Top 5 Financial Need-To-Knows for Young Adults

Financial Planning for Young Adults

           Anne Rogers

I think we can all agree that transitioning from childhood and our teenage years to adulthood is definitely not easy. To say that there’s a lot you need to know in order to successfully navigate those treacherous waters, especially if your parental or educational experiences have left you lacking in that department is an understatement, so here’s a crash course in your top 5 need-to-knows for setting yourself up for financial success in adulthood.

 

Setting up a Checking (Debit) & Savings Account

Getting this account set up is the basis for everything else financial you will be doing in the future.  Make sure to be educated on any monthly or yearly service fees, minimum balance requirements, and overdraft fees that may be applicable to your account and ask about student accounts if you are currently enrolled.  Just visit your local bank and ask to open an account.

Do you need a credit card?

If you are approaching or already in your early 20’s now is the time to look into getting a credit card. The thought can be intimidating, but if you don’t have any other lines of credit (student/ car/ housing loans, debit accounts, etc.) then you will need a credit card to help build a credit score.  Your ability to buy a car, get approved for housing loans or apartments can be dependent on this.  Compare card benefits (sign up bonuses, cash back rates, interest rates, yearly fees, etc.) before you sign up and know that for every credit card you open or close will cause a short term dip in your credit score.  This dip will recover with on time payments and low usage, so make sure you don’t go off the deep end with your new plastic and know your card’s limit!

Build Your Budget!

First and foremost, you need to know what ALL your monthly income and financial responsibilities are. Covering all your bills is first and foremost, then with the money left over there are a few things you need to consider: an emergency fund (try to aim for $30-50 per paycheck), money to save (10% is a good place to start if your income is low), any things you are trying to save for (this amount is personally set), and last but not least, your fun money will be what’s left at the end.

Create a Bill Calendar

Due DateOnce you know what all your bills are, now you need to set up a calendar with reminders to pay or that the payment is being collected out of your account.  Let’s say you get paid on the 15th and 29th of every month and you have 7 different bills that are collected monthly.  Depending on how much your two paychecks are, you may need to ask the entities to which you owe money to move your billing date for 3 of your bills to the 17th and keep the rest on the 1st so that that way you don’t end up in a situation where you need money, but your account was just cleaned out because of your bills.  If possible, try to keep a minimum of $500 in one of your accounts for your emergency fund.  You never know what could happen!

Maintaining Your Files/ Staying up to date on your spending

Finally, make sure you have a safe box that is both fire retardant and waterproof to keep all of your important financial and personal documents (think bills from the mail, credit and debit card account informational packets, birth certificates, social security cards etc.) because you never know when you may need the official document.  Also, look into apps like Mint that help you to track your spending habits so you know where your money is going and in what areas you can cut back if you need to save for something!

Once you have all this down and maintained, you will have set yourself up to be able to be financially stable!  You’ve got this!

 Anne Rogers collaborated with Parr Financial Solutions for a first-hand view of the world of personal finance from a young adult’s perspective.

Parr Financial Solutions Inc. Named A Top Financial Advisor in Baltimore for 2nd Consecutive Year by Expertise.com

PRWeb Release – Columbia MD March 1, 2018 Parr Financial Solutions Inc., an independent, fee-only,wealth management firm serving clients nationwide, was named a Top Financial Advisor in Baltimore for the 2nd year running. Christopher P. Parr CFP®, PFSI President/CEO and owner of an independent financial advisory firm for over 25 years, said: “it is gratifying to receive recognition as Top Financial Advisor in Baltimore again in 2018.” PFSI is among the 18 selected, of 163 judged, for the merit-based Expertise.com award.

merit-based Expertise award badgeBest Financial
Advisors in
Baltimore
2018

“Parr Financial Solutions is dedicated to providing objective, unbiased advice as fiduciaries in the best interest of its clients,” says Parr. “We specialize in managing investment risk, developing customized retirement plans with income distribution strategies, and in estate planning helping clients manage generational transfers of wealth.”

The merit-based award process is conducted by Expertise via a proprietary research and selection process. Only publicly available data is analyzed. Key factors weighed include reputation, credibility, experience, professionalism and availability. The goal is to connect people with the best local experts. Unlike the many ‘pay-for-play’ awards, an Expertise award is based purely on merit.

About Parr Financial Solutions, Inc.

PARR Financial Solutions, Inc. is independent Fee-Only Financial Advisor and Wealth Management firm helping clients define and achieve their long-term financial goals with a customized investment management strategy and a pro-active financial planning approach. Based in Columbia, Maryland, in the heart of the Baltimore – Washington corridor, PFSI serves clients across the country.

President and CEO Christopher P. Parr, CFP® has been an owner of an independent financial advisory firm for over 25 years. He is past chair of the Howard County Pension Oversight Commission where he was appointed by successive County Executives, approved by the County Council, and served 2 voluntary 5-year terms from 2004 -2013 with responsibility for overseeing over $650 million of county pension assets.

Parr is a Certified Financial Planner and a member of the National Association for Personal Financial Advisors (NAPFA), the leading professional association for fee-only financial advisors. Worth magazine chose him as one of the country’s 250 Best Financial Advisors four times. Parr has written articles for national publications, the Baltimore Business Monthly and has been quoted in the Wall Street Journal, the Washington Post, Baltimore Sun, Forbes, Bloomberg, Investor’s Business Daily and other major publications.

 

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Understanding Investment Risk: Impact of Individual Stocks

This article was originally published in River Hill Magazine.

The fastest way to accumulate wealth is to buy the stock of the best company you can find, invest all of your available cash, and sit tight until you eventually need the money.  Most people do not follow this approach because they realize no one is able to predict the future with any degree of certainty, and they are uncomfortable with the investment risk. This concentrated strategy can be the fastest way to lose all of your wealth if you place a bad bet.

It is possible to reduce overall portfolio risk and volatility by creating a diversified portfolio.  From the chart below, total investment risk can be divided into unsystematic risk and systematic risk.

Unsystematic Risk

A truly diversified portfolio eliminates unsystematic risk. The first component of unsystematic risk is business risk.  Business risk is risk that is attributed to a particular industry, competitive threats, and regulatory constraints.  The second component of unsystematic risk is financial risk.  Financial risk is related to the financial health of the company itself, its level of debt, its cash flow, earnings, and profits.

When you purchase the stock or bond of a single company, unsystematic risk is an additional risk that you incur. The professional investment community generally agrees that a basket of at least 25 – 30 different stocks must be held in order to minimize or perhaps virtually eliminate unsystematic risk from a portfolio.  Keep in mind, however, that risk and volatility is the investor’s friend in a rising bull market.  Some investors are perfectly willing to take on higher risk with the hope of achieving higher returns.  A diversified portfolio will generally not lead to the highest returns over time, but should offer more stable and consistent returns than a portfolio that is not adequately diversified.

Systematic Risk

The second major category for investment risk is systematic risk.  The four types of systematic risk are purchasing power risk, interest rate risk, market risk, and exchange rate risk.  Purchasing power risk refers to the risk of inflation.  Stocks have proven to be a good long-term hedge against inflation.  It is prudent therefore for most investors to have at least some portion of stocks or stock funds in their portfolio.  Interest rate risk refers to changes in market interest rates.  When interest rates rise, bonds lose market value, and stocks quite often perform poorly as well.

Market risk is related to the behavior of the market in general.  In the long-run, the stock market is driven primarily by the growth of earnings.  In the short-run, the market can be driven by irrational and emotional factors.  Many individual investors do not realize how much the performance of a company’s stock is dependent with the behavior of the general market.  The statistical term for this is beta.  The best way to diversify against market risk is to hold different asset classes in your portfolio that behave differently (not highly correlated).  This strategy involves using a combination of cash, bonds, stocks and even other asset classes.  Within the major category of stocks, an investor can further diversify by choosing among small, large, growth, and value stocks.

The last type of systematic risk is exchange rate risk.  Exchange rate risk results from adding international investments to a portfolio.  It is impossible to eliminate systematic risk completely from a portfolio, but it can be reduced.

If your investment goal is to implement a strategy of lower volatility and reduce risk, then avoiding individual stocks in favor of using more broadly diversified funds should provide a smoother ride.


Christopher P. Parr CFPTM is a River Hill resident and President of Parr Financial Solutions Inc.- an independent, fee-only financial advisory firm:  www.ParrFinancialSolutions.com

News and Insights

Business Monthly: Ten Common Investment Mistakes to Avoid

  1. Taking Excessive Risk

Many investors gravitate toward investments offering the highest potential returns while ignoring the associated risks.  If your investment loses 50% of its value during a bear market, it will take a gain of 100% just to return to break-even status.  The goal of a well-diversified, balanced portfolio is to reduce market risk while earning steady, consistent returns over a long time horizon.  Minimizing losses during downturns generally produces higher average compounded returns over a long time horizon. Read more

Financial Planning: the right target-date funds strategy for clients

Christopher Parr was quoted extensively in this article by Donald J. Korn on target-date funds strategy (or TDFs) in the September, 2016 issue of Financial Planning Magazine.

Parr discusses two approaches advisers can take when using TDFs in client portfolios.

  • “Some funds have a glide path to the date of retirement, gradually reducing exposure to stocks until the specified year of retirement and then leveling off,” says Christopher Parr, CEO of Parr Financial Solutions in Columbia, Maryland.
  • Alternatively, a TDF on a glide path through the targeted year typically has a higher allocation to stocks at that date, but decreases equities afterward.

While real life might throw a curveball to advisers who see themselves on the “through” side, Parr says, “My preference is to keep reducing equity allocations as retirees grow older.” He tells of a client who is in his 90s with a moderate-risk portfolio. “He’s comfortable,” Parr says, “so he’s not changing his allocation.

Thus, the portfolio brought to retirement may be fine all the way through. Or, as Parr observes, some clients are reluctant to adopt a more conservative stance because “nobody wants to face up to getting older.”

River Hill Magazine: Five Common Investment Mistakes to Avoid

 

  1. Taking Excessive Risk

Many investors gravitate toward investments offering the highest potential returns while ignoring the associated risks.  If your investment loses 50% of its value during a bear market, it will take a gain of 100% just to return to break-even status.  The goal of a well-diversified, balanced portfolio is to reduce market risk while earning steady, consistent returns over a long time horizon.  Minimizing losses during downturns generally produces higher average compounded returns over a long time horizon.

 

  1. Using Stocks to Meet Short-Term Cash Needs

Funds that are needed to meet a specific financial goal in less than a three-year period, and perhaps longer, should not be heavily invested in stocks or stock funds.  Examples of goals are a car replacement, the down payment on the purchase of a home, or even plans for a major vacation.  The logic behind this is simple.  Stocks are quite capable of losing 30% of their value or even much more in a rather short period of time.  When these periods of volatility occur, the odds are that you will not escape the carnage.  Based on historical data, it often takes 2-4 years and sometimes longer to recover from a major market setback.  When your goal is short-term, it is more important to protect your resources than to reach for higher returns.

 

  1. Lack of Diversification

Diversification is the key to managing total portfolio risk and volatility.  Reallocating funds moderately between asset classes that have a low correlation relative to the U.S. stock market can potentially reduce portfolio volatility without significantly sacrificing long-term portfolio returns.

 

  1. Concentration – Keeping Most of Your Eggs In One Basket

A concentrated investment strategy is the quickest way to accumulate wealth as long as you make the correct investment decision.  It is also the quickest way to lose wealth if you make a poor investment choice.  A general guideline is to limit any individual stock to 5% or less of the stock portion of your total portfolio.  An allocation above 5%, while carrying significant risk, could be justified if you are knowledgeable about the specific investment and are confident that this particular investment can outperform the broad market or other alternatives.

 

  1. Stretching For High-Yield At The Expense Of Quality and Stability

Income-oriented investors are frequently attracted to the promise of high-yielding investments.  It is important to mention that investment returns are comprised of two factors.  One factor is the income or yield that is generated in the form of interest or dividends.  The second factor is capital appreciation or depreciation (loss).  Total return, the sum of these two factors, is the bottom-line and all that counts.  If an investment advertises a yield that seems too good to be true, it probably is.  Interest rate or yield is irrelevant if you lose your investment.

 

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Christopher Parr is a River Hill resident and President of Parr Financial Solutions Inc.- an independent, fee-only financial advisory firm:  www.ParrFinancialSolutions.com

Vantage House Men’s Breakfast, JUL 28, 2016 | Macroeconomic Food for Thought

Chris Parr was invited to speak to an engaged and inquisitive group at Columbia’s Vantage House on the impact of Brexit and the global outlook for interest rates and the stock market.  One of the key points he made was that stock market values in the U.S. are inflated relative to economic value and that it may be a good time to invest outside of the U.S. in spite of the challenges facing Central Banks globally.

Brexit Microeconomic Impact

Business Monthly: Stock Market Turbulence & 5 Steps to Weather the Storm

The increased stock market volatility experienced to date in 2016 has been driven by a global economic slowdown leading to increased fears of a recession in the U.S.  At this point, the U.S. economy does not appear likely to be on a path toward a recession in 2016. Contrary to the stock market turbulence, some risk seekers may wonder if this is a good time to jump into the market and invest extra cash while the market is down. It may be best to not do much trading when markets get extremely volatile. Here are five steps that investors can take to weather stock market turbulence:

  1. Distinguish financial resources required to meet short-term goals from long-term goals.
  2. Understand your cash-flow requirements. Cash needed to…

To read the complete article by Christopher Parr, CLICK HERE.

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Christopher Parr is President of Parr Financial Solutions Inc. , a Columbia-based, independent, fee-only, wealth management firm:  He can be reached at 410-740-9011 or on-line: www.ParrFinancialSolutions.com

River Hill Magazine: Lifecycle Target Date Funds – A useful investment tool and not a one-stop shop

Lifecycle funds, also known as “target date” funds (TDF), are popular investment choices found in many company retirement plans.  They are also being marketed to individual investors through mutual funds as a single, one-stop investment solution.  Lifecycle funds have a simplistic concept which may not be such a bad idea.  The concept is that these funds, primarily using a mix of cash bonds and stocks, steadily become more conservative as the account holder ages.  The funds typically have names that include the desired year of retirement (i.e. “Retirement 2045 Fund”).

An advantage of TDF’s is that they can help keep retirement plan participants fully invested and focused on building long-term growth retirement savings.  New contributions from participants previously were often parked in low-earning cash or money market funds as the default investment choice until specific instructions from the account holder were made.

Lifecycle target date funds are not generic in nature and can actually be quite complex.  A common misperception among many investors is that funds from different providers with the same target year in the name will have very similar investment philosophies and identical risk and reward profiles.  When using lifecycle or target date funds it is important for investors to have a clear understanding of the design of their specific fund.

Perhaps the most important concept to understand is known as the “glide path”.  This design feature determines how much of the fund assets are invested in stocks as the target date of retirement approaches.  A glide path “to” the date of retirement gradually reduces exposure to stocks up to the specified year of retirement and then typically levels off at a stock allocation around 30%.  A glide path “through” the targeted retirement date typically maintains a decreasing allocation to stocks through the date of retirement plus 20-30 or more years covering average life expectancy in retirement.  A “through” glide path often, but not always, maintains a 25-30% allocation to stocks in the later years.  The spot where the glide path levels off is called the “landing point”.

There are a few potential drawbacks to using target date funds:

  1. There is no standard definition from company to company for the design of the glide paths.
  2. Target date funds assume all investors have the same financial needs and risk tolerance.
  3. TDF’s are often a collection of proprietary, in-house mutual funds. The proprietary nature opens up the possibility of higher fees or poor performance from some of the underlying funds.
  4. There could be a lack of transparency regarding the total cost of these funds due to additional underlying fund charges.

The most significant problem with target date funds, however, may be the lack of protection during times of stock market turmoil.  In 2008, during the global financial crisis, the average “2010” target date fund lost 25% of its value.  In other words, a typical investor within 2 years of a planned retirement date would have lost 1/4th of the value of his entire retirement savings.

Here are a few points to consider when evaluating target date funds:

  1. Does the fund follow a “to” or a “through” retirement date glide path?
  2. When does the glide path reach the landing point and level-off?
  3. What is the past history of the fund and the experience of fund management?
  4. What is the trade-off between investment risk and the risk of outliving assets?
  5. Are total fund fees transparent and not excessive?
  6. Is the fund manager allowed to deviate from the glide path explained in the prospectus to make tactical (market-timing) adjustments?

To summarize, lifecycle target date funds are becoming an increasingly significant component of most investors’ company retirement plans.  It is important to research a particular fund, understand the potential risk-reward trade-offs, and how the fund allocation will evolves over time.  On a final note, remember that lifecycle target date funds are long-term investments and probably not a suitable place to park funds needed to meet short-term goals.  Also, use of these funds does not guarantee that the individual investor will be saving enough for retirement.

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By Christopher Parr, CFP® is a River Hill resident and President of Parr Financial Solutions Inc.

– An independent, fee-only financial advisory firm:  www.ParrFinancialSolutions.com