Allison Dubreuil, Wealthway Financial Advisors: New Year New You, right? Getting your body in shape, probably. Maybe getting your mind in shape. Let’s get your finances in shape. Three simple stages you can take yourself through this year to set yourself up for financial success are to: detox debt, get a healthy savings plan or habit. And then put your money to work for you by investing. We’ll talk about those each specifically. And what you can do first debt detox, you might have gone a little overboard when it comes to Christmas. And you might have had to use the credit card to buy all the gifts that you wanted to give. Debt though – consumer debt, specifically credit card debt or high interest rate debt is really a big no, no. You want to try to wipe that out as quickly as possible so that you don’t pay unnecessary interest charges on those expenses. Really carrying your credit card balance is a no-no. And you want to try to get out of that as quickly as possible.
Kevin Zywna, Wealthway Financial Advisors: It’s really a drain on your net worth. It’s a sign of overspending. Now, certainly, it can happen from time to time for a variety of reasons, maybe a big vacation or Christmas time you went a little bit overboard. Or you had an unexpected emergency and hadn’t quite yet built up that emergency fund so you had to put it on a credit card. Well, that happens from time to time, that’s life. But efforts should be directed to that immediately to pay that down as quickly as possible. Because among the worst forms of debt is consumer credit card debt because it’s the most expensive and it’s sort of the easiest to use as well which makes it harder to go away. So, focus on that credit card debt.
Allison Dubreuil, Wealthway Financial Advisors: Trying to pre-save for big expenses that you know are coming up like you know, Christmas will be the same time next year. So maybe you pre-save for that or you pre saved for the vacation instead of racking it up on the credit card. If you are in the position where you have significant credit card debt. How do you get out of that? Well, there are a couple of strategies.
One is called the avalanche strategy, we’re going to go with a winter theme here. The avalanche, where you target the highest interest rate credit card or loan first. So, you put every extra penny you can towards the highest interest rate card or loan. When you pay that off, regardless of balance, you apply all that money to the next highest interest rate. Financially, you’re tackling the one that’s costing you the most first. So that can be a great strategy. But for some people, depending on the balance, that might not feel like you’re making much progress very quickly,
Kevin Zywna, Wealthway Financial Advisors: If the highest interest rate debt is also your largest debt, then it could feel like you’re just pounding rocks in a prison yard day after day, and you don’t see much progress. Get whittling down that big and so it can be demoralizing. And then it could cause people to stop on motivation. So what is most important is that you pick a strategy and you stick to it.
Allison Dubreuil, Wealthway Financial Advisors: The alternative strategy, then I like to call the snowball strategy. That’s where you start with the smallest balance, regardless of the interest rate, you attack it. You get it paid off, probably more quickly than the biggest balance. Then you snowball your payments on to the next card. Get that paid off. Snowball on to the next card. So, you start with the smallest and you can get some momentum, you feel some progress. And hopefully you can stick with the plan.
Kevin Zywna, Wealthway Financial Advisors: And I have always seen a lot of parallels between personal finance and weight loss. Little steps of progress are motivating, and they keep you on the path to your ultimate goal. And so that’s why using the snowball technique, starting little, get that taken care of, gives you sort of a sense of self satisfaction. Then attack the next one, then you feel like I got this and then you go off to the next bigger one. And all of a sudden, you’re making real progress. So, it might not technically be the most financially expedient way of going about it. But ultimately, the end goal is to get all that bad debt paid off. And if that’s what it takes to do it, then that’s the approach you take.
Allison Dubreuil, Wealthway Financial Advisors: And the other part of the whole call to detox. if we’re making a comparison to fitness, the other part of the detox is to take a look at your spending. It’s always good to know what you’re spending and where so that you can identify any areas that you might want to change or just make different decisions. A lot of people have no idea how much they’re spending. The credit card companies will give you a handy dandy report at the end of the year that will show you every penny and where it went into what category. So, if you use your credit card a lot, you can just pull up the annual summary and you can see where all your money is going. And then you may choose to make different decisions, or you may not, but at least you know where you stand.
Kevin Zywna, Wealthway Financial Advisors: So, it’s sort of an easy way of creating a budget, which most people aren’t going to say the B word, I know. Because most people won’t do a budget on their own. It’s sort of too big, too restricting, too difficult. So, people aren’t going to create a budget because they can’t stick to it. And it doesn’t work. But there is value of knowing where your money is going and framing where some of that money is spent. So that you can make sure that you are operating as most financially efficiently as possible. Paying down bad debt, and then redirecting cash flow into higher earning long term investment vehicles. First savings and then ultimately, you know your company retirement plan investments. And that’s how you build net worth over time.
Allison Dubreuil, Wealthway Financial Advisors: Let’s call it a spending plan. Instead of a budget, we will say a spending plan even brought it up. It doesn’t mean you have to cut necessarily but you know, again, by looking at what you have been spending you can determine if your spending truly aligns with your values. If it’s really getting you where you need to go or if not, if it’s not, where are you willing to make some adjustments. Start by detoxing debt and looking at your spending and maybe coming up with a spending plan to make sure where your money goes is a value to you.
Kevin Zywna, Wealthway Financial Advisors: Once you know where your money is going, then you can make good, healthy, conscious financial choices going forward. When you don’t have any idea feels like your water running through your fingers. It just, you don’t have control over it. And when you don’t have control over it, you’re most likely to make bad decisions. And you’re most likely to stay mired in debt or never get yourself on good solid financial footing. And then the days turn into weeks turn into months turn into years and you look back 10 years later, like wait a minute, I haven’t really accomplished much from a financial perspective, and retirement is looming. So that’s why good financial habits are the foundation to a good financial plan.
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Allison Dubreuil, Wealthway Financial Advisors: We’re talking about getting your finances in shape for 2023. The first stage we talked about was debt detox. Get your debt paid off and develop a spending plan. Moving on to stage two, once you have a hopefully a clean slate, you can start developing healthy savings habits. Saving is a little bit like a muscle and has to be worked out. You can build up – you can start small and build up. But the important thing to do is to start at a minimum.
If you have an employer sponsored retirement plan, you want to contribute at least as much as you need to get the company match. If your employer provides matching, that’s free money. You don’t want to leave that on the table. At least start with that.
Kevin Zywna, Wealthway Financial Advisors: Yes, a lot of times people will ask questions on how to start. What’s the secret to saving a lot of money and amassing a solid net worth? I always come back to, you’ve got to just start small. How to eat an elephant is right. Yes, one bite at a time. Right? Exactly. Sometimes people get so wrapped around the axle that they don’t see the big picture. You’ve got to just go to human resources on Monday or payroll, or online, or whoever does your pay and sign up for your company retirement plan. And just start with $25 a pay period, or $50. Don’t make it too big. Don’t make it I can’t afford it. You can afford $25 a pay period. Okay. But you’ve got to start. And so often people say, “well, I’ll wait until I get all my other bills paid. And then, I get the clothes for the kids, and then then we will start saving money.” No, no, you won’t. Because there will always be something in life that you will want to spend money on more. You have to start the habit of savings. That’s the most important thing.
Allison Dubreuil, Wealthway Financial Advisors: Yes, rip the band aid off. Don’t wait until you have the money or you’re ready to rip the band aid off. Start like Kevin was saying as small as possible and just increase it incrementally. With inflation, I think a lot of people saw pay increases. People that get regular cost of living increases with their jobs. I know government employees got pay raises, I think teachers. If you’ve got a pay raise, that’s an excellent opportunity before you start spending those extra dollars. Put a little bit of it aside into long term savings. And every time you get a pay raise, if you increase your savings, give yourself a little raise, but then your future self a little raise, eventually you’ll get to where you need to be. And the general rule of thumb, we would say, for those people that don’t have a pension, if you don’t have a pension, you want to try to work up to saving at least 15% of your household income 15 to 20% gross household income.
Kevin Zywna, Wealthway Financial Advisors: That’s before the taxes.
Allison Dubreuil, Wealthway Financial Advisors: Right, and it’s of all household income. It’s not like just one person does the savings, and the other person spends all their paycheck, we got it, you got to do the math, because it all counts.
Kevin Zywna, Wealthway Financial Advisors: So, if your household income is $100,000 then $15-$20,000.
Allison Dubreuil, Wealthway Financial Advisors: If you have a pension, if you are a GS employee or a school teacher, and you are certain you’re going to finish out your days and have a pension, that does change the calculation. You don’t have to save as much on your own because you’re paying into your pension through your paycheck and your employer’s providing that. But for anybody who doesn’t have that built-in pension 15 to 20% is your long term goal. But you don’t have to get there today. Just start somewhere and at least get the match.
Kevin Zywna, Wealthway Financial Advisors: Take the first tiny baby step – get started. And then the next step will be a little bit easier and a little bit easier after that. But if you never take the first step, if you keep delaying the first step, time marches on. And one of the greatest determinants on how much wealth you create over your lifetime, is the factor of time. And time is something we can never get back. So, starting early in your 20s, it’s a lot easier to save small amounts then rather than waiting to your 40s and trying to play catch up, because you don’t have as much time.
Allison Dubreuil, Wealthway Financial Advisors: So, let’s talk about where you should save. We mentioned employer sponsored retirement plans, that is the easiest place to get started if you have access to one. You can contribute up to $22,500 a year into a 401K, 403B, or TSP. If you are over 50, you can add to that you get the catchup contribution of an additional $7,500 this year. So that’s a total of $29,500. That’s a good chunk of change for a lot of people. So, you can put that amount away. And we’re not going to get into the new tax law that came out at the 11th hour last year. That takes effect in the next few years. But those amounts are going to be going up soon. So, you’ll have lots of opportunities to save into your employer sponsored retirement plan.
Kevin Zywna, Wealthway Financial Advisors: Yes, well cover some of the details in the Secure 2.0 Act that has just come out at the end of the year. But we’re going to let the dust settle on that. Oftentimes, when new legislation is created, there’s more confusion than certainty and facts around it. So, we’re going to let that marinate for a little bit. And probably in a couple months, we will come back with a show that delves deeper into that and let people know what changes in retirement plans there are and so forth.
Allison Dubreuil, Wealthway Financial Advisors: A lot of it’s being phased in and really doesn’t apply yet. Anyway, so more to come on that after your employer sponsored retirement plan. Another good savings vehicle is a health savings account. We talk about these a lot on the show. If you have a qualified high deductible health plan, then you may be eligible to add to a health savings account. And we love health savings accounts because they are triple tax advantaged – better than any other savings vehicle out there. You get a tax deduction for the money that goes in. It grows tax deferred in the account and it can be invested. Then, if used properly in retirement for medical expenses, the growth comes out tax free. Triple tax benefits with a Health Savings Account and we love those accounts.
Kevin Zywna, Wealthway Financial Advisors: You do have to use a health savings account with a High Deductible Health Plan. A High Deductible Health Plan means you, the employee, are primarily responsible for a big chunk of those first couple of 1000 or more expenses in any calendar year for medical expenses. But used in conjunction with a funded health savings account, it’s an excellent financial planning tool. It provides you the ability to still get rock solid insurance coverage and have some choice on where you go for medical care, because you have cash in the health savings account. So, the whole idea of having a high deductible health plan, which, you know, when we were going through the Obamacare years, those were often looked down upon and criticized. Yes, like, you know that’s low rent insurance. No, that is not the case. It’s just a different style, different technique for paying for health care services. So especially if you’re a relatively young and relatively healthy person, having a high deductible health plan means lower insurance premiums, and then you can redirect that excess cash flow into a triple tax advantage health savings account. That’s a win.
Allison Dubreuil, Wealthway Financial Advisors: To give you an idea, if you think you may be eligible for a high deductible health plan and Health Savings Account. Individuals with the correct coverage can contribute up to $3,850 into a Health Savings Account for this year, and families can contribute up to $7,500 this year. If you’re over 55, you can add an extra $1,000. So you can put a decent amount into this account. Like I said it grows tax deferred. So, it acts essentially like your other retirement accounts and can be a retirement savings vehicle.
Kevin Zywna, Wealthway Financial Advisors: Tonight we’re talking about how to get 2023 off on the right foot and some tips and techniques in order to shore up that financial foundation. A lot of people motivated the beginning the year to make some changes. Well, this is your time to do it. We’ve got some information to help you out. And just to show you how complicated and convoluted the IRS tax code is. Sometimes we have to stay up to date with the numbers we deliver for our contribution amounts.
Allison Dubreuil, Wealthway Financial Advisors: Yes. So stage one of getting your finances in shape was debt detox and spending plans. Stage two is developing healthy savings habits. We talked about maximizing your employer sponsored retirement plan contributions. If you can, we conflated some numbers there. So, the maximum you can contribute in 2023 is $22,500. Or if you’re over age 50, an additional $7,500. So that’s a $30,000 total. And then Health Savings Accounts limits have gone up as well. Individuals can contribute $3,850 and families can contribute $7,750 with a catch up of another $1,000. So, there’s a lot of numbers floating around here. And we didn’t mention this. But in case you’re wondering about individual retirement accounts, IRAs and Roth IRAs, those limits went up as well. You can contribute $6,500, this year to an IRA or a Roth IRA, depending on how much money you make. And if you’re over 50, it’s a catch up of an additional $1,000. So that’s a rundown of some of the contribution limits. And any savings is good savings. So, if you have access to any of those savings vehicles, we would recommend taking advantage of them.
Kevin Zywna, Wealthway Financial Advisors: And a lot of those numbers are going to change with the Secure 2.0 Act. They will change out into the future. This year’s contribution limits are pretty well set. But the numbers are going to change and get even more complicated in the future based on what we’ve seen already from the Secure Act. Once the dust settles on that, we’ll come back here and give you an update on all that. Right now we’re going to pause, go up to Williamsburg speak to Bill. Good evening, Bill, you’re on Dollars & Common Sense.
Caller: I would like to know, when you say fiduciary risk, I think it’s called a fiduciary responsibility. I think that’s what you say, what does that actually mean?
Kevin Zywna, Wealthway Financial Advisors: All right, Bill. Yes. Thanks for the question. Essentially, what is a fiduciary? It really has nothing to do with investments in particular and what type of investments your advisor chooses. It has to do with the duty of care that your advisor has towards our clients. So, a fiduciary is very much like a lawyer or attorney who you would hire to do what is in your best interest. So that’s what we, as fiduciaries, are for our clients. We get hired by our clients to scan the financial universe and put together a package of recommendations and advice that is in our clients’ best interests. Whether it’s in our own corporate best interests or not is immaterial, it should be immaterial. We have to give advice that is in our clients’ best interests. What we know the facts and circumstances surrounding our client and is the highest duty of care that a professional can have. And it is the highest duty of care in the financial service industry. Most people in the financial services industry who call themselves a financial advisor are not held to a fiduciary standard. They are held to a lower suitability standard and without getting into a bunch of legalese here. I’ll just leave it at the fact that suitability standard is a lower standard, it’s usually required of financial sales people who don’t have to put their clients’ interests first. They don’t have to recommend products or services that are in the client’s best interest. They have to just make sure that the products that they recommend are suitable for that individual. So, there is a very big distinction in the legal world between a fiduciary and the suitability standard. Most people don’t know about it. Most people work with advisors who are only held to the lower suitability standard, where the David’s going up against the Goliaths. But we think it’s better.
Allison Dubreuil, Wealthway Financial Advisors: And that’s why we say, when you’re looking for a financial advisor, we recommend looking for a CERTIFIED FINANCIAL PLANNER ™. Because professionals who have earned CERTIFIED FINANCIAL PLANNER ™ status, by the virtue of their certification, they are held to a fiduciary standard. And then you can go one step further and look for an independent registered investment advisory firm which would be like we talked about at the beginning of the show with Gary, which registered investment advisory firms are overseen by the Securities and Exchange Commission and they are also held to a fiduciary standard.
Kevin Zywna, Wealthway Financial Advisors: We appreciate that was a good question. We throw the word out there a lot – fiduciary. But I know a lot of people really don’t know exactly what it means or what the distinctions are. All right, any last tips before we wrap-up?
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Allison Dubreuil, Wealthway Financial Advisors: Yes, we didn’t quite get to stage three, we got to stage one and stage two. But stage three of getting in shape and financial shape for 2023 is making sure that you are putting your money to work. Savings is the first step money into the savings vehicle is the most important thing you can do. But then the next step is to make sure that you invest the money. And we can say today that this is a better time to buy than it was this time last year, this time last year markets were at all-time highs. Now we are in a pullback of 18 to 20%. So investments are on sale, and you’re buying on sale when you buy right now.
Kevin Zywna, Wealthway Financial Advisors: Yes, so just getting money into your 401K plan, for example is step one. But then step two is once it’s in the plan, where do you invest it? A lot of times the default investment in a 401K plan or company retirement plan, TSP, 403B B is a stable value fund. It’s like a savings account. Well, that’s not the point of long term retirement investment money that like a 401 K plan that needs to get out of the stable value account and into an equity type vehicle, an S&P 500 fund or a Vanguard all stock portfolio or something like that. You’ve got to get it invested in equities. Equities are where you’re going to get the largest bang for your buck the largest growth rate over an extended period of time, not in the money market accounts. So step one, get it in the plan. Step two get invested properly.
Allison Dubreuil, Wealthway Financial Advisors: And more to come. I’m sure over the next couple of months on how you can continue to put these practices into practice.
Director of Financial Planning