For young people early in their careers, the COVID-19 pandemic and its economic fallout are perhaps the first time they are navigating financial hardship as an adult. Many are navigating job loss, salary reductions, a volatile stock market, and economic uncertainty for the first time. Certified Financial Planner Gideon Drucker of Drucker Wealth specializes in working with young people and advising them on the unique financial concerns they face. He shares his advice for young people who are facing uncertainty around their financial future.
You primarily work with young people in your financial management practice. What are some of the trends you’ve been seeing with your clients?
Well, I’ll start by saying this…When the world is spinning a million miles a minute, and we’re all dealing with work, family, friends, and the daily grind, it’s easy to avoid asking the difficult questions, keep your head down, and hope for the best. It’s even easier to be content with this approach when the stock market & your 401(k) are consistently going up (as it has for the last decade) and you figure all is great!
But, as we all know, the world has changed.
Right now, more than any other time in my career, I’ve found that young people are truly looking to peel back the curtains of their financial world and see where they stand. They want to know how they’re financially affected by everything going on and what it means for their future. Has market volatility affected their ability to send their young kids to college one day? Has the change in their cash flow affected their ability to put away money for retirement? Put another way: so many more people are taking a step back and wondering if they’re still (or ever were) really on the right track to accomplish their goals.
With clients that I’ve been working with for years, we’ve spent the last few months game planning for different financial decisions they’re contemplating as well as any new financial realities that may have happened to them. We’re going back into their original financial plan (their financial “decision center” as we call it) and stress test different scenarios that may play out over the coming months and years. Clients have wanted to do this more in the last 3 months than the last 3 years combined.
Some clients want to know what their plan likelihood for success would be if their income were to fall 20% over the next 12 months, or what would happen if they pushed back buying a home another year. Simply put, clients want to know where they stand in relation to their financial goals.
In a lot of ways, the most difficult and frustrating part of this crisis is the not knowing…the fear of not knowing what the future holds. Well, I’ve found that to be a trend with young professionals during these times especially. The people we’ve met that had done minimal planning leading up to March have found themselves the most stressed about what the future holds right now. We’re trying to help them rectify that.
How can people early in their careers manage economic anxiety right now? What should they be paying attention to as far as their finances?
Put pen to paper. In The Martian (one of my favorite movies), Matt Damon’s character explains his mentality while he survived all those months alone on Mars. He says, “You just begin. You do the math. You solve one problem and the next one. And the next one. And if you solve enough problems, you get to come home.” Well, we’re not trying to escape from another planet… but the same general idea applies here. Start small and take it from there:
1) What’s your monthly burn? How much do you spend each month? How much of that is fixed and how much is variable (optional!) Are all of those optional expenses necessary or even wanted right now? Is there anything you can cut back on with no real effect to your lifestyle? Sometimes just breaking out the numbers like this provides some much-needed clarity.
2) Next, write down your goals. Not in an abstract “I want to be a millionaire one day type of way.” But using actual costs and realistic timelines. If you want to own your home…in what year? What area? And what’s an expected price for that area?
These two things are an excellent way to build a foundation AND to manage your economic anxiety immediately. Of course, there’s more work to do, but the clearer we are about our habits and our goals, the less scary and hypothetical it all sounds. It can be quite liberating to honestly define & articulate where you stand and what you’re hoping to achieve.
Why shouldn’t people panic right now?
Because this can be a huge opportunity to proactively plan for your financial future. It can be a catalyst for change. Most of us don’t take positive steps forward (in anything) unless forced to. Well, allow this moment to become your catalyst for change. Use the past few months as a dress rehearsal for what CAN go wrong in your financial life and prepare accordingly so that you’re ready for the next financial crises, job loss, sickness etc. Commit to doing the things necessary to come out of this in better financial shape than you started.
I’ve met so many people over the past few months that are using this entire situation as the impetus to start taking their finances seriously and it’s a powerful thing to see.
You’ve probably noticed, as you’re reading, that I haven’t mentioned much about the stock market…That’s because, by and large, it’s totally out of our control: none of us can know what’s going to happen in the stock market over the next few months. But for us young people, we don’t need to know what’s going to happen over the next 6 months- it doesn’t matter! We have time on our side. Every single 20-year period in history has shown positive gains in the stock market. So, if you’re 30 years old and investing for the next two decades, don’t worry about the short-term market corrections. We’re in it for the long haul… both time and history are on our side.
You’ve written about the “anyone can be a millionaire” mentality and blue-collar millionaires— that it’s often not about how much money you make, but how much money you save. Tell us more about that.
Absolutely. So, my grandpa started our firm back in 1959, and we’ve worked with clients at every stage of their financial life. And, without question, the clients that truly accomplished their financial goals and reached retirement financially independent were the ones that were the best (most disciplined) at saving money, not necessarily the ones that were the best at making it. The book that best encapsulates this idea is called The Millionaire Next Door. The book breaks down the spending habits and lifestyle choices of America’s millionaires. And the surprising reality was that most of these millionaires didn’t necessarily break the bank income-wise, but rather because they all lived by two secrets:
1) Live below your means
2) Save a disproportionate amount of your money
They were able to reach a level of financial freedom that most people never will. I think this is the most powerful news a young person can hear! Of course, making more money helps and makes everything easier, but the reality that we can save our way to reaching financial independence is an amazingly powerful truth. We have more control over our finances than we think.
On the flip-side, I meet people making hundreds of thousands or millions each year and saving less than 15%. As their incomes increased, so too did their spending (something we call “lifestyle creep”) because they had never focused on saving money, and their lifestyles just kept gradually catching up to their income. Now, they may have nice toys, eat, and travel well, etc., but if everything they’re making is going right back out, they’re not really building any sort of long-lasting wealth because they’re not storing money away. Think about it like this… If you save $50,000 each year, it doesn’t matter if you made $500,000 or half of that in order to get there. At the end of the day, whether you reach your financial goals (or become a millionaire) is based ONLY on that $50,000 number you still have at the end of the year.
What are some concrete actions young people can take right now to shore up their finances?
1) As I mentioned above, break down your expenses. This is the most direct and immediate way to turn the financial corner. What’s nonnegotiable to cut, what are the expenses you’d rather not cut, and what are the expenses that are purely a luxury? Work backwards to shore up your monthly expenses even if it’s only temporary and to get back on track in the short-term.
2) Think about your family’s protection planning. Right now is an opportune time to buy life insurance & disability insurance to protect your family and your income. Most of the insurance companies we work with are not requiring medical exams and the underwriting requirements are much more lenient than they normally are. Most young people haven’t thought much (if at all) about their life insurance needs, but it’s a cost that only goes up by waiting, so I would recommend at least having that conversation and figuring out what’s appropriate for you and your family.
3) Have an approach to save money consistently and automatically. Every single new client we start working with has their own “Wealth Accumulation Account” to automate the process by which they add money to their investments in the same way that their employer automates their 401(k) saving. The more consistent and habitual your saving habits are, the greater your chances for long term success.
4) Be proactive in your tax planning. There are reasons why, depending on your income, saving money into a Roth 401(k) might be better than a Traditional 401(k) as it can save you more on income taxes in the future. If your income was lower this year than it normally is, it might be a great opportunity to do a Roth IRA conversion of any Pre Tax IRA money you have because you would be paying the taxes due on that conversion on a lower income this year than any year to come.
These are all general & high-level thoughts and recommendations, of course, but I know that if you start to become more proactive in your planning and money management you will be setting yourself up for financial success!
Gideon Drucker, Certified Financial Planner, is a third generation advisor at his family’s wealth management firm, Drucker Wealth. A Forbes 2019 Top Next Gen Advisor, Gideon is the Founder and Director of the firm’s division for young professionals. He is the author of the new book “How to Avoid HENRY Syndrome: Financial Strategies to Own Your Future.”
The views and opinions expressed are those of the author.