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Daphne Youree
Right before I turned 30, I decided to get serious about my finances. I had spent most of my 20s making all kinds of money mistakes (from not saving for retirement to racking up credit card debt). I was eager to approach a new decade of my life with my finances in a strategic place so I could meet the big goals I had for my future, like retiring early and buying property.
I didn't know what to do first, so I did anything I could to tighten my spending and start investing. Since I never worked one-on-one with a financial professional, I always wondered if I was making any glaring mistakes. It turns out I was.
I decided to find a financial advisor. I sat down with Adam Scherer, a financial planner and president of Greenbeat Financial, to review every inch of my financial portfolio to not only identify the mistakes I'm making but also make a game plan for how I can start fixing them.
The first mistake I knew Scherer would bring up is a mistake I've knowingly made for years. More than half of my financial portfolio is cash that's just sitting in my savings account. I'm making this mistake because I'm not sure what else to do with that money and I'm scared to lose it.
Scherer said it's great to have cash on hand as an emergency fund. A good rule of thumb is that a couple should have between six and nine months of fixed and variable expenses in their cash account.
So how can I fix this mistake?
Scherer says that, first, it's important to assess my risk tolerance, then get clarity on when I'd want to access that money in the future (whether it's for retirement in 20 years or to buy a house in five years). Once I know the answers to those two things, I can consider putting that money into a retirement plan (through index or mutual funds), or investing in real estate (both directly by purchasing real estate or through a REIT, which allows you to invest in real estate properties without buying one yourself).
A few years ago, after many friends advised me to do this, I opened up an investment portfolio with a robo-advisor that automatically manages your money for you. All you have to do is set your risk tolerance and they do the rest. Without much thought, I did what my friends did and set that tolerance to be 90% stocks and 10% bonds, making this allocation very risky.
Scherer says that because I'm a bit scared of risk right now and unsure of my financial goals, it might make more sense to dial that down from 90/10 to 80% stock and 20% bonds.
"If the idea right now that your money is 90% in risky assets and only 10% in something that's safe makes you uneasy, it's OK to adjust this to be in a more comfortable place as you seek advice and guidance from a professional," says Scherer.
I confessed to Scherer that, during the pandemic, I put a little money into many individual stocks without much research or thought. What Scherer noticed was that most of those stocks fell in one sector (tech, media, and telecom), and having a portfolio that was heavily weighted in one industry can be risky and not strategic.
Scherer recommends diversifying across different sectors since these sectors are more in tandem at different times.
So, what are my options? Scherer said I can sell my current individual stocks and use that money to invest in stocks across different sectors, or I can go broader and buy sector-focused ETFs to have a fully diversified portfolio.
I wondered if this meant I should ensure I'm investing equal amounts of money in each sector.
"It depends on the rate of return you're looking to generate, where we are in the buzz cycle, where we're heading, and more factors," said Scherer.
One thing Scherer said was missing from my portfolio was tax diversification. He explained that there are three tax buckets: taxable assets (such as money in a taxable brokerage account); tax-deferred (where the money is taxed down the line, like my SEP IRA); and tax-free (where the money isn't taxed, like a Roth IRA).
Scherer said I'd have challenges with a Roth IRA because I potentially make too much money to contribute to one, and I'm married filing separately from my spouse, so I don't qualify for the higher limit. However, he did mention a workaround.
"You can still execute a backdoor Roth IRA strategy to get more investments into your 'tax-free' investment bucket," said Scherer. "To do so, you'd open a traditional IRA account and a Roth IRA account, then make 'nondeductible traditional IRA contributions' and convert the funds over to the Roth IRA."
One thing I mentioned to Scherer at the end of our meeting was that I recently got married. Even though my partner and I keep most of our finances separate and don't file taxes together, I wondered if there was anything my partner and I should do with our finances now that we've tied the knot.
Scherer said yes.
"One thing you can do is make each other beneficiaries on your different accounts," said Scherer. "If an asset's contract (like your retirement account, savings account, investment portfolio) has a beneficiary, you can bypass the long process of having your assets in probate with the court. Instead, your assets will transfer automatically to that person, saving time and money."
Another thing Scherer mentioned was that now that we're married, we should consider getting life insurance.
"If you both have a life insurance policy in place, it can ensure the other person is able to pay for some debts and maintain the quality of life they are accustomed to if their partner passes away," said Scherer.
This article was originally published in April 2022.
