Good Financial Habits Die Hard

Make good financial habits your reality this year.

A woman with a blonde ponytail jogs on the sidewalk along a river in a city, heading  toward the sunrise.

IT’S SAID, “OLD HABITS DIE HARD”, an adage about the difficulty of ridding oneself of bad repetitive behavior. But the flip side is that good habits also stay with us. If you’re trying to set yourself up for long-term financial security and success, good financial habits will work to your advantage.

In this article, we're highlighting a set of good financial habits and the different shapes they might take across multi-generational demographics. Regardless of your age, there is a way to make these habits automatic for you.

Protection Comes First

Maintain adequate life insurance

The first rule for achieving financial security and success is making sure that you and your loved ones are financially safe. Safety can be enhanced by many habits; we’ll focus on two. The first is maintaining adequate insurance—which may encompass life, health, property, auto, and more. But (like so much else in finance), insurance is notoriously complicated.

Life insurance, for example, is available in term and permanent-life policies. The former provides only a death benefit for a fixed term—often renewable, but for a higher premium. Most permanent-life policies (among them the popular whole-life offerings) protect for the entire lifetime of the insured and also accrue cash value, a portion of which can be borrowed, invested elsewhere, or sometimes used to pay premiums.

Maintain a cash emergency fund

The second safety-first habit that we’d encourage is maintaining a cash emergency fund large enough to support your lifestyle for at least six months , since one never knows what’s around the corner. And it’s equally important to get in the habit of replenishing that fund as soon as possible after it’s accessed. These habits shouldn’t differ from generation to generation: Whether you’re 25 or 85, maintaining an emergency fund should happen automatically. But a Charles Schwab survey reported in Barron’s found that 36% of today’s Millennials have no savings for emergencies. That raises a huge red flag.

Different life insurance for different demographics (life stages)

The situation with insurance is much more nuanced. All generations need the protection of health insurance, though for working Millennials, Gen Xers, and younger Baby Boomers, it’s often provided by employers. But more protection is needed with increasing age: Gen Xers are well advised to consider buying long-term care insurance and catastrophic-illness coverage, which are typically unavailable or prohibitively expensive for Boomers. Life insurance is almost always cheaper for younger buyers, but Millennials may be better off waiting a bit and using any extra money for savings and investments. Boomers, meanwhile, often find that they no longer need their life insurance because they’ve provided for loved ones adequately through savings or legacy funds. If they own permanent life policies, they may choose to sell them, albeit typically at a very steep discount to face value.

As for property, casualty, auto, and private-business insurance, the key is whether it’s needed or not, regardless of age.

Take-away habit:

Evaluate and re-evaluate your insurance needs whether you’re starting out, in retirement, or in-between.

Automate Your Saving

Start early

Once you’ve established the foundation for financial security by assuring the safety of Numero Uno and your family, the next worthy habit is saving as much as you can, starting as early as you can. The amount you save matters less, especially in the early years, than establishing a savings routine. If you start saving $100 each month—not a lot—when you’re 25 and your money compounds at 6% per year, when you’re 65 you’ll have $73,450. If you begin 10 years later, you’ll wind up with a bit over $55,000. Neither of these sums would be enough to fund a retirement in the absence of a healthy pension, but the difference between them is significant. We’d also note that it’s better to save $100 each month than $1,200 once per year. Saving every month reinforces the habit and makes it less likely that you’ll abandon it. And the more you can automate the saving process the better—for example, by setting up deductions from your paycheck into your savings account.

A special case is contributing to a retirement plan without fail, hopefully via automatic payroll deductions if you’re working and your employer offers a 401(k) or similar plan. If your employer matches your contributions up to a point, contribute at least up to that level. If not, you’re throwing away free money.

Determining amount

How much should you save? That depends on too many things to list here, including your age, the needs of your family, your health, and your overall net worth. One rule of thumb is to save 10-15% of your discretionary income each year (what you have left over after spending on necessary items and taxes), if you can swing it. If that’s too aggressive a goal for you, starting at even 5% and increasing the amount by one percentage point each year—5%, then 6% the next year, and so on—may be more palatable. While the amount saved will probably be largest for Gen Xers, who are in their prime earning years, this financial habit should begin before then, and continue among younger Boomers. (Beyond that point, saving often takes a back seat to retirement spending—though it’s never too late to start saving.)

Take-away habit:

Establish a savings routine to save as much as you can, starting as early as you can.

Get Rid of “Bad” Debt

Good debt vs. bad debt

The distinction between “good debt” and “bad debt” is well known. The former—such as student loans and home mortgages—helps promote well-being or success for you or loved ones. The latter is typified by debt owed on high-interest credit cards. The habit here should be to pay off those high-interest loans, and fast, to the extent possible. The average credit-card rate in mid-2019 was 15.1% for existing accounts, and much higher for new offers—even with Treasury-bond yields in the low single digits and inflation hovering around 2%. And though you’ve heard it again and again, don’t make just the minimum payment each month: You’ll be trapped in credit card debt for a long time.

Paying off vs. investing

As to paying off good debt early, the most important factor is whether you could do better by investing the money instead. But don’t discount the psychological benefit of freeing yourself from debt. Of course, you can earmark some of your funds for debt repayment and other funds for investing. But even if you decide not to pay off early, make it a habit to check the prevailing rates to see if you might refinance (for mortgages and sometimes credit cards; it’s not an option for federal student loans). If you do choose to prepay, make sure there’s no penalty attached, though that’s never the case for either federal or private student loans. For Millennials, who are first building their lives, evaluating the trade-offs between paying off debt early and putting the funds to other uses can be particularly challenging. That’s one reason out of many why seeking professional guidance can be so helpful.

Take-away habit:

For every generation, keep track of your debt at least every month and ideally with every purchase you choose (or worse, need) to pay out over time. And monitor interest rates.

Spend Prudently (No surprise about that)

Cutting spending

If saving early and often is a powerful financial habit to cultivate, cutting your spending is the other side of that coin. We’re not talking about making big changes to your lifestyle—unless your spending is way off the chart—but rather trimming around the edges. Don’t try to eliminate activities that you truly love (unless it’s shopping in Tiffany’s every week); you’ll undoubtedly go back to them.

Preparing a budget

So what should you do?

  • Prepare a budget and stick to it.
  • Shop with a list to avoid impulse buying.
  • Reduce restaurant visits (which can deplete funds quickly).
  • Distinguish between what you want and what you need.
  • Try to live below your means; that can really pay off in future years.

Although these good habits apply to all spenders, they’re particularly important for Millennials, who need to save and invest as early as possible, and for Boomers approaching or already in retirement.

The retirement years can be scary to contemplate: In the absence of a defined benefit pension (a perk that’s becoming obsolete), a retiree has to rely on the funds that he or she has accumulated plus Social Security, which almost never can be enough by itself. Planning is the key here, both before and in retirement—including planning for a long life and poor investment markets: Better to be positively surprised than left without money. The old guideline of spending 4% of your investment portfolio when you start retirement, increased annually to account for inflation, may still work. But spending 3% may be more prudent, especially if you’re hoping to leave a legacy to family and/or charity.

Take-away habit:

Prepare a realistic budget at every stage of life, including in retirement, that helps you track and control your spending, and stick to it.

Investing Habit #1:

Remain in the Market

Wouldn’t it be great if you could get out of the stock market right before a major downdraft and get back in just as the market was recovering? In deed it would be. The problem is, no one can foretell market turns. Worse news for market-timers, returns have tended to come in quick bursts.

Investing Habit #2:

Stay Diversified

Different investment assets serve different needs. Stocks, for example, tend to grow in value nicely over time, but at the cost of short-term volatility. Bonds are much more stable, and they produce regular income, but they’re typically slow-growers. Cash investments usually grow even less, and should be seen as a short-run safety play. But too much of that “safety” will make long-term security impossible.

As important, the behavior of any asset class is unpredictable over short time periods. That’s why it’s a good idea to not put your eggs into one basket—including U.S. assets—but rather hold onto a globally diversified mix. When one asset class is performing poorly, another will do better, providing some insulation against risk.

For just one example, consider emerging-markets stocks (admittedly a particularly volatile asset class). They were at the top of the chart in 2009 (with a 78% return!) and 2010, only to become the worst performer in 2011, posting an 18% loss. Any asset will likely give you good and bad years; the key is to invest in many, in proportions suited to your return and risk goals.

Here’s where the different generations tend to have different priorities. Millennials can feel relatively secure with a portfolio heavily weighted toward stocks, since they can expect very long time horizons—though some may wish to stick their toes into the investment waters with a conservative mix. Many Gen Xers will likely also own stock-tilted portfolios, but probably with more bonds in the balance. Boomers need to be careful, in our view: They may migrate toward bond or even cash portfolios because of stock risk, but with life expectancies for 65-year-olds now well in the 80s, most Boomers shouldn’t abandon stocks: They need investment growth as well as safety and income

Investing Habit #3:

Ask About and Track After-Tax Returns

The tax bite on your investments can be painful—perhaps in the range of 35% or more for investors in high tax brackets living in high-tax states and cities. You can help mitigate the pain by adopting the habit of being aware of taxes whenever you invest—certainly in taxable accounts but in retirement accounts as well when you consider which assets you should shelter from taxes. When you’re thinking about buying into an investment, ask whether after-tax results are available and what the annual turnover is, since high rates of buying and selling securities mean higher capital-gains taxes.

For Millennials starting out as investors, taxes are often a less-important consideration (unless they’re also independently wealthy). As an investor’s age increases, all else equal, taxes become more significant. Boomers may think not so at first, since their tax brackets tend to go down after leaving work. But taxes take center stage no later than age 72, when Required Minimum Distributions (RMDs) from most retirement accounts become mandatory (raised from age 70½, courtesy of a late-2019 legislative overhaul). RMDs can be a big deal; investors should consult with their tax professionals.

Take-away habit:

When it comes to investing, stay in the market, stay diversified, and be aware of taxes.

Want to Leave a Legacy? Plan for It…

Legacies come in all shapes and sizes, many not financial. But if you’re interested in leaving funds to your family and/or charities, get in the habit of preparing to take the necessary steps. That can mean many things: thinking about who you want to receive the money, how much you wish to give, and when (for example, when you’re still living or after your death?); deciding whether you wish to disclose your plans to the recipients or not; and reviewing the possibility of using trusts as a legacy vehicle.

Trusts can be good vehicles for transferring assets to your spouse, your children and grandchildren, charities that are important to you, or both family and charity. In that last instance, you might employ a “charitable lead trust” that gives regular distributions to the charity for a set period of time and leaves the remainder to a family (or any other) beneficiary, or a “charitable remainder trust,” which can provide income to family and the remainder to charity. But don’t try to navigate these waters alone: Work with financial and legal experts in deciding which trust(s), if any, are appropriate for you. And don’t forget to ask about the tax consequences and benefits, including for estate tax. Estate taxation affects only the wealthiest right now on the federal level, but that may change. In addition, some states levy their own estate taxes.

Generally speaking, the importance of legacy planning increases with age. For most Millennials it’s not on the table. But Gen Xers should think about it, rather than pushing every decision into their retirement years.

…As You Plan for Everything Financial

We advise drawing up a blueprint for every financial decision in your life, and then following it through. That blueprint can be a daily shopping list, an annual spending budget, or a complex estate plan. Indeed, the best plans cover a broad swath of financial territory—always including retirement. Most experts say that you’ll need to replace 70-100% of your pre-retirement income after you stop working, which will require a solid (but flexible) plan. Of course, any plan should be re-evaluated and revised frequently, as your circumstances and goals change.

In our view, planning in coordination with financial professionals is appropriate for every age group, with different content. But one feature common to all plans, including those of Millennials, should be specific guidelines for retirement—developed not out of fear but resolution.

Take-away habit:

Draw up a blueprint for every financial decision in your life, follow it through, re-evaluate and revise frequently as circumstances and goals change.

This article is for informational purposes only and is not intended for use as legal, accounting, tax or professional financial advice by People’s United Bank or any of the bank’s subsidiaries. Financial calculators are for illustrative purposes only. Always consult your legal, accounting and/or tax advisor to fully understand how information may or may not apply to your personal or business financial situation.

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