Women's Money Wisdom

Episode 191: Scariest Financial Planning Moves

• Melissa Fradenburg, CDFA®️, AIF® • Season 4 • Episode 191

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This Halloween special episode uncovers scary financial blunders people commit, especially in relation to retirement planning and emergency savings. Melissa Fradenburg will walk you through the chilling implications of being too conservative with long-term investments and the terror of having your cash sit idle. We underline the importance of securing your own financial future before extending help to others. This episode is brimming with real-life scenarios and practical advice to keep you safe from these frightening financial pitfalls. So muster your courage, tune in, and let's bravely confront these unnerving money behaviors together!

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Speaker 1:

Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a certified financial planner and founder of Pearl Planning. I'm Melissa Freidenberg, financial advisor. We dive deep into topics like work-life balance, financial planning, personal growth and the intricacies of the sandwich generation. Tune in for money conversations that every woman needs to have. Hello and welcome to the Women's Money Wisdom Podcast. This is Melissa Freidenberg.

Speaker 1:

This week and I am going to do a special Halloween edition because this episode is going live on Halloween morning. So for those listening on the day it goes live, happy Halloween. May your kids' costumes arrive on time, fit and they don't change their mind at the last minute. That's all we can ask for, right? So I thought it'd be a fun idea to talk about the scariest money moves I've seen people make as a financial planner. So number one has to do with allocation of assets, being too conservative or saving long-term money in cash or cash equivalents, and I see men and women make these mistakes. But I will say, as this is the Women's Money Wisdom Podcast, you see it more often with women clients than men where long-term retirement savings are too conservative for the period of time until clients will need that money. So what I mean by this is really saving versus investing. So savings accounts are great and we love to see people have money in savings, especially for emergencies or quarter-term goals that they may want in the next few years. Right now, rates on money market and CDs are very attractive compared to the last five years, so it's even more enticing to say you know, I don't really like the ups and downs of the market, so, rather than the potential upside of investing in equities or, say, the S&P 500, I am going to keep my money in an interest bearing FDIC insured account at the bank. I get the temptation. What I do want to talk about and why it's one of the scarier things that I see people do.

Speaker 1:

It's really really hard to grow your money because if you think about your return and then you also factor in the rate of inflation, which everyone now in 2023 understands, that purchasing power of what you can buy with the same amount of money over time we have experienced it firsthand very dramatically. However, historically, over time a 20, 30 year period you're going to see inflation really eat away at your purchasing power as a consumer, and I'm going to give an example here. So if we look back at the average annual return of the S&P 500, which is an index that we use when we talk about equities. If we look back between 1983 and 2022, the average annual return this is without fees, if you were just invested in the S&P 500, was 11.24%. That's a pretty good return. You can really grow your money at that rate. The Ibbotson 30-day T-Bill Index, which we would use to represent cash, basically CDEs, money markets, that type of investment that was an average annual return of 3.38% per year over the same time period, again 1983 to 2022. However, if we look at inflation, which over that time period averaged 2.82%, so low or lower than our current inflation rate that we're experiencing now, if we were to take that inflation rate, subtract it from the average annual return that I mentioned for those two indices, your return on the S&P 500, again between 1983 through the end of 2022, goes down to 8.2%. For the Ibbotson 30-day T-Bill Index, that average annual return drops down to 0.55% average annual again when you factor in inflation over that time period.

Speaker 1:

Now you may be saying, melissa, that is a very big time period, and do I know? Because I was born in 1979. So that time period is almost as old as me. But you think about it. If we're living into our late 80s and 90s, in some cases beyond that, or if you're in your 40s. Now that is a time frame that is very realistic when we're looking at return over time and purchasing power. Again, we are living well into our 80s, so a 40-year time period is realistic when we're talking about things like inflation and purchasing power. So I just want you to think about that, because that isn't something you think of scary money behaviors. You're like, hey, I'm saving, I'm keeping my money safe, I'm putting it in cash. But when it comes to long-term financial planning, it is really hard to grow your money if you're not investing in at least partially, some of it in the equity market.

Speaker 1:

Number two and this one is going to seem counterintuitive to the last one but it's not having an emergency savings. So again, I want to stress the point I want people to have money in the bank. I just want that money that's in the bank to be there for emergency savings and shorter term goals. Well, women do tend to be more risk-adverse, meaning they don't want to take on the risk that we see in equities. It actually is sad, because Bankrate did a survey and found that only 28% of women have a sufficient emergency savings fund compared to 40% of meth.

Speaker 1:

So it's really important that we do this, and typically I mean everybody's different. It really depends on if you have dependents, if you're a dual income household, if you own a home where there could be, you know, emergency repairs and such that come up, and then, of course, the size of all of those things that you have to pay for every month. But typically we say to aim to have three to six months worth of living expenses in an easily accessible account to provide that emergency savings. Again, the more dependents you have, the fewer streams of income that you have. That number may be higher as far as number of months.

Speaker 1:

The problem with not having this emergency savings is if something comes up, and especially if you have kids, things will come up, whether it's out-of-pocket medical expenses, home repairs, having to buy a new vehicle or repair a vehicle. These are some of the things that I see with my clients that come up and really eat away at those emergency savings, if they have them. Or where people come to me and they're like where can I take money out of? Right, whether it's equity in the home or retirement savings, which you don't like to see, most of the time those emergency go on credit cards when they don't have an emergency savings to pull from. So we definitely don't want to see that, because the rates on credit card interests are outrageous and generally they can be used for emergencies, especially just to kind of bridge you over until you have money to pay them off. But what I see is people will use them for an emergency, and that is the kind of debt that people carry around for 10 years plus. I'll meet with people and they'll go through everything and share statements for investment accounts, 401ks and their equity in their home, and I'll get to that. Any last items you want to share with me. Oh well, I have 30,000 in credit card debt. My goal is to pay it off in two years, but they don't have a plan to pay it off. So, again, let's just avoid this altogether by having an emergency savings and if you have credit card debt, I want you to really make a plan. Sit down and figure out how much you need to pay each month in order to pay it off. Try and consolidate into a lower interest rate, but then also, as you're paying off even if you just start with $100 a month into an emergency savings fund at the same time, so that you don't spend all that hard work paying it off just to have to go into it again for the next emergency. So do both at the same time.

Speaker 1:

And last but certainly not least, as far as scary financial planning moves, that people make, funding their kids college education or just their kids' lifestyle at the expense of their own retirement savings. And this one is really specific to women, and really the analogy is often used for this, but you think about on the airplane you have to put your mask on first, so you have to make sure that your finances are in order before you sacrifice for your kids. The most extreme example I saw of this was a woman who was already kind of living above her means. She had a house that was probably on the high end of what she could afford. She had a lifestyle, nice vehicles that were kind of on the higher end. She had no retirement savings and she was approaching middle age and she wanted to figure out a way to save for her kids' college education as well as private high school. She had young kids. She didn't have an inheritance or anything that she was planning on, she just really wanted this for her kids. It was something that was important to her and, while I'm always supportive and wanting to help my clients reach the goals that are important for them, I just felt like it was such a huge red flag that she had no savings for herself.

Speaker 1:

I like to provide nice things for my kids. I say no more than I say yes, setting expectations and being open and honest. I'm not talking about sharing exactly how much debt you have if you're in debt, or how much you make If you're not comfortable sharing that with your kids, but being open and honest about what you can afford. When it comes to colleges, especially for those who have high schoolers who are going to start the college application process, I have seen people making tremendous sacrifices and even taking on debt of their own, not just sacrificing saving for retirement, but actually taking all their additional income that's not going to cover monthly expenses to pay as you go for college education and then also taking out loans that are going to be so difficult to pay off for these individuals. So if you're struggling with any of these, please do look at our additional resources, some of which I'm going to link below in the show notes, as well as what you can find on pearlplancom. And then, of course, please reach out to a professional for help.

Speaker 1:

Financial planning can be so powerful. Yes, it is an investment up front. They help you make these decisions and also avoid these scary decisions. We would love to help you. Please reach out to us at Pearl Planning if you are looking for a financial advisor to help you with these decisions. And have a happy Halloween. Thank you for listening to the Women's Money Wisdom Podcast. If you found value in our conversations, please take a moment to like, follow and subscribe wherever you're tuning in from. It helps us continue to bring these valuable insights every week. Head over to women'smoneywisdomcom. There you'll find tools, tips and a supportive community to help you gain financial confidence.

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Melissa Joy, CFP

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