Episode 47: Where to Invest Your Next Dollar

Isaac Wright: Well, hello everyone. Welcome to the December year end show of Wright Money Tips. I’m Isaac Wright and I’m here with lead financial professional advisor at Financial Dynamics as well, Ricky Lafon. And Ricky, I hope you’re ready for Christmas or at least getting to the point of holding your breath and holding on with both hands.
Ricky Lafon: Absolutely. Trying my best.
Isaac Wright: You know, today, what I wanted to do is a lot of times we talk about retirement. We talk about being at a point where maybe you have to make lifestyle decisions. Today’s program is a little different.
I want to talk a little bit about what is going on when it comes to your income, the savings that you are having maybe earlier in your working career. Maybe considering because the cost of living has gotten to be so high, everything is so expensive and maybe you don’t have the income left over that you used to have or have had to use some of your savings for emergencies. I mean, there’s a whole litany of things. But what do you do with that extra dollar that you have today that maybe otherwise you haven’t thought about in the past?
And so, Ricky, when we talk about this, let’s focus on what I would say is some of the building blocks of when should you take that dollar and put it in your savings or when should you take that dollar and put it into your investments and which one do you choose? And maybe let’s start by saying, I guess, a little bit about what is a good step or two or good first steps about taking that dollar and deciding what to do with it?
Ricky Lafon: Yeah, that’s a great conversation to have and very timely as well. So, we always want to make sure as fiduciaries that our clients have an established emergency fund. You’re famous for saying, what happens if we wake up tomorrow and life is different? We want to make sure we’ve got that emergency fund we can turn to for copays, deductibles, helping out family, whatever the case may be. Is that funded? That’s number one.
Number two is insurance. When we talk about insurance, a lot of people think their auto and their home insurance, but also health insurance as well. Are you adequately covered for the level of financial assets that you have? Are you adequately covered for the family situation that you’re in? These are things we have to talk about as well.
And then thirdly, we have to talk about debt. With the rising interest rate environment that we’ve had, do we have high interest rates on our debt? Do you have a plan to start paying that off? Have you started paying that off? These are things, foundationally, we have to talk about. Once we get a plan in action here, then we can talk about investing and further saving your next dollar.
Isaac Wright: So, what I’m hearing you say is number one is to consider your emergency fund and how much money you have sitting in a place that has easy access to it without penalties. Now, you all have always heard about the general rule of thumb is three to six months of emergency expenses. We can help you a little bit, let’s call it, bring that into focus. If you just want to take that general rule of thumb and do what you will with it, so be it.
Number two is, like you said, insurance. And I want to make sure everybody hears this. So, insurance, of course, you want to make sure you’re covered for any catastrophic events: death, disability, things like that, especially if you have loved ones that depend on you. But then you also said liabilities. And when I think liabilities in today’s interest rate environment, especially what I would say are variable rates if you have credit card debt or other debt, that’s north of 15, 20 percent today. What would you choose there? Would you pay down credit card debt or make sure that extra savings is maybe looking at going into some form of insurance?
Ricky Lafon: I think you have to cover yourself with insurance first. As long as you’re making your payments and you have a plan to pay off the debt, you need that insurance first and foremost.
You know, I always use the example, if a client leaves our office here and someone runs a red light and you get into a car accident, there’s your auto insurance and your health insurance. You have to make sure that you’re covered, that those bills are paid. That if you’re still working, that income replacement piece of the insurance is still there, and then you can continue to pay down that debt, but you just have to be financially wise with that debt and have a plan to pay that down. But insurance, I would say, comes before the high interest debt.
Isaac Wright: Okay. Well, you know, another thing too that we get questions on, and again, this can go sometimes both ways. You may work at a company that allows you to put money into a 401(k) and they match you maybe up to a hundred percent of that first three percent as an example. Maybe you can put three or four thousand dollars a year into a 401(k) where the company matches that another three or four thousand, where do you fall? How do you see that? Where do you see that falling in terms of the priority list?
Ricky Lafon: I think that once you have those foundational things we just talked about, that’s a great option for you. And I know we’re famous for saying here at Financial Dynamics, if you’re getting a match on employer sponsored retirement plans, that’s free money that you have coming in, so please take advantage of that.
And then there may be some other local companies here that offer a stock purchase plan, an employer stock purchase plan. That’s a great idea to get into as well, as long as it doesn’t interfere or conflict with any short-term or higher priority goals. It’s a great way of building wealth.
Isaac Wright: You’ll be amazed, we get that question quite often, but again, if you only have 100 dollars sitting in your savings account, and yes, you may get 100 percent of a match from your company, not a lot’s going to matter if you have to pull all that money back out.
There may be a vesting schedule depending upon how you pull the money out. You maybe take a loan out of your retirement plan if it’s a 401(k), but that defeats the purpose. You may wind up defeating the match. And so, I would even say that probably in the realm of what we’ve said here, your savings or the money that you have at the bank and not having to increase your debt and your liabilities at a tune of 15, 20 plus percent interest rates on credit cards, we really want to make sure that you at least have enough liquidity for that emergency situation.
So, you’re not running rough shot back over the money you’ve contributed into your retirement or having to, let’s call it, have a credit card paid off and then you’re putting it all right back on there.
And let me be clear, today’s world is probably the toughest to get some of this done because, again, the cost of living, the cost of your rent, your mortgage, we talked about this in our last month’s episode, lifestyle, gas, and groceries.
So, where your next dollar should go, Ricky, emergency funds, make sure they’re adequately ready. If you are shortchanging yourself, especially severely on insurance, especially health insurance, you have to kind of pay attention to that. I could also argue disability and life insurance, and those things aren’t normally talked about as much.
We talked about, again, we’re kind of talking about when to invest money. Maybe number one is, before we get to investing, is making sure that if the company offers you a match, that, again, goes into consideration, and if you’re paying down your debt, maybe you can take on the matching program if you have a way of knowing that you have enough income coming in to pay down the debt.
But if you had a dollar and you had to choose between a matching program or reducing down the debt, you have to, I want to say this, you have to pay the minimum payment every month. So be careful about how much you have to pay in credit card debt, let’s call it for example, after you meet those minimums. I could argue that there is some opportunity to put money into the investment side in a fully matched retirement contribution.
Ricky Lafon: I think you’re right there. And you know, life’s about balance, right? You have to have a balanced approach, and that’s the reason I started off with if you have that higher interest debt, you have to have a game plan to pay that off. Does that mean you have to sacrifice your whole financial future to get that paid off? Not necessarily. But, we have to be good stewards of what we’ve been entrusted with. So have that plan to pay it off, and it’s about balance. Put something in that 401(k) for tomorrow as you’re paying down that debt. As long as you’re not incurring new debt, you’ll be fine.
Isaac Wright: Let me just kind of open ended. What else can you think about when it comes to having that discretionary dollar that you don’t want to spend and you do want to save? What are some other thoughts you have around that?
Ricky Lafon: Yeah, well it comes down to your risk tolerance as well, you know. How do you want to invest that? As long as you have that emergency fund saved, you’re maximizing your opportunity with whatever retirement plan you have. And if you don’t have one, we can set up an IRA, etc.
You can talk about investing, but it has to align with the goals that you’ve set for yourself. You know, are you saving for something that’s specific, that’s more short-term? Are you getting that new car? Are you getting that new house? Are you saving for college, for a child or grandchild, things of that nature? Do you save for those things? Do you invest for those things? It depends on your risk tolerance and the time horizon that you have for that money to sit there and grow. Then we can talk about educating you on everything that’s out there that you can choose from and customize that to your financial situation.
Isaac Wright: Yeah, that’s probably a good thing to say because actually when it does come down to it, if you’re putting money into an IRA, whether you’re getting a match or maybe you are in a position where you have a significant amount of discretionary money. I’m not trying to tell everybody’s hand to mouth. If you have that, then obviously you want to make sure that the investments you choose are appropriate based upon, again, like you said, time horizon, risk tolerance.
These are basic principles that we can help you with here at our office. But, you know, we’re getting into 2024. And so, why we wanted to say this is because, you know as well as I do, you get the New Year’s resolutions going. You want to make sure that you’re kind of doing that financial checkup. You know, we did a financial checklist at the beginning of 2023. You’re going to see that come back through in 2024, because normally this is when you want to kind of take stock of this stuff.
So, you know, Ricky, when we again, big picture here, some people have more dollars than others for sure, but these dollars you do have to prioritize where they go.
Ricky Lafon: You do. And you know, to your point, if you can sit down now and create that game plan or sit down with a financial planern or call us for an example, get that together now. 2024 will get off to a great start for you and your family.
Isaac Wright: Yeah. Well, listen, we didn’t want to have a long-winded show today here in the holidays. You all are running around with your hair on fire probably. But just want to say thank you for just being a part of our program. Thank you for listening in and we’re always here to help. So, from ours to yours have happy holidays and we’ll talk soon.
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