What Matters When It Comes to Your Finances

We speak with Stuart Ritter, CFP, Insights Director at T. Rowe Price about what investors should keep in mind when it comes to their finances and how consumers can best position their investments. Ritter also shares what the biggest expense are for every age group and how consumers can tackle record high credit card debt levels.  

What matters when it comes to saving for retirement?

Here are three top things that matter most when it comes to saving for retirement:  

1. Start early! 

Starting early affects your final balance. You’re contributing more, and that money has more years for potential growth. Both increase your final balance.

2. Target 15% of your gross salary.

That includes any match you might get from an employer.

3. Save throughout your career.

The longer you save, the more you will have.  

What are the biggest expenses for every age group?

According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, housing expenses make up about 1/3 of everyone’s spending. The second biggest expense for just about every age group is transportation, at about 15% of spending.

Decisions people make in just those two categories account for about half of all their spending. It then affects every other aspect of their lifestyle (what’s available to spend on clothing, entertainment, vacations, coffee, etc.).

Credit card debt is at an all-time high, what do consumers need to know about tackling this area of finance? 

Despite credit card debt being at an all-time high, it might come as a surprise that more than half of American families pay off their credit cards, in full, every month. It’s been that way for the last 30 years, according to the Federal Reserve’s Survey of Consumer Finances. If you’re paying off your credit cards, in full, every month, you’re in the majority.

There’s an old saying: if you’re in a hole, stop digging. For those who are carrying a balance, make adjustments so you stop adding to your balance. Then, pay down your debt using one of two approaches. The first approach is to pay as much as you can toward the card with the highest interest rate (while paying the minimum amount on all the others). Then target the card with the next highest interest rate, and so on. This technique gets you out of debt the fastest. The alternative approach is to pay as much as you can toward the card with the lowest balance (while paying the minimum on all the others). Then the next-lowest balance, and so on. This technique gets you the fastest emotional payoff.

Any tips for how to maintain and grow a budget?  

Decide if your spending matches your priorities. To do that, track your spending all the time. If that feels like too much, try this: Pick just three categories and track those for one month. You might choose categories like eating out, clothing expenses, and entertainment. No judgment – just see where some of your money is going.  Then decide if your spending matches your priorities.

Spend and save your money for what you want and adjust along the way as your priorities shift. That’s what budgeting is about.

How can consumers best plan and prepare for retirement?   

Planning emotionally for retirement is equally important as planning financially. In a survey conducted by T. Rowe Price, only one out of three people had made a serious effort to plan emotionally for retirement.

Think about the five Ws – Who, What, Where, When and Why: 

Who you’ll spend time with

What activities you’ll engage in

Where you want to live

When you’ll retire

Why – your sources of meaning and purpose

Once you have your answers, share them with other people – like your spouse or partner.  You may find that they have a different perspective.  Better to discover that now when there’s time to reconcile any disparities.

What are some of the top decisions to make when it comes to achieving a financial goal? 

Consider these three decisions to achieve any financial goal: 

1. How much to save

How much to save is, by far, the most important decision you will make. You can’t invest your way out of a bad saving strategy! 

2. What account to use

What account to use means getting tax benefits for the goal you’re pursuing.  For retirement, that could mean using accounts like 401(k)s and IRAs (Traditional and/or Roth).  For college, it could be a 529 plan.

3. How to invest

Choose a mix of stocks and bonds (your asset allocation) based on your goal’s time horizon and your personal circumstances like risk tolerance. Diversify within stocks and within bonds. Then decide how you’re going to implement the plan you’ve put together. You could create, monitor, and regularly adjust your own portfolio; hire a financial professional; or choose an investment that includes those elements. Think of it like choosing between a manual transmission car and an automatic transmission. Here are some resources to help you.

How does investing fit into retirement? How important is it to invest? 

Next to how much to save and what account to use, how you invest has the biggest influence on your retirement balance. Invest for the years leading up to retirement and the potential 30 years after retirement. Investing for retirement with the understanding of historical long-term returns helps with choosing the right mix of stocks and bonds. 

How can consumers best position their investments?  

Positioning your investments involves three components: 

1. Asset allocation

Asset allocation is the mix of stocks and bonds appropriate for your goal’s time horizon and your personal circumstances like risk tolerance. The longer your goal’s time horizon, the more in stocks.  As that time horizon shrinks, your asset allocation shifts from stocks to bond. 

2. Diversification

Diversification means owning different kinds of stocks and different kinds of bonds.  If you’re overweighted in one security or sector of the market that unexpectedly does worse than average (remember, no one invests in something because they expect it to perform poorly!), your portfolio’s overall return will suffer. 

3. Implementation

Implementation is thinking about how you’re going to keep your plan on track.  Will you do it yourself or get help? Once you’ve set up your plan, stick to it. 

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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