Power Up Wealth podcast – Having a Financial Life Raft – Episode 25 transcript:
Shane Thomas 0:00
Preparing for the unexpected can help you build a secure financial foundation. I’m Shane Thomas, guest host of the Power Up Wealth podcast. Today, Sharla Jessop will provide tips to weather financial storms.
Sharla Jessop 0:23
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Shane Thomas 0:46
Welcome, Sharla.
Sharla Jessop 0:47
Thank you, Shane.
Shane Thomas 0:49
Sharla is president of Smedley Financial Services, is a Certified Financial Planner, as well as has a behavioral financial advisor designation. Sharla, tell us a little bit about some of these key steps that people can take to set themselves up for having a good financial foundation for the future.
Sharla Jessop 1:08
You know there are always habits that we can create that help us and if we follow these little habits, they make a significant difference over the long term. You know, if you’re on a boat, and it springs a leak, you’re going to want to make sure you have a life raft, or a flotation device to help you keep your head above the water. And that same thing or concept can be applied to an emergency fund. If you have an emergency, having a fund that set aside, money that you can get to without restriction without having to make payments or interest, can help you keep your head above water financially.
Shane Thomas 1:47
So what would be an amount someone should have in this emergency fund? This isn’t for a new laptop or a bike or a car then, right?
Sharla Jessop 1:56
No, this is just for emergencies, which makes it difficult for people to set money aside thinking I’m not going to use this. The rule of thumb is you should have three to six months of net income or expenses set aside for emergencies. This is money that you’re not going to touch you’re not going to dip into it’s not for that new gadget you want to buy. Sometimes it’s hard to see it sitting there knowing it’s not being used. But when we go through periods of time where we’re dealing with potential recession, market volatility, maybe someone loses a job, maybe there’s an event where they have to have excess money, maybe the car breaks down and they weren’t expecting it. Obviously, our car breaks down always at the worst time. Never when you want it to or the water heater goes out. You’ve got to have money readily available. Having an emergency fund protects you from using a credit card. Because if you use a credit card during an emergency, then you have to be able to make a payment on that. And interest is accruing. So if you’re not paying it off, once you use that credit card, if you don’t have the money to pay it off immediately, then you’re going to be accruing interest and whatever you had to buy is going to cost a great deal more than the purchase itself.
Sure. So an emergency would be something like your air conditioner, water heater, car repair, something like that. But then have some another savings account for other items like travel or fun things that you save for?
Yeah, we call that planned spending. You know what’s coming up, though some of these things we know their. Christmas comes every year, regardless, and it’s nice to have the money in advance. Otherwise, if you’re using credit, you’re paying for it all year long. And nobody wants to be paying for Christmas in June. Vacations, new car, I mean, we all have an idea of what the life expectancy is of a vehicle when we purchase it. Rather than making a payment pay yourself. Pay money into an account that you can use in the future. Children’s education. You know if your children are going to go to a trade school or on to university, you’re going to have to have money for that. And you know, our homes over time, require some upgrading. New carpet, you know, some things wear out. All of those things fall into what we would consider a planned spending and you pay for it in advance. I can relate an experience that I had when I was young. From a young age, my parents have always taught me that you save 10% of any money you earn. It’s set aside it’s for you. Back then I didn’t have an emergency fund because as a teenager, I didn’t have any emergencies. I just had wants.
Shane Thomas 4:26
Right.
Sharla Jessop 4:26
So planned spending was important. And I was saving up all the money earned, I had to save it in advance to buy a 10 speed bike because let’s face it when you’re a teenager, you don’t really qualify for credit anyway. So I learned from a young age that you can save in advance for the things that you want. And you get more gratification when you pay for it and have it and you’re not worried about what the monthly payment is going to be. And you can do that in savings accounts. You know at a bank or credit union. If it’s going to be longer term, you can invest the money. You know, for instance, college savings for kids. You know that’s not going to occur for you know if the child is young that’s gonna be years before they’re going to use it. But you’re probably going to be saving a little bit every month to help cover that large expense. Those types of things can be invested. But the idea is to get in the habit of paying in advance, whether you’re paying yourself or paying into planned spending, and do it regularly.
Shane Thomas 5:15
That makes sense to have that set aside, and making sure that you’ve noted it’s specific for that item. So it doesn’t get pulled into others things. That you’ve you set it aside, like hey we’re planning to do a vacation and that money goes to it, then save it there and earmark it for that. Don’t let it get pulled into grocery spending or out at the movies or other things. So you’ve got an emergency fund, you’ve got planned spending specific for items that you’re looking for you like, you know, couple years, we’re going to need a new car, or redo the roof or other items like that. But what about just regular retirement savings? How much should we be saving in just regular retirement savings? Like in an IRA or 401k etc?
Sharla Jessop 6:06
The answer is unfortunately, probably more than you’re saving. Right now, we’re seeing a change in savings habits in Americans. And the personal savings rate in April of 2022 dropped to 4.4%. And this is down significantly from just a few years ago, when the personal savings rate hovered around seven and a half percent. In fact, we’ve not seen a personal savings rate this low since August of 2010. Just as we were coming out of the Great Recession. Many people remember being in that. And savings rates were really low we’d been through recession, you know, a lot of people had lost jobs. And we saw that. And the shocking thing about this is that 4.4% savings rate that we’re seeing right now, that includes everything, including retirement savings. The reason that’s shocking is because retirement savings, when you’re thinking long term, you should be planning on saving somewhere between 10 and 15% of your income towards retirement savings. And we’re seeing the savings rate at 4.4% for everything. And that sets people up for some challenges in the future. The challenges might be not when I’m going to retire, but if I’m going to be able to retire at all. What type of lifestyle do I get to live versus am I going to be able to cover my basic expenses when I retire? And some of those things that come up. You know, planning in advance and putting that money aside is extremely important. And it’s easy to do.
Shane Thomas 7:31
So when you say 4%, that’s really only $4, for every 100 that you earn, on average is getting put into savings.
Sharla Jessop 7:42
Right.
Shane Thomas 7:43
And when you mention you should be saving 10 to 15%. That’s definitely a shortfall by a lot.
Sharla Jessop 7:50
It is. But there are ways to make that up. There are ways to correct that, and to improve it. And it might not be something that people can do overnight. Because when I say it’s easy, I’m not trying to be glib. What I’m trying to say is there are some steps. There are ways to change the outcome. And they’re small. And they are it isn’t something you change overnight. But it’s things you do in baby steps over time.
Shane Thomas 8:13
What would be some of those steps that somebody could start with, whether they’re young or old?
Sharla Jessop 8:20
Well, if you’re if we’re looking at retirement, let’s use that as an example. Because that’s the last thing we touched on. If you’re looking at retirement, you may have access to a company 401k, where not only are you going to put money in but your employer might even contribute in a company match. Put as much as you can away in that account. It comes right out of your paycheck. Before you see it. It happens automatically. It goes into an investment. They have investment options you can choose from, and then it compounds. And the greatest thing about planning for retirement over time is the value of compounding interest. And then every year as you get a pay increase, or every year automatically escalate that percentage. So let’s say you start out saving 4%. Next year, increase that to 5%. And just each year or every time you get a raise, increase what you’re putting aside.
Shane Thomas 9:13
Those are excellent tips. Definitely it’s worth taking advantage of putting it in now and letting it grow over time. What do you say right now with people with inflation, you know, things are costing more. It’s difficult to find those extra dollars to save. What do you tell people, what do you advise people?
Sharla Jessop 9:33
I think that what people have to do is go back to some of the basics because we are dealing with inflation and we’re seeing a pinch on spending, you know, it’s reducing what we have available in spendable money every month. Go back to your budget and look at your spending and see where you might be able to cut back Be realistic. You know, in the good times. We’ve just come out of some really good years, especially in the last couple of years where people were receiving stimulus and were not maybe in a position where they really needed it. They had an excess flow. And so they may have developed some spending that they can’t keep up with now that we’re back to reality. So go back to your spending plan and be realistic and determined am I spending too much? Are there places where I can cut back a little bit? And make sure that your spending plan includes paying yourself first. If you put yourself at the top of the list when you’re looking at your budget or spending plan, you’ll always make sure you’re, you’re paid first. That’s why having money come out of your 401 out of your paycheck to go into your 401k sets that habit up. You’re paying yourself before you’re spending what’s leftover.
Shane Thomas 10:39
Excellent, thank you Sharla. We appreciate these tips. And hopefully our listeners will follow through and be able to increase that savings rate. So the next time we look at it, it’s definitely higher than 4%. Again, thank you, Sharla.
Sharla Jessop 10:53
Thank you.
Shane Thomas 10:58
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
