planning your way to better financial health
September 2, 2021
John Brennan and Franco Maniaci from Cape Ann Savings Bank sit down with John Maher to talk about financial planning. They look at financial strategies that can carry people from college graduation to retirement, and they talk about the unique financial concerns people face at different stages in their lives.
Transcription Disclosure: Below is a transcript of the conversation between John Maher, John T. Brennan and Franco Maniaci. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
Planning Your Way to Better Financial Health (Podcast)
John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Vice President and Senior Trust Officer, and Franco Maniaci, Trust Investment Officer, at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, we're talking about planning your way to better financial health. Welcome John and Franco.
John Brennan: Hi John, thank you.
Franco Maniaci: Hi John, glad to be here.
What Is Personal Financial Planning?
John Maher: So John, let's start kind of at the beginning here and tell me a little bit more about what is personal financial planning?
John Brennan: That's essentially all financial decisions and activities of an individual or sometimes a family that includes budgeting, insurance, savings, investing, debt servicing, and then even estate planning falls under this umbrella, because planning encompasses, as you might imagine, your long and short-term needs.
The way I like to think about this, this is essentially the economy of the home, or the economy of the personal life, and how do you create your own personal economics and systems that not only sustain you, but also transport you and bring you through the various sorts of life stages that come in adulthood.
Financial Planning Tips for the Young
John Maher: So talking about estate planning, is that more of a long-term thing where we're looking at something that's a little bit more far off into the future?
John Brennan: Well, estate planning is part of the picture and I'd say that one of the things that happens is that estate planning is probably not as relevant for a 20-year-old as it is for a 50-year-old or a 60-year-old. So, it's one of those things that comes as maturity comes into your financial life.
1. Use Money Wisely After College
John Brennan: So when you're 20, let's say you just graduated college, okay, the slate is clean, maybe you come out, you have some debt, but the number one thing that you do is you try and get a job and hopefully get some income. Then the initial, those first few tender steps are hanging on to some of that money, okay? If you have some debt, you get a plan to pay it off. Once you have some income in, how do you use that wisely and how do you create those structures and buckets where you can hopefully save some money and leverage it on a go-forward basis, okay?
2. Plan for Retirement Early
John Brennan: So as far as that goes, when we're kids, we have piggy banks, some of it's some of the same principles, except the vehicles get more sophisticated. One of the things that is, I think maybe counter-intuitive, but Franco and I both know this, is that when you come out of the gate, one of the things you do is you should start planning for your retirement. That has to do with investments in compounding, and maybe I'll just pass the baton over to Franco in a sec here, but what you want to do is you want to start setting some money aside for your retirement.
3. Organize Your Finances
John Brennan: So baseline, here are a couple things I recommend. People need to be organized in facing your finances. A lot of people bring a lot of stress to the table, they get concerned about money. I recommend people get just an accordion portfolio for each month and you put your bills in it. It becomes manageable that way. It gives you something you can use as a data set, and you also start to get a sense of what the regular payments are. I mean, monthly, that's kind of easy, but then as the year goes on, you might incorporate bills that you pay once a year, say something like insurance or something like that.
4. Set Up a Savings Account/Rainy Day Fund
John Brennan: So first step, get organized. Second step, set up some buckets, think about retirement, and then third step is leveraging that, okay? I always recommend a baseline checking account. That's somebody's operations account. Money comes in, you pay a little something, you pay your bills from that. I recommend a savings account for the unexpected expense that might come up. A car repair, maybe you want to go on a vacation or something like a guy might need to buy a new suit for an interview or something like that. Savings account where you can accumulate hopefully some kind of emergency fund. These numbers can range, but what you want to have is you just want to have a little bit of a cushion there.
5. Reap Tax Benefits From Your 401(k)
John Brennan: Third, ideally you work for an employer where you can start to contribute to an employer-sponsored retirement plan. The advantage of this and the classic form of this that everybody's really kind of familiar with now is a 401(k), okay? A 401(k) is essentially a retirement plan where an individual can take money, put it in the 401(k), deduct it from their income so they don't pay any taxes on it, and put it in a 401(k) where they can invest it and that money will grow. The catch is, is this money, think of it as putting it in sort of like a cocoon or an incubator or a terrarium, the rub is you have to put the money in, but you can't take it out until your retirement age. To that end, Franco, maybe you want to speak about some of the why's... on why you would start so early and some of the benefits that you gain from starting early.
Why You Need to Save Money
Franco Maniaci: Right, John. I would start by saying, it's never too early to start saving, and it's never too late to start saving, but the more you're able to save earlier means your retirement savings will have that much more time to grow. By investing early and staying invested, you take advantage of what you mentioned, compounded growth.
You may have heard the term make money on your money, that's the concept behind compounding. You're able to earn from your investments when they're reinvested, and that accumulates so that the amount of your assets are reinvested, it can grow.
By investing in a retirement plan like a 401(k) or 403(b), you get that benefit of compounding, but you also get the tax deferral benefit. Your retirement account can grow much faster because you don't have to pay taxes on it. As long as it stays in a 401(k) or IRA type vehicle, you can continue to defer taxes until you make a withdrawal. So it's always great to start early, but it's never too late to start.
Rule of 72 in Investing
John Brennan: Hey, Franco, one of the points that I think you make with clients, which is a good one, do you want to explain the rule of 72?
Franco Maniaci: The rule of 72 is the amount of years it takes for money to double. So if you had a 10% return, you would take 72 divided by 10, and assuming you had a 10% return, your money would double in 7.2 years. So in the stock market, historical return is around 9% to 11%, so you could assume that your money in the stock market would double in seven to eight years.
The Importance of Insurance
John Maher: All right, so those are great things to be thinking about as you're younger. Like you said, college grads and just getting their first jobs, things like that. What are some of the next things that people should be thinking about as they get a little bit older?
John Brennan: Well, as people age, one of the other pieces they should have in mind is some kind of insurance, okay? Obviously, you want to have health insurance. This is something that people should always consider in their compensation package, you want to have good health insurance. Going with this sort of younger grad theme, renter's insurance can make a lot of sense, it's often very cheap and helpful. I think most everybody knows, I think the first kind of insurance most of us face is car insurance, okay?
Building Up Credit to Improve Financial Health
John Brennan: So, we have our young grad and the grad's kind of moving along, accumulated a little savings, what comes next is the thought of the big purchases as somebody sort of moves forward in life, and that is usually the purchase of a home. So, one of the things that you would do is you ... as I alluded to before, savings helps. So people start to save for maybe some kind of down payment, they want to be able to approach a lender and get some kind of mortgage.
So, one of the things that comes in the early stages of financial life is building some kind of credit. That means perhaps taking out a credit card and putting some money on it and paying it off and building up your credit score, as well as accumulating assets so that perhaps one day you can have enough to buy a home, either on your own or perhaps with a spouse or a partner.
Why You Need Life Insurance
John Brennan: So, that's just another angle as you develop with your finances. After that, for young families one of the things that you need to be aware of is life insurance, okay? When you have children, I would say really that's the real cutoff. A lot of jobs these days, there's tax incentives to have insurance about three times of your salary. That's often a feature of a lot of professional jobs and a benefit that a lot of workplaces offer, which are really pretty cheap.
But once you have a child, one of the things you need to think of is that if an accident would happen to either spouse and you lost income, either from the breadwinner or if the non-breadwinner didn't have any income, you need to replace that. Life insurance, term life insurance, something that would last 20 years, 25 years over say the childhood of a child is that type of insurance for a family. So, that's another piece of prudent financial planning to take on when you hit that sort of gate or life stage.
John Maher: So, is the intention there to just make sure that if you happen to die early and your kids are still young, that they would be taken care of until the point where they're able to go out and get a job and work on their own?
John Brennan: Exactly. Something to pay the mortgage with, something to pay their education expenses with, because you don't want to be in a position, and you see this, when people die prematurely, you don't want to have to go to GoFundMe, you want to have something that can replace that income. So, that's the role that life insurance plays in a complete personal financial picture.
Estate Planning After You Have a Child
John Maher: Okay, and then what are some of the things maybe that people should be thinking about as they're getting much older and facing retirement or even later in their life?
John Brennan: So one of the things too, is that also I'll point out with the birth of a child, which obviously is important, I mean, I would say in the personal financial planning perspective, two big things would be buying a house and becoming a parent.
When you become a parent, the other thing you need to be aware of, this is where probably estate planning becomes more relevant. Because one thing to be aware of, when you're a young single person, and let's say you're accumulating money in a 401(k), 401(k)s, and in fact, IRAs and most retirement plans, what happens is you have a beneficiary form and you can name someone the beneficiary of your account.
So if you're 25 and you're paying in a 401(k), your estate plan is essentially you writing a name on that beneficiary form. Pretty straightforward. Then once you're married, pretty straightforward, have a spouse and you do the same thing. But what is tricky is that once you have a child, and if you need to appoint a guardian for your child in case of disaster, you need a will for that.
So that's the first time where I would say estate plans and wills really kind of take on real material relevance, because it's something you would want to be aware of and you want to know that that's the instrument that the court will honor in terms of appointing legal guardians for your kids.
How a Financial Planner Can Help
John Maher: Okay, and then maybe just as a final thought, maybe talk a little bit about a personal financial planner and what your role is in helping your clients to navigate through all of these different things throughout the different stages of their life, and organizing what sounds like an awful lot of things that people should be thinking about.
John Brennan: Yeah, so I would say, with our work at the bank, with most young people, I'm kind of talking to them and kind of coaching good behaviors. Franco and I know we get a lot of rollover IRAs. Rollover IRAs are when somebody leaves a job and they're no longer connected to that 401(k) which is based on their workplace. What we recommend there is somebody roll that money over into an IRA where they can manage and direct the investments better on their own.
One of the things that happens is we've sort of talked concisely about an era of somebody's life that could take 20 years or 30 years. A couple of the other planning pieces that fit into this picture, as you can imagine, there's the financial planning we were talking about elements of, but also encompassing this as retirement planning, because that's what people are essentially planning for.
There's three big expenses in one's life typically, and that's planning for healthcare, planning for retirement, and then planning for housing, okay? That's usually the big three. So, retirement's a big one. We talked about Social Security in one of our other podcasts, but to supplement Social Security takes some personal responsibility and some planning, preferably as when we heard from Franco about compounding, that preferably it takes place over decades, not in a 10 or even a 20 year span.
John Maher: All right, well, that's really great information, John and Franco. Thanks again for speaking with me today.
John Brennan: You got it, John. Anytime.
Franco Maniaci: Thanks, John.
Contact Cape Ann Savings Trust & Financial Services for Help Saving
John Maher: For more information, contact Cape Ann Savings Trust & Financial Services at (978) 283-7079, or visit the website at capeannsavings.bank.
Investments purchased through the Cape Ann Savings Trust & Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.