Paul Jr. started off the year with four more columns in The News-Gazette’s Business Extra section, covering the top three New Year’s resolutions and dividends.
Top Resolutions: Spend Less
Paul R. Ruedi, CFP®
Fidelity recently performed its 2021 New Year Financial Resolution Study, and found that once again the top three financial resolutions among Americans are saving more, paying down debt, and spending less. These are three fairly broad goals, and are seemingly interrelated as well. Since most people will need to spend less in order to be able to save more or pay down debt, we’ll start there.
A great starting point when it comes to achieving the goal of spending less is actually getting a realistic grasp on how much you spend in the first place by tracking your spending. There are a ton of helpful apps and websites like mint.com that help you track and categorize your spending. If you are lucky there will be some places where it will be obvious you have been “treating yourself” a bit too often and can make cuts with a minimal impact on your lifestyle.
With an idea of your baseline spending, it will be helpful to create a budget and stick to it. Spending less requires discipline – and making a budget with concrete spending limits for different categories can make it easier to be disciplined and balance your spending throughout the month.
There are often ways to lower your spending while still receiving practically the same thing. I think the way TV and movie services have changed is a great example of this. Tons of people are switching from traditional cable to lower cost alternatives like Netflix, Hulu, ESPN+, HBO Max, or other apps and standalone services. These services provide all the entertainment you could want, for a fraction of the cost of a traditional cable TV service. You can also switch to generic brands that are practically the exact same product in a different box.
There are also a lot of things that people spend their money on that they can get for free. I have found myself enjoying a lot of free entertainment and exercise lately. I think health is a great investment and worth just about anything you can spend on it, but there are plenty of ways to exercise for free.
YouTube has a ton of great exercise videos – I love yoga videos from Yoga With Adriene’s YouTube channel. There is a ton of great entertainment and educational material available for free on YouTube and similar sites as well. At least there is for nerds like me who enjoy documentaries, lectures, audiobooks, and the occasional podcast. Regardless of where you are trying to save, the best thing is to make a plan and to put it in motion.
Top Resolutions: Save More
Paul R. Ruedi, CFP®
Fidelity recently performed its 2021 New Year Financial Resolution Study, and found that once again the top financial resolution among Americans was saving more. Last week I discussed how to spend less and make sure there is more money available for saving, but today I want to discuss easy ways to increase your saving.
A great way to make sure you increase the amount you save this next year is by automating the process as much as possible. Set up automatic monthly transfers to a savings account, brokerage account, or retirement plan through your employer. I find it is easier to save money before you ever have the opportunity to spend it, rather than hoping for money to be left over at the end of the month.
If you already have some form of automatic saving, or are very diligent about saving on your own, that’s great! You can simply increase the amount you automatically save. Most people won’t really miss an extra 1 or 2% of their salary going to savings, and even seemingly small amounts can have a large impact on how fast your savings accumulate. For example if you are currently saving 5% of your income and increase that to 6%, you increase your savings rate by 20% at a minimal cost to your lifestyle. Don’t feel bad if you can’t do it all at once – you can always increase your saving in small increments over the course of the year to give yourself more time to adjust.
Another one of the best ways to increase your savings is to make your employer do it for you. Many employers match their employees’ contributions to their retirement accounts up to a certain percentage of their income. Make sure you are taking full advantage of that benefit, otherwise you are leaving free money on the table.
Savers can also set up and contribute to a traditional IRA or Roth IRA to have a designated place for saving and also receive some tax benefits as well. Whether you defer taxes now using a Traditional IRA, or save on taxes later using a Roth IRA, lower taxes means more of your savings and investment growth stay in your pocket.
If your lifestyle simply will not afford you any extra dollars to save, evaluate if you can cut expenses in your investment portfolio by switching to low-cost index funds instead of actively managed funds. Lower expenses means more of your money stays in your pocket, a boost to your savings that requires zero extra effort on your part.
Top Resolutions: Pay Down Debt
Paul R. Ruedi, CFP®
Fidelity recently performed its 2021 New Year Financial Resolution Study, and found that once again the top three financial resolutions among Americans are saving more, paying down debt, and spending less. Debt hanging over people’s heads has a big emotional impact, and it is no surprise people want to be free of it.
When it comes to paying down debt, many people are working to balance multiple obligations like a car loan, student loans, credit cards, or possibly even a mortgage. People often struggle deciding which piece of their debt to really focus on first, and sometimes the numbers can make that fairly obvious, but other times there are human components that may take priority.
The mathematically optimal way to pay down debt the fastest way possible is by paying down the highest interest rate debt first. High interest credit card debt should be paid off first, then lower interest rate debts like student loans, until you get to the point where only low interest debt like a mortgage remains.
But there are also many people who think it is more important to emphasize the human side and mental reward of completely paying off one of your pieces of debt. In this case a person would pay of their smallest debt first, regardless of interest rate, because it is the shortest route to the feeling of accomplishment a person can get from closing out a debt that was hanging over their head.
My job as a financial planner is usually to prevent people from acting on emotion and pursuing a course of action just because it makes them feel better, and I don’t want anyone to think I am an enabler of bad habits by suggesting someone could pursue a path that is mathematically “sub-optimal.” Quite frankly, it isn’t something I would do myself because I am just a stickler for optimizing the mathematical side. But given the choice between empowerment or frustration as people start taking responsibility for their own financial well-being, I know which one is more likely to reinforce good habits and set someone on a path to financial success.
Whichever route you choose, make sure to create an explicit plan of action and stick to it. Though it may seem far away now, eventually your diligence will result in completely paid off debts. My recommendation at that point is that even though you have paid off your debt, keep the habit and start regularly saving a similar amount.
Paul R. Ruedi, CFP®
One of the benefits of stock ownership is the payments they make to investors, called dividends. Many stock investors like dividends because they provide a return in the form of actual cash, or in additional shares of stock, instead of price appreciation which can only be reaped when a stock is sold.
Individual companies set their dividend payments, which is usually a certain dollar amount for each share an investor owns. These dividends are taxable to the investor in the year they are received when the stock is held in a taxable account, even if the dividends are reinvested. In the case of stock dividends, companies usually designate a fractional amount of shares to be distributed for each share an investor owns. Stock dividends are not taxable until the investor sells the shares of stock they received.
Companies declare what dividends will be in advance on what is called the “declaration date.” It will be paid to everyone who holds the stock on a certain date, called the “record date.” The “ex-dividend date” usually occurs a day before the record date, and if you purchase a stock on this date or later you will not receive the dividend. Dividends are then paid on the “payable date.”
Dividends may sound like a great thing, but there are other ways to look at dividends that may make them seem less appealing. The first is that companies that pay out dividends instead of reinvesting in themselves may be a sign that they are not confident in their ability to invest the money to grow the company. The second is that since the companies choose to pay them, they can choose to stop paying them. When they do this, the stock price naturally gets crushed, making the damage to investors even more catastrophic. This played out with bank stocks during the financial crisis, for example.
Additionally, focusing on investing in dividend stocks as a strategy lowers the amount of companies you have available for investment. This inevitably results in a portfolio that is concentrated in a handful of high-dividend stocks. Leaving the fate of your entire investment portfolio in the hands of a few companies can be a recipe for disaster.
Though dividends make up an important portion of the returns stocks provide, and they tend to arrive in cash form, investors shouldn’t focus too much on this single feature. Whether a company pays out a dividend or its stock appreciates in price makes little practical difference to investors. Investors should put more focus on being adequately diversified, keeping costs low, minimizing taxes, and remaining disciplined.