VENTEUR spoke with Faron Daugs, a Certified Financial Planner™and wealth advisor with more than 30 years of experience, about how to master one’s personal finances. As the founder and CEO of Harrison Wallace Financial Group, Daugs is a go-to source and trusted advisor for clients across the country. Based in Libertyville, Illinois, Harrison Wallace Financial Group provides comprehensive wealth management services and a consultative approach to help entrepreneurs, executives, self-made millionaires, and generations of families meet their financial goals. Daugs has been awarded Chicago Magazine’s Five Star Wealth Manager Award several years in a row and regularly shares his financial advice with trusted publications.
Financial literacy is understanding how money can work for or against you. I believe many people struggle with it because they do not understand the relationship between income vs. debt, assets vs. liabilities, and how compound interest can impact your situation positively or negatively.Â
When I talk to many young investors, I can see the “aha” moment when they realize the power of putting even a tiny amount of money away from each paycheck today and the impact they can have on their future. I also get that moment when people realize how long it will take them to pay down a credit card balance if they only pay the minimum amount due. These are fundamentals that, truthfully, I wish were taught in high school but need to be understood to make sound financial decisions.
Today, many resources are available to investors online and in publications, and more employers are now offering “financial wellness programs” to their employees. In my experience, many people do not take advantage of these resources because they feel those things are for people with money to invest. Ironically, this person should be looking to learn from these resources and programs.Â
Seek out programs that teach financial basics from the ground level. Attend your company’s enrollment programs to understand everything available to you as an employee and how they can benefit your financial situation. Continue to strive to learn and seek out advice when struggling with financial decisions. Your decisions today can have a long-term financial impact on your future.
I believe one of the most effective ways to manage your money is by setting goals. Once you have a goal established and understand what level of savings it takes to reach that goal, monitor that goal regularly every six months to see where you are in terms of progress towards that goal.Â
Start small, like taking a vacation. Determine how much a vacation will cost you and how much you will need to save every month to achieve that goal. Understanding what it takes to achieve a goal and how hard your money needs to work for you will instill a sense of achievement, more confidence, and better money management practices in your day-to-day financial life.
One of the most effective strategies for saving more money is by paying yourself first. By this, I mean every single paycheck, you set aside an amount automatically deposited into either a savings or investment account. By doing this automatically, you are systematically transferring money from your income statement (your check) to your balance sheet, which helps increase your net worth.
Another way is by having money taken directly out of your paycheck into your company’s retirement plan. This also helps impact your budgeting because you will not or should not spend what you do not have in your checking account.
The 401(k), or your employee retirement plan, is the best way to help you prepare for retirement. This allows you to have money sent directly from your paycheck to an investment account of your choice. This may be on a pre-tax basis, saving you Federal Income taxes today, or if you have a Roth 401k option, you will pay taxes on your contribution today, but then the investment grows tax-free and remains tax-free when you use it in retirement. Additionally, there is generally a company match where the company will add a percentage of your salary into the plan. It’s free money and a great benefit.
The 401(k) typically allows you to put the most money away per IRS regulations. With the pre-tax contributions, your investments will grow tax-deferred until you start to use them in retirement, then you will pay taxes on any amount you withdraw. If you use the Roth 401k option, you do not pay the tax on withdrawals, only the contributions. Be aware that these plans are designed to encourage long-term saving for your retirement, so there is a 10% penalty on any amount you withdraw before age 59 ½.
When helping clients reduce debt, we look at all their liabilities: mortgages, auto loans, personal loans, and credit cards. Then we focus on those with the highest interest rates and on paying those cards down the fastest. After the highest debt is paid off, we go to the next. During this cycle, we also want to be sure we are not adding to the debt, and once we pay a one-off, we close that account.Â
It is essential to understand that you will still need to pay the minimum requirement to the other loans or lines of credit while focusing on paying off the highest-interest debt. You should also maintain healthy cash reserves to pay out unexpected expenses when the bill comes. This takes some time, so you need to be patient. If larger loans like a mortgage are low interest, we may not focus on paying that off sooner than it is due, but this is a must for high-interest cards and loans.
Venture capital investments can be very speculative. While many people are drawn to them because of the potential return, it is essential to include them in a portfolio only as a small portion. I recommend you not invest any more than you are willing to lose. Be sure your core portfolio is in place and on track to help you achieve your various goals. Once this is in place and you have discretionary investment dollars, it could be reasonable to consider investing a small portion in VC assets.
In this case, it is not about being better. It is about which investment provides the best opportunity for potentially better returns than the other. There are several types of risk when investing: market risk, interest rate risk, geopolitical risk, and purchasing power risk. Today we are experiencing more purchasing power risk: the risk that your dollar today will not be able to buy the same amount of goods in the future. If it takes you $100 to buy a bag of groceries today and it costs you $108 to buy those same items next year, you will need to have investments that have the potential to keep up with this rate of inflation over time. If your investments are earning 2% and inflation is at 4%, you are losing 2% a year in purchasing power risk.Â
Your investments need to be aligned with your goals. Investments in the stock market are generally for longer-term goals, as they can weather the market's ups and downs and movements and keep up with inflation over time. As you get closer to retirement, you would adjust those investments to be less aggressive and reduce the amount of potential fluctuation. Shorter-term investments typically will have a lower likely rate of return. However, they will not fluctuate as much and may be more appropriate for shorter-term goals. Understanding how the long-term impact of inflation will affect your long-term goal will give you valuable information on how much you need to save and how hard your investments need to work to achieve that goal.
What types of insurance should we consider being covered by, and why?
There are many different types of insurance, and depending on your financial stage, your need for those insurances will be higher than at other points in your life. For example, renting, you will need renters’ insurance. If you own a home, you will need homeowners’ insurance and liability insurance, commonly referred to as an umbrella policy.Â
Additionally, you will need the basics of automobile and health insurance. Beyond that, you should consider long-term disability insurance, which may be offered in your employee benefits package. Many people do not take advantage of this coverage. However, your ability to earn an income is one of your greatest assets. Therefore, your income deserves some attention to be covered if you cannot work due to a disability.
Also, long-term care insurance tends to be more appropriate as you get older and closer to retirement. Then there is life insurance, which depends on your liabilities, family situation, dependents, and financial goals. If you have a spouse, it is a good idea to see what they would want “covered” if something happens to you. After all, they will be the survivor left to handle the finances. It is a challenging subject to discuss, but it is important. These insurance coverages should be reviewed at least every two years.
If you are new to stock market investing, start slowly. Set up systematic savings into an investment so you buy at different monthly prices: this is called dollar cost averaging. Dollar-cost averaging allows you to buy more shares when the price is low and fewer shares when the price is high to help reduce the risk of buying all your shares at a high price. Don’t do it alone. Find some help if you have questions, but don’t let it hold you back from getting your investment portfolio started as soon as possible. Your future self will be happy you did!
