work.
Check out books like “Simple Path to Wealth,” “The Little Common Sense Book of Investing,” and “A Random Walk Down Wall Street.”
What types of insurance should we consider being covered by, and why?
Insurance needs to reflect you and your life. For example, with my childfree and permanently childless clients, there tends to be very little need for life insurance, but disability insurance is a more significant need.
Life insurance has little usefulness when you don’t have a next of kin.
The goal of life insurance should be to provide income after you pass to someone relying on it.
Life insurance makes less sense if you don’t have anyone relying on your income.
We all also need to have a plan for long-term care.
You need to either set aside money for long-term care or get a long-term care insurance policy, ideally in your 40s (as it is the cheapest then).
Medicaid provides for long-term care only after you have spent everything you own.
You are responsible for your long-term care planning and need to put money toward it.