Financial Empowerment for People of Color Financial empowerment can be a challenging topic–especially with an…
Everyone knows how important it is to have a retirement savings strategy. But because our brains are wired to make ‘someday’ seem so far away, it’s only natural for plan participants to put more immediate financial needs ahead of 401(k) contributions. Here are a few of the most common roadblocks people encounter, along with ways that advisors can encourage plan participants to overcome them.
Roadblock #1 Not Having an Emergency Fund
Life is full of surprises: some good, some bad, and some costly. Did you know that 57 million Americans have absolutely no emergency savings fund, leaving them few options when unanticipated costs arise? These participants have little ability to think about, let alone contribute to, retirement accounts. It’s important to encourage plan participants to have an emergency fund ready and set when the unexpected happens–which we know it will. A ‘life happens’ fund is an important part of everyone’s strong financial foundation, because it keeps people from going into debt when things don’t go as planned. The most important thing is getting participants to start saving for it.
The ideal size of an emergency fund can vary and it’s OK to start small, by encouraging participants to set attainable goals. Six months of living expenses can sound overwhelming to many people, so suggest that they start with the smaller, bite-sized goal of one month of fixed expenses. Being successful at meeting this goal can motivate them to keep going. If they are not sure where to start, you can encourage them to schedule an appointment with you to develop an achievable action plan.
Roadblock #2: Having Credit Card Debt
Credit cards are easy, sleek, and fun. They’re easy to get, offer exclusive perks and rewards, and they’re fun to swipe. In fact, Americans like credit cards so much that credit card debt climbed to more than $9 billion last year, 8% up from the year before. The average household carrying credit card debt now has a balance of more than $15,000. Every swipe and chip read makes each purchase easier to rationalize and the implications of those mounting bills easier to put off to the end of this billing cycle…or the next one. Digital banking has made the brutal reality of balancing a checkbook a thing of the past.
So, what should plan participants do if they have credit card debt? Here are several tried-and-true recommendations you can share. First, have the participant acknowledge the problem and cut up or put away all non-vital credit cards. Second, ask them to cancel all non-vital subscriptions and recurring charges. Third, have them add up how much they owe in total. Fourth, invite them to schedule an appointment with you. Talk through the situation and help participants come up with a realistic debt eradication plan they can stick with.
Roadblock #3: Having Student Loan Debt/Saving for College
Many people have money roadblocks related to education—either paying back the loans they took out for their own, or saving for their children’s—and sometimes both at the same time. As of 2017, student loan debt exceeds $1.3 trillion, almost twice that which is owed on credit cards. Part of the problem is ever-increasing tuition costs that make saving for college seem daunting. But there are solutions to both repaying loans and saving for future educational costs.
There are several ways participants can tackle repaying student loans. If they can add a little extra payment against the principal every month, they can pay down the loan faster and save money on interest charges. You might also recommend that they look into whether they are eligible for consolidating loans at a lower interest rate, or for loan forgiveness.
When it comes to saving for college, a no-commission 529 plan is probably the best bet, and one which will allow participants to save on taxes at the same time. While it’s admirable when parents and grandparents want to help cover their children’s education, many people need to be reminded that as important as a good education is, it shouldn’t come at the expense of their own financial future. While children can always borrow for college if they need to, participants can’t take out a loan for retirement.
Everyone knows saving for retirement is important but it’s hard for anyone to take steps toward the future today when debt is standing in the way. The most important step a plan participant can take is simply to get started. Let them know they’re not alone. They have a trusted advisor who can help them build a financial plan and retirement saving strategy that works with their budget—you. Help plan participants realize that it’s possible for them to have the life and the future they want to live.