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Young Investor’s Guide to Building a Financial Future—Part 2: Investing for Your Goals

In the first installment of our Young Investor’s Guide to Building a Financial Future, we looked at avoiding credit card debt to set you off to a healthy start, the benefits of investing over the long term and the advantages of doing so in a retirement account, such as a 401(k) or IRA.

In the second part of this two-part series, we discuss three more investment concepts every young investor may want to embrace:

  • The importance of diversification
  • The dangers of market timing and stock picking
  • The benefits of investing according to a plan that fits your personal goals

Get Diversified

Short-term market swings can challenge even the most resilient investors. However, history shows that over the long term, markets tend to smooth out and trend upward. Diversifying your investments involves spreading risk across various types of assets, not just increasing the number of holdings.

While this may make intuitive sense, many investors come to us believing they are well-diversified when they are not. They often hold numerous stocks or funds across multiple accounts, yet upon examination, their portfolios are heavily skewed towards large U.S. companies or narrow market sectors. Diversification is effective because various investments respond differently to market shifts. When one falters, others may thrive, balancing overall portfolio performance. However, if holdings are too similar, the benefits of diversification diminish over time.

In short: 

Investing in a wide range of assets from different sectors, sizes, and geographies can create a robust portfolio that is better equipped to handle market fluctuations over time.

Avoid Speculating

Focusing on broad market indices helps avoid detrimental speculative behaviors that can harm long-term returns. 

Market timing—buying and selling stocks based on breaking news and short-term market movements—often turn out poorly. Because you’re typically buying into hot trends and selling when conditions are scary, you end up buying when prices are high or selling when prices are low. In both cases, that behavior can significantly impact savings and hinder financial goals

In fact, research consistently shows that investors’ attempts at market timing generally underperform broader indices like the S&P 500, with average equity fund investors trailing by approximately 5.5% in 2023 due to poor timing decisions according to a long-running annual survey of investor behavior by DALBAR.

Similarly, stock picking can reduce diversification and increase concentration risk, where a few stocks can heavily influence your portfolio’s performance. Investors are typically rewarded for taking on systematic risk, or risk inherent to the entire market. Concentration risk is not systematic. It is specific to individual stocks and doesn’t reliably yield rewards. Holding a significant portion of your portfolio in a few stocks exposes you to outsized impacts; for example, a single company’s bankruptcy could lead to substantial losses.

It’s also exceedingly difficult to pick stocks that will outperform the broader market over time. In 2023, over 70% of companies in the S&P 500 Index underperformed the index. These results vary from year to year. But since a handful of companies often drive most of the stock market’s returns, choosing just when to sell the future losers and buy the next big winners can end up becoming an impossible—and often losing—game. 

In short: 

Timing the market can lead you to buy stocks when they’re expensive and lock in losses by selling during downturns. When it comes to stock picking, it’s exceedingly difficult to pick single stocks that will be winners, and holding concentrated stock positions can introduce uncompensated risk to your portfolio. Instead, build a diversified portfolio as part of your long-term financial plan. 

Follow a Plan That Fits Your Goals

So how should you divide up your diversified investments? Start with your asset allocation, which is how your portfolio is spread among asset classes including stocks, bonds and cash. Then base your asset allocation on your personal goals, tolerance for risk and the length of time you have to invest. 

In short:  

Build your portfolio based on your personal goals, risk tolerance and time horizon rather than chasing or fleeing hot or cold investments or focusing on generalized rules of thumb.

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk. 

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Young Investor’s Guide to Building a Financial Future—Part 1: Where Do You Start?

The future looks bright for younger investors. A 2024 analysis by the Investment Company Institute found that, adjusted for inflation, Gen Zers have nearly three times more retirement assets than Gen Xers did at the same age. This shift is largely due to improvements in the retirement system, such as 401(k)s and employee stock purchase plans.

For new investors, getting started can be overwhelming. With so much information out there, it can be hard to know where to start. The good news is that understanding a few basic principles can set you on the path to a healthy financial future.

In this first of a two-part series, we’ll cover three key concepts for young investors:

  • Getting started on the right foot by avoiding debt
  • Embracing the power of long-term investing
  • Making the most of tax-advantaged accounts

Avoid the Vicious Cycle of Credit Card Debt

Debt impacts your financial life, reducing money available for future growth. Every dollar spent on paying down a credit card bill or car loan is one less dollar that can grow for your future. Minimizing bad debt is essential for a strong financial future.

Not all debt is bad. Low-interest student loans and reasonable mortgages can be beneficial as you can follow a career path or build equity. However, high-interest credit card debt can quickly become expensive and hinder your ability to save and invest.

Credit card debt is particularly harmful due to high interest rates, often around 20% or more. If you carry a balance, interest accrues, and making only minimum payments means your debt grows over time. For example, let’s say you have $1,000 in debt on a credit card with a 20% interest rate. If you only make minimum payments of 2%, it will take you 195 months—more than 16 years—just to pay off this single debt. In that time, you will have paid $2,126.15 in interest—more than double the amount of your original debt. 

In short: 

Use high-interest debt cautiously and pay off your credit card balance quickly. This avoids debt cycles and frees up cash for saving and investing.

Stay Invested for the Long Haul

As a young investor, you may have limited funds, but you have plenty of time. Decades until retirement mean your modest investments can grow significantly.

This growth is due to compounding returns—earning returns on your returns. The longer your money is invested, the more it benefits from exponential growth.  In tax-advantaged retirement accounts, these benefits are magnified as tax-deferred and tax-free growth allows even more money to compound over time. 

In short: 

The longer you stay invested, the more your investments can grow exponentially, thanks to compounding returns.

Make the Most of Tax-Advantaged Retirement Accounts 

The government incentivizes saving for the future by offering substantial tax benefits through retirement savings plans like 401(k)s and individual retirement accounts (IRAs). 

Employer-sponsored plans such as 401(k)s allow you to contribute pretax income, with a maximum contribution of $23,000 in 2024. Additionally, many employers match your contributions, essentially offering free money. Contribute enough to receive these matches to maximize your benefits. 

During tax season, neither your contributions nor your employer’s contributions are taxed as income, and investments within the account grow tax-deferred. You won’t have to pay any taxes until you start taking withdrawals from that account, encouraging the growth of your savings through compounding. Eventual withdrawals are taxed at ordinary income tax rates and withdrawing before age 59½ may incur a 10% penalty on top of regular taxes.

If you want to save even more, consider traditional IRAs, which also permit pre-tax contributions (up to $7,000 in 2024). Like 401(k)s, investments in traditional IRAs grow tax-deferred, with withdrawals taxed as ordinary income. 

Alternatively, there is one other account: Roth IRAs. Unlike traditional IRAs, Roth IRA contributions are after-tax, meaning contributions aren’t tax-deductible, but withdrawals in retirement are tax-free. This arrangement is advantageous, especially for younger investors in lower income tax brackets, as investments grow tax-free.  After your account has been open for five years, you can access your principal contributions penalty-free. However, withdrawing investment gains before age 59½ may incur penalties. Nonetheless, it’s essential to view retirement funds as a last-resort resource and prioritize long-term saving goals over short-term needs.

In short:  

Maximize contributions to retirement plans to leverage their tax-sheltered growth. and take full advantage of employer matching contributions to optimize benefits.

Next up, we’ll take a look at the importance of building a diversified investment portfolio, why speculating can harm your long-term prospects, and how to build an investment plan that meets your individual goals. 

Interested in learning more about how to take the first steps toward meeting your personal financial goals? Reach out to set up a time, and let’s talk.

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

It’s Time to Revisit Your Student Loans

Last week, the Supreme Court voted against the White House Administration’s plan to eliminate up to $10,000 of student loans for non-Pell grant recipients and up to $20,000 of loans for Pell grant recipients. This news comes just as the three-year pause on student loans is coming to an end, with loan interest accruing again in September and payments beginning in October. 

The Administration plans to propose other types of aid to borrowers, such as reducing the income-driven repayment plan from 10% to 5% of disposable income and not reporting missed payments to credit rating agencies for 12 months. Still, the timeline on these proposals could take months to get approved — so it looks like it is time to prepare for paying back your student loans.

At Warren Street Wealth Advisors, we want you to take the necessary actions to feel confident about your next steps. Start with the considerations below, and feel free to reach out to your financial advisor with any questions.

1. Update your information on studentaid.gov.

Check that  your current contact and billing information are up-to-date with the Education Department on studentaid.gov. If you’ve moved, for example, the Education Department will need your updated address to contact you with loan status updates.

2. Determine how much outstanding student loan debt you have.

Work with your loan provider to see how much student loan debt you have remaining and how much the monthly payments will be. Once you know how much to expect each month, it will be easier to manage your spending.  

3. Factor student loan payments back into your budget.

Whether you use software to help analyze your budget or the back of an envelope to do your calculations, it is time to add up all of your expenses and compare them to your take-home pay. This will let you know if you will be running a surplus, breakeven or deficit each month going forward.

4. Explore income-driven options.

If you determine you might be at a monthly deficit with student loan payments, an income-driven repayment plan could be an option for you. However, while this option could help your monthly budget, it usually involves you paying more interest in the long-term and extends your payments well past the 10 year standard repayment plan.

5. Shore up your emergency fund.

It’s always a good idea to count your liquid cash savings, especially in a time like this. Having a three to six month emergency fund to fall back on will be important if you have a student loan bill you need to pay again. Now is a good time to start an emergency fund if you don’t have one. 

These are some of the most important steps to ensure you make payments on time and know what to expect in the near future when it comes to your debt management. Please reach out if you’d like to discuss these planning points with a Warren Street advisor!

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

DIY Credit Repair

Credit scores sometimes feel like the GPAs of high school. It’s just a number but also has a lot of power of what you can be approved for (like GPAs determine what colleges you can get into). If you’ve struggled with credit, it may be tempting to call the 800 number you hear on the radio promising you an overnight solution to repair your credit. As tempting as it is, do not do it! Most of these are just scams that will get you to spend money you don’t need to.

You can work on repairing your credit yourself and you should. 

Step #1 – Monitor your credit

The first step is seeing where you are at. You can get copies of your full credit reports from all the credit bureaus (Experian, TransUnion, and Equifax) by going to annualcreditreport.com or calling 877-322-8228. You are able to get your reports for free once a year via Annual Credit Report. 

You can also sign up for a reputable credit monitoring service. These services help you by sending alerts anytime there is suspicious activity on your credit and also giving you the ability to check in often. You can find a list of some options here.

Step #2 – Dispute any errors

Once you have your reports, you should review them for accuracy. Confirm that your name, address, social security number, and all other personal information is correct. Then review all the accounts reported including balances. If you see any errors, you can tell the credit bureaus in writing what information you think is incorrect. Make sure to include copies of supporting documents (bank statements, credit card statements, etc). You can find a sample letter for disputing errors on your credit report from the Federal Trade Commission here.

According to the Federal Trade Commission, credit reporting companies must investigate the items you question within 30 days unless they consider your dispute frivolous. Once the investigation is complete, the credit reporting company must also give you the results in writing and give you another free copy of the report. 

Step #3 – Control the things you can control

While sometimes there can be errors on your credit report that negatively affect you, a lot of the time your scores can be in your control. If you have a poor credit score because of things like missing payments, maxing out accounts, or applying for too much credit in a short period of time, work on improving these behaviors: 

  • Always try to pay your bills on time even if it’s just the minimum payments. 
  • Work on paying off your debt, especially high interest credit card debt.
  • Avoid applying for new credit. If you are trying to get a handle on your credit, one of the best things you can do is break the cycle of continuing to apply for new credit. 

For more information, or if you have any questions, please reach out to your trusted wealth advisor at Warren Street Wealth Advisors.

Veronica Torres

Director of Operations, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Talking About Money Before & After You Marry

Talking About Money Before & After You MarryNo money secrets should stand between the two of you as you wed.

Provided by: Warren Street Wealth Advisors

 

 

 

No married couple should suffer from financial infidelity. If you hide debt, income or assets from your spouse, it can lead to a fight and possibly even an impasse in your relationship.

 

Communication & transparency are essential when it comes to money. That truth should be recognized by every couple tying the knot, or even just cohabitating. Yes, financial matters can prove hard to discuss – but if you can’t talk about them together, that’s already a serious problem.

 

That problem may affect more couples than we realize. In 2013, 7% of engaged individuals who answered a National Credit Counseling Foundation poll said that if they discussed money issues with their fiancé, it would prompt a fight; 11% felt such a talk would uncover financial secrets, and 5% said it would “cause us to call off the wedding.”1

 

On the bright side, 32% felt a conversation about financial matters would be “a productive and easy conversation to have.” The most frequent response (45%) was that a money discussion would be “awkward,” but also necessary for the health of the marriage.1

  

You have to tell your future spouse about your debts. Do it before you get married, not after. That debt will become your spouse’s financial concern as well as yours. The two of you should plan together to pay down your individual debts in the coming months or years. Again, this represents a shared commitment. Don’t put your name on your deeply indebted spouse’s credit card. Attaching your name to that account will have minimal impact on your FICO score, but you don’t want to pay a (literal) price for your spouse’s runaway financial impulses.2

 

If you have six credit cards between the two of you, see if you can slim it down to three or four – the ones with the lowest fees and best rewards programs. Or see if you can just use those three or four and let the other accounts lie dormant. That might be a better move than just canceling the excess credit cards – that could hurt you, especially in the case of older accounts. About 15% of your FICO score is based on the duration of your credit history, so if that was good history, you don’t quite want to say goodbye to it.2

 

Think about a new joint credit card account for the two of you. If you feel your spouse needs debt counseling before you can make that move, don’t be shy about requesting it. Even if your spouse has been living on plastic, think twice about leaving him or her without a credit card. You want (and need) to show some credit history.

 

You will have to compromise. The most valuable verb in marriage is also really valuable when it comes to your shared financial life. Maybe you’re a good saver, a future “millionaire next door” – and yet your spouse is a comparative spendthrift. If you can’t compromise on a “money policy,” then maybe you can find a middle ground by saving for a special experience. Or, maybe each of you can set aside a bit of money per month to spend or save purely at your discretion.

 

You may want to pay the bills proportionately. If one of you earns 70% of the household income, then maybe that spouse should pay for 70% of the household bills and expenses. To many newlyweds, that seems entirely fair.

 

Build retirement savings & an emergency fund together. Financially, there are few better ways to signify your long-term commitment to one another.

 

Wait on a big purchase. Consider waiting 24 hours (if you can) before going through with it. Or, alternately, set a dollar limit on such purchases – give each other limited financial autonomy I making major purchases that ends at X hundred or X thousand dollars. If the money exceeds that limit, then you both have to discuss it before it can occur.

 

Make a budget. In fact, strive to make a zero-based version, a budget in which income minus expenses comes precisely to zero each month. This is a way of accounting for each and every dollar spent (actual or projected) and a way to pinpoint potential monthly savings or redirection of income toward expenses.

 

Watch those taxes. Should you file your taxes jointly? Not necessarily. That is wise for many couples, but if your incomes vary greatly it may be better to file separately. Consult a tax preparer for an answer. Also, look at your W-4 at work. It may be time to adjust your withholding status. If your spouse isn’t employed, you get to add another withholding allowance. Assuming he or she is employed, you can turn to irs.gov to learn how many allowances you are due in total. Then, you can divide that total by two. You and your employer need to follow the instructions on the W-4 so you don’t withhold more or less than you should.

 

Talking about money isn’t always pleasant, but candor, communication and full disclosure can lead to clarity in your financial lives.

 

Warren Street Wealth Advisors

190 S. Glassell Street, Suite 209

Orange, CA 92866

 

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.
Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered
Investment Advisor. Warren Street and Cambridge are not affiliated.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 – nfcc.org/press/multimedia/news-releases/two-thirds-of-engaged-couples-express-negative-attitudes-toward-discussing-money/ [5/31/13]

2 – washingtonpost.com/news/get-there/wp/2014/09/23/for-richer-or-poorer-a-financial-plan-for-newlyweds/ [9/23/14]