It is critically important to understand what you want to do with your money in the near-term (goals) and what you wish to do with your money over the long-term (dreams). This will determine what you will do with your money right now in order to reach those goals and fulfill your dreams.
As an example of how a near-term goal will impact your investment decisions – say if you want to buy a house in a few years then you shouldn’t put all of your money into risky investments since you will need cash soon for a down payment. Or if you think kids are in your near future then you need to have extra cash to cover expenses.
Just of equal importance are the things you want to achieve in your life … what you dream about. Honestly, this sounds a bit cheeky, but most people our age don’t yet think of the things they wish to do in 30-40 years since there is just too much to focus on now.
Having dreams in focus (however random they may be) will help you as you sacrifice pleasure now (spending) in order to put money into your investments (saving).
Sit down with your partner and have an arbitrary conversation about your distant future or just daydream by yourself to think of things that can really motivate you to spend time on your finances and to save money for your investments.
As an advisor in my mid-30s, I frequently interact with married clients near my age who have disparate feelings about their goals with their money. Most often the differences center around each of their individual willingness to take risk, and this tends to manifest itself in two common situations.
The first is centered around their debt burdens from student loans or their mortgages. One spouse may be adamant about paying off every penny of debt before considering saving for retirement, while the other is comfortable with making minimum monthly payments and investing any additional savings.
In today’s low interest rate environment, we work to counsel debt-adverse clients to take advantage of refinancing student loans into low fixed-rate loans to pay off over 7-10 years, and to just pay the minimum payment on a fixed rate 30-year mortgage.
This enables them to have the cash flow in order to take full advantage of tax-favored accounts like 529 college savings accounts for young children, or their work-based 401k retirement plans or Roth IRAs to begin retirement savings as early as possible.
With mortgage rates at or below 4%, we review historical illustrations with clients to show how in many market environments that returns on an investment portfolio will likely outperform their mortgage interest rate, so they would likely be better off long-term by investing that additional mortgage payment instead of applying it to the loan.
The second example of wide differences in risk tolerance that I often see with young couples is how comfortable young professionals are with taking investment risk in their portfolios.
Investors our age are really “students of the financial crisis” in that we were just beginning our careers right around the time of the Great Recession (in my case I entered the financial services industry coming out of undergrad in the summer of 2007). So, our first experience with retirement savings began right around the worst peak-to-trough decline in U.S. stock markets since the Great Depression.
This tough initial experience with investing has left some young professionals favoring a more conservative investment allocation in their portfolio, or with the tendency to hold an excess amount of cash reserves. We may have one client who is fully comfortable with a 100% equity allocation for their retirement accounts, while their spouse is terrified of market risks and wants to invest in fixed income at an early age.
With long time horizons until retirement it is critical for young investors to be positioned for growth with a focus on a globally diversified equity allocation in their retirement accounts, and many times it takes work to counsel one or both spouses to buy into this strategy.