Joe and Jill Johnson are regular people. They graduated from BYU, got married, and now have a few children. The Johnsons enjoy taking family vacations and cheering for the Cougars on game day. Joe makes a good salary, and the Johnsons face the same challenges most of us deal with. The stability of the Johnsons’ financial structure depends on their habits and daily decisions about money:
|Joe and Jill Johnson are regular people. They graduated from BYU, got married, and now have a few children. The Johnsons enjoy taking family vacations and cheering for the Cougars on game day. Joe makes a good salary, and the Johnsons face the same challenges most of us deal with. The stability of the Johnsons’ financial structure depends on their habits and daily decisions about money:
• The Johnsons account for every dollar in a detailed budget each month.
• They spend less than they make each month.
• They pay the balance each month on their one credit card.
• They always pay their bills on time and have credit scores in the mid-700s.
• They pay their tithing and give generously in other offerings.
• They pay an extra $75 each month to their mortgage for their modest home.
• They contribute to Joe’s 401(k) each month, and Joe’s employer matches 6 percent.
If Joe and Jill continue building within this financial framework, they will pay off their debts quickly and retire comfortably. Their wise planning opens up a host of possibilities. Three BYU personal finance experts have advice to help the Johnsons—and you—make the most of that hard-earned money.
As evidenced by the example of the Johnsons, building and maintaining financial security often has more to do with making wise decisions than with making more money. To be like the wise Johnsons, you need to go beneath the sometimes-daunting surface of the financial world—a surface filled with jumbles of words and numbers like Roth IRA, 401(k), and annuity. You need to dig down and grasp the basic underlying principles of finance, many of which have been endorsed and expanded upon by Church leaders.
Three of BYU’s personal finance experts—Bryan L. Sudweeks (BA ’80), Craig L. Israelsen (PhD ’90), and Todd M. Martin (BA ’84)—are here to help. The BYU experts suggest that success in personal finance isn’t as hard or confusing as it may seem. With the right tools and a little motivation, anyone can improve their financial situation. “Assets and other things change,” says Sudweeks. “Principles don’t.” According to Sudweeks, Israelsen, and Martin, applying five simple principles will help you construct a safer and more secure financial future.
Lay a Solid Foundation
You may have learned your best financial lesson in Primary, when with swooping hand gestures and great gusto you sang, “The wise man built his house upon the rock.” The BYU experts say that same gospel foundation that kept the wise man’s house from washing away should be at the base of all your financial decisions.
According to Sudweeks, an associate teaching professor of business management, a first step is to learn to view money matters through a gospel lens. He often quotes Elder N. Eldon Tanner, a former Apostle and member of the First Presidency, who taught, “We must first seek the kingdom, work and plan and spend wisely, plan for the future, and use what wealth we are blessed with to help build up that kingdom” (“Constancy amid Change,” Ensign, Nov. 1979, p. 80). From such a perspective we see that everything ultimately belongs to God and we are only stewards. This, Sudweeks notes, should eliminate our pride in material possessions and help us see money as a way to fulfill our stewardships—strengthening our families, serving others, and building up the kingdom of God.
Create a Blueprint
Before you start evaluating your financial situation, you need to draw up a blueprint for your fiscal goals. “It is not enough to just want to save money,” says Sudweeks. “You should know what you are saving for.” Goals, he says, should be SMART—Specific, Measurable, Achievable, Realistic, and Time bound.
Look at where you want to be in one, five, 10, 20, and 30 years and create goals that will help you get there. The experts suggest organizing your goals into short-term (within a year), medium-term (two to five years), and long-term (more than five years) categories. Do you want to establish a pattern of monthly budgeting or do you need to reduce credit-card debt? Put those in the short-term group of goals. Would you like to put a down payment on a house or build up emergency stores of food and money? Think medium-term goals. Are you hoping to financially support your children on missions or build up retirement funds? Plan for the long term there. Having a written set of goals can help you handle unplanned expenses, save money for special purposes, protect your assets, invest intelligently, and minimize your tax payments.
Build a Life You Can Afford
“Simplify, simplify,” wrote Henry David Thoreau. Israelsen, an associate professor of family life and columnist for Financial Planning Magazine, says we should all take Thoreau’s message in Walden to heart. Israelsen isn’t suggesting that you move to an isolated shack and hoe your own beans, but he does believe that learning to live more simply will save you from many financial pitfalls. BYU alumni in particular, he says, should follow prophetic counsel to live within their means and stay out of debt.
One of the keys to living within one’s means, Sudweeks says, is developing and living on a detailed budget. Sticking to a budget can help you avoid rash purchases, make more responsible spending decisions, and stay out of debt.
In addition to showing expected income and expenses, a budget should reflect your short-, medium-, and long-term goals, says Sudweeks. You should regularly evaluate your budget versus your actual expenses and adjust your budget or spending habits as necessary.
The BYU experts are quick to remind Church members to take tithing into account when budgeting for expenses large and small. Having 10 percent less money will likely mean you live in a smaller home, purchase a less-expensive car, or take a less-lavish family vacation than the average American household.
Lay Up in Store
Martin, financial counseling and outreach manager in BYU’s Financial Aid Office, tells of a young friend who, in his high school years, was determined to buy a black Volkswagen Jetta. The young man worked very hard, saved $20,000, and bought the car. He drove it for about three months before leaving on his mission, and when he came back, the Jetta was worth closer to $14,000. “If he could have piled that money into a Roth IRA and left it there until he retired, it would have been worth between 2 and 3 million dollars at age 65,” says Martin. “They say girls like cars, but the smart girl is going to say, ‘I’ll take you and the $2 million, thanks.’”
For the BYU experts, the overarching principles of investing are simple: follow prophetic guidance and put your money into assets that will be worth more as time goes on—like a home, an education, or a well-managed mutual fund. Israelsen also points out the importance of starting investments early, particularly for retirement. “Let time be your ally,” he says. “If you invest money sooner, time has more power on it.” Though investments may at times mean sacrificing fun now for security later, Israelsen says it can be very rewarding to build up a reserve to support you through your retirement years.
Before thinking about such investments, though, the experts say everyone should first “invest” in food storage and an emergency fund. Martin says each family’s food storage will differ depending on their position in life, but every family should prepare for the unknown. If a year’s supply is daunting, start with a month’s worth. Then work up as you can. “You don’t have to have 5,000 pounds of wheat,” he says. “But it’s sound to have some margin between you and the street.”
Make Room to Give
Sudweeks likes to quote American politician William Jennings Bryan, who stated, “The human measure of a human life is its income; the divine measure of a life is its outgo, its overflow—its contribution to the welfare of all.” According to the BYU experts, giving should not begin after you are established and making a robust salary. “If you don’t learn to give when you are poor,” says Sudweeks, “you will never give when you are rich.”
A recent study demonstrated that people who have more money actually give a smaller percentage of their income to charitable causes. Sudweeks recommends measuring your charitable donations in terms of percent of your income, rather than in dollars. “Don’t let your giving decline as your income increases,” he says.
Israelsen says learning to give is essential to being a wise steward over material things. “We are preparing for the infinite by learning to deal with the finite,” he says. “When others suffer, we either look at them and do nothing, or we do something. And if we do something with our finite resources, we will have less. And therein lies compassion.”
Get Your Financial House in Order
Like the lives of Joe and Jill Johnson, your life can take drastically different directions depending on the financial choices you make. Sudweeks, Israelsen, and Martin recently sat down to offer financial advice to people like you in different stages of life. While the people represented in the following case studies are fictional, their problems and concerns are very real.
Kelly A. Popham (age 22) is a BYU senior majoring in sociology who plans to graduate this December. Kelly relied on student loans and financial support from her parents for the first two years of her college experience, but she now supplements her parents’ support by working 20 hours per week at a retail job where she makes $8 per hour. Her manager has offered her a position as assistant store manager after she graduates—a job that would pay roughly $30,000 per year. Because her parents will no longer be helping her financially after college, Kelly is concerned about all the responsibility that comes with being financially independent. She owes $2,000 on a credit card, $6,500 on her car loan, and $6,000 on her student loans, and she would like to go back to school in a few years to get an MBA.
What the Experts Say:
1. Develop a budget. “Kelly needs to watch her cash flow,” says Martin. “Very often if you get this sudden stream of income, you’ll say, ‘Oh great, I can go out to dinner every night or buy all these clothes.’” If Kelly can carefully account for her income and expenses, she can ensure that she is using her money to progress toward her goals.
2. Build up an emergency fund. Kelly needs to begin putting away money and food in case of an emergency. Martin recommends starting with saving $1,000 in a cash equivalent (such as a short-term CD, a money-market account, or a savings account), and then working up to saving three months’ living expenses. Because Kelly is young, she may not have the money or the space for extensive food storage. But, says Martin, “when she shops for food, she could buy a little extra and set aside some food each month.”
3. Ensure that basic insurance is covered. Kelly should investigate the medical insurance benefits her employer will offer once she takes the job as assistant manager. In addition, she should consider renter’s insurance to protect her assets.
4. Make a debt-reduction plan. A debt-reduction plan will help Kelly determine how quickly she can eliminate her debts. The rule of thumb is to pay off the highest-interest loans first. Thus Kelly ought to first focus on her credit-card debt, then her auto loan, and then her student debt. Martin also points out that most lenders will give Kelly an even lower interest rate on her student loan if she sets up automatic payments.
Carson (age 27) and Trudy Hale McInnis (25) got married right before graduation and moved to Indianapolis after leaving BYU. Carson has worked with a marketing firm in Indianapolis for three years and makes about $41,000 per year. The McInnises have one daughter, Jessica (age 2), and are expecting a second child in June. Carson has access to a 401(k) plan with his employer but contributes only 2 percent. His employer will match his contributions up to 5 percent. Both Carson and Trudy have Roth IRA accounts, and each has about $1,000. The McInnises spend roughly $250 per month on satellite television service, two cell phones, and eating out. They typically have no money left over each month. In fact, they regularly overspend their monthly budget. Carson and Trudy would like to buy a home, but they have a lot of debt. They owe $6,200 on a car loan, $2,000 on their student loans, and $4,000 on their credit cards, mostly from the purchase of furniture and electronics for their apartment. When they were first married, they failed to pay the monthly minimums on their two credit cards, which significantly lowered their credit score.
What the Experts Say:
1. Cut expenditures by budgeting carefully. Before they can focus on a down payment, Martin says that Carson and Trudy need to “get their budget under control so they’re not bleeding every month.” They spend $250 per month on things they could do without, like cell phones and entertainment. If they can cut that number in half and reduce other expenses as well, they will have more money to pay off their mounting debts.
2. Set a timetable for paying off debts. In developing their budget, the McInnises need to incorporate a detailed debt-reduction plan. “Set a finite target to get the debt taken care of,” says Israelsen. For instance, if Carson and Trudy put the $125 they freed up by halving their superfluous expenditures toward aggressively paying down their debts, they can pay off their debt in just under three years. An important side benefit is how the McInnises’ credit rating will improve as they pay down their debts.
3. Build a down-payment fund. While purchasing a home is a worthy goal, Israelsen says home ownership may still be several years in the future for the McInnises. After their debts are paid, the McInnises should take all the money that went into debt reduction each month (the combination of the payments on the credit cards, auto loan, and student loans) and place it into a fund for a down payment on a home. If they do this faithfully, they can have a down payment for a reasonably sized home within a year or two after they’ve paid their debts.
4. Build up a 401(k). The experts agree that while it is good to have money in Roth IRAs, the McInnises should focus on Carson’s 401(k) right now. Carson should increase his monthly contribution to get the full employer match. “Always take the matching funds,” Martin says. “That’s high leverage, high payoff. He makes 100 percent profit immediately, before it even goes into the mutual fund to grow.”
Morgan (age 43) and Kristine Webster Hirsch (43) have five children: Angela (16), Jonathan (14), Rachel (10), Jacob (6), and Justin (4). Morgan works in aerospace engineering in Seattle and makes about $92,000 per year. Money was tight when the Hirsches first married and started their family. Consequently, Morgan and Kristine haven’t put any money away for their kids’ college education or missions. Now the Hirsches are playing catch-up as they get ready for Angela to go to college in two years and Jonathan to serve a mission in five years. The balance on their home mortgage is $145,000, and they owe $9,000 on their minivan. Morgan and Kristine are preparing for retirement by taking advantage of their 401(k) and Roth IRA accounts. They seldom overspend their monthly budget but typically don’t have much left over.
What the Experts Say:
1. Invest in a 529 plan. To address their children’s educational needs, the Hirsches might consider a state-administered college-savings program (called a 529 plan for the section of the Internal Revenue Code that authorizes it). “A 529 plan is a program wherein you can gift money and it will grow tax-free if it is used for college,” says Martin. Money from a 529 plan can cover any college costs and can be transferred from one child to another. If the money isn’t used for college, however (for instance, if the Hirsch children decide not to go to college), the Hirsches will pay a 10 percent penalty to withdraw it, plus taxes on any earnings.
2. Help children invest money for college. Another approach for college savings is for the Hirsches to help their kids invest in Roth IRAs. Because their children aren’t yet 18, they can’t open their own accounts, but Morgan and Kristine can open custodial accounts in their children’s names. Money that goes into Roth IRAs cannot be gifted—it must actually be earned by the children. The principal can be taken out of the account at any time, and after the account has been open for five years, the interest can be withdrawn without a penalty to pay for college.
3. Set up a “family 401(k).” Israelsen recommends enticing the kids to save for their own futures by setting up an at-home matching plan. “For every dollar they save toward college or a mission, match it with 50 cents, or whatever ratio you choose,” he says.
4. Allow siblings to support one another. According to Martin, one of the best ways to save for education and missions is to encourage the children to support each other financially. “In our family, there are six boys,” says Martin. “The little brothers shovel snow for the oldest brother’s mission. Even our 7-year-old wants to get out and do his part. And there is a unity and a benefit that is beyond just having the money.”
Allen J. (age 55) and Mary Farr Redden (54) are empty-nester parents of three children and are grandparents of four. Allen has worked for the same company in Tulsa, Okla., for 31 years and is currently the company’s controller, making around $111,000 per year. Throughout his career, Allen has contributed about 9 percent of his income to his 401(k) plan, and his employer has matched 5 percent. The balance of his 401(k) account is just over $2 million. The couple also has a portion of their savings in a combination of stocks and bonds, which have a balance of $600,000. Allen would like to retire in eight years, and the couple is concerned about whether they will have enough for retirement, long-term health care, and the cost of serving a mission. Mary opened a small neighborhood nursery a few years ago. Allen and Mary owe $45,000 on a home equity loan and $68,000 on a business loan for Mary’s nursery. The Reddens usually have $1,500 of surplus income each month, which they deposit into a savings account.
What the Experts Say:
1. Set a goal to pay off loans in three to six years. Israelsen says a large portion of the $1,500 the Reddens are saving each month should go toward paying off their debts so that they can retire debt-free. “Prepare as if Allen is going to retire at 60 without really intending to do so,” he says. By paying off those debts before retirement, the Reddens will have the freedom to step away when they decide the time is right.
2. Don’t stop budgeting. “They’re making good money,” says Israelsen, “but they still have to budget. You never outgrow budgeting.”
3. Determine retirement needs. The Reddens have saved well, but according to Sudweeks, they need to sit down now and determine how much money they will need in retirement, which may last as long as 30 or 40 years. If the amount they have saved will not cover their projected expenses, they may need to restructure their current budget to allow them to save more for retirement.
4. Discuss stock and bond allocations with a professional. Martin suggests that the Reddens see a certified professional about the allocation of their stocks and bonds (see “Ready, Set, Invest,” p. 40). In choosing a financial advisor, however, the Reddens should be wary of advisors who stand to gain substantial commission from recommending particular investments.
For additional ideas and tools to help you shape up your personal finances, see personalfinance.byu.net. Also, check out the tools available for students at the BYU Financial Aid Web sites, financialaid.byu.edu and financialpath.byu.edu.
Learn to Pay Yourself
Sudweeks suggests an alternative to traditional budgeting: First, pay your tithing. Second, pay yourself—put 10–20 percent of your income (depending on your financial situation) into your savings and investments. After you have paid the Lord and yourself, budget the remaining money for living expenses.
Budgeting: The Better Way
Income --> Pay the Lord --> Pay Yourself --> Expenses = Other Savings --> Personal Goals
Financial Tool Box
Need help creating a budget, developing a debt-reduction plan, or choosing between a Roth and a traditional IRA? The Marriott School of Management has developed the Web site personalfinance.byu.net to help you plan your financial future. Click on “Tools and Resources” to access free personal finance courses, manuals, readings, and software tools like these:
• Budget Balance Sheet and Income Statements
Set up a budget tailored specifically to your needs.
• Maximum Mortgage Payments for Latter-day Saints
See how much you can afford to pay on a mortgage with tithing taken into account.
• Debt Elimination Spreadsheet with Accelerator
Find out how much money you would save by paying off your debts faster.
Ready, Set, Invest!
Before you start investing your money, Sudweeks recommends that you answer the following questions:
• Have I paid my tithes and offerings?
• Do I have adequate health and life insurance?
• Am I out of credit-card and consumer debt?
• Do I know my goals and have a written investment plan?
When you can check all these off, you are ready to start investing.
Sudweeks suggests that there is a priority to investment and that the following is a wise investment strategy:
• First, cover the basics: build emergency funds and food storage.
• Second, build your core: select mutual funds that invest in broad market indexes (such as the S&P 500).
• Third, diversify: broaden and deepen your asset classes. (“Choose several mutual funds that focus on large U.S. stocks, small U.S. stocks, international stocks, REITs, etc.,” says Israelsen.)
• Fourth, consider making some opportunistic moves: invest in individual stocks and sector funds (funds that invest only in one “sector,” such as energy, health care, precious metals, etc.). Realize, however, that you can have a successful portfolio without investing in individual stocks.