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Financial advisors have clients with assets. That seems obvious. If they are invested in the stock market, they are doing pretty well. Financial planners, insurance agents and accountants might have clients with income, but little or no savings and investments. People living from paycheck to paycheck are finding themselves on the bottom leg of the “K shaped economy” everyone is talking about. How can you help those clients without sounding patronizing?
Have you seen the TV ads featuring Jim Cramer talking about his new book, “How to Make Money In Any Market?” When talking about younger people, a key point he makes is “Put the stock market to work for you.” Let us consider some advice you can give to a client (or their child) who has a job but finds themselves on the wrong leg of a K shaped economy.
1. Take the free money. Your company probably has a defined contribution retirement plan. You put in money, they match it, up to a point. Nationwide, about 50% of employees contribute. Sign up for the plan. Contribute as much as you can from each paycheck. At least get to the level to max out the company match.
2. Look for more free money. Many public companies have an employee stock purchase programs (ESPP). This allows company employees to buy company stock at a discount to the current market price. It might mean a monthly deduction and a quarterly stock purchase, but the stock usually belongs to you the moment after the purchase is made. If you can buy company stock at perhaps a 15% discount and sell it anytime you want, that is an opportunity that should not be missed.
3. Consider your tax refund check your nest egg. About two thirds of Americans get federal income tax refund checks. This is “found money.” Instead of spending the money, put the money to work for you and invest it.
4. Treat an employee bonus the same way. Many companies design their pay model as salary plus bonus. This allows them to keep the payroll lower and align employee efforts with the overall success of the company. The amount can vary from year to year, based on the company’s success. Another type of bonus is a signing bonus where you are rewarded for switching jobs. Treat this as “found money” and put it to work.
5. Don’t worry about being “cash poor.” You might feel investing money means you are putting it to sleep for a long time. What if an emergency comes up and you need it? Retirement plans and other investment vehicles usually have provisions for taking a loan in case of an emergency. Assume you can access at least part of the money if necessary.
6. Those “cash back” offers add up. We have the Costco Executive membership. You get back a 2% refund on our annual purchases, once a year. The idea is you use the check towards in store purchases. Instead of finding a way to treat yourself (buying those great, but expensive steaks) apply the money towards your weekly grocery shopping. (Boring stuff like croissants, yogurt, $5.00 roast chickens and birdseed.) You are freeing up some cash in your weekly budget.
7. Entertain at home. Instead of meeting up with friends for Friday night Happy Hour, meet up with the same friends at someone’s home. You can rotate the location among your circle of friends. Making your own drinks and appetizers is much cheaper than buying them at a restaurant.
8. Eliminate or limit yourself to one vice. Cigarettes in NYS average $15/pack. In PA and NJ the cost is might be about $12/pack. Alcohol is another vice. How many people do you know that gamble online? You can think of a few more vices and know what they cost. This can be a significant drain on your finances. The money freed up can be redirected to other uses.
These are not impossible steps to consider. They make sense. Most are not too difficult to put into practice.
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