Saving & Investing
Balancing multiple goals and needs
November 20, 2013
Rebecca Katz: Okay. Our next question is from Nathanielle from Wellington, Florida. "I have a poor financial history. Now I'm paying back debt and trying to fix my credit. I'm a single mom of four, and I can only do so much on one income. I'm afraid I won't have enough to retire on. I've just started my 401(k) this year. What should I be focused on?" Sarah?
Sarah Hammer: Well, that's such a complex question, Rebecca, and I guess the first thing that we would say would be thank you to her for writing in because actually it's something that a lot of people grapple with. Having multiple goals and multiple needs and then feeling like a lot of times your financial needs are competing needs and wondering how you can meet all of those needs.
So I think the first important thing to recognize is that it is possible to address multiple goals, if you prioritize and you plan. And when you're dealing with a lot of different issues, like it sounds like she's dealing with debt, with credit, with retirement, a single income, and having children, a lot of the time what we will tell people is that you should first think about your credit history if you do have a negative credit history.
And all credit history means is each one of us has a history of if we repay our credit cards, or if we have a mortgage, or if we have a lease on a car, how do we make those payments? Are we making them on time? Are we making them in full? Do we have debt that we're not repaying? And if you miss a payment or you're not paying your debt down, then you can develop a negative credit history over time, and that can really impact you in a number of different ways. It can make it hard to take out a loan in the future. It can make it hard to get utilities, and it can actually affect your employment. Sometimes employers will go out and look at your credit history.
So when someone's in that situation, it makes a lot of sense to start by just getting your credit history. Go to one of the national credit bureaus. You can find information online, and get one of those free reports. Look at your credit history. Identify the issues that are there, and then make yourself a plan and start to pay down that debt over time. Set up your monthly payments, and when you are successful in paying down your credit cards, keep your cards because it actually continues to establish a track record of good credit. And that can reap a lot of benefits over time. So you have to be persistent, and you have to be patient about it, but it can be done.
Rebecca Katz: But when you think about those competing priorities—saving retirement, saving for her children's college, and debt—is that debt issue really the top priority?
Sarah Hammer: It's really one that should be addressed from the get-go because, unfortunately, if you have a negative credit history, then it can affect all the other aspects of your financial life. So, they're all important goals; I mean we'll be talking about all of them here today, I'm sure. But that's definitely one that you want to address from the get-go.
Rebecca Katz: Our next question is also from someone's who's single but a recently divorced single mom named, Sue, who says, "Where should I invest the most—my retirement, my child's college, or real estate?" And I think we frequently hear that you can always borrow for some of these other things, but you can't borrow for your retirement. I don't know if you tend to agree with that.
Sarah Hammer: Right. Yeah, that's a common question. It's another one of those questions about multiple goals and competing goals. And, again, what we tell clients is it's possible to address multiple goals with prioritization and planning. And as you mentioned, Rebecca, saving for retirement is so important. So if you are close to retirement—and when we say close, we mean 20 years or less until retirement—and you are falling short of your retirement savings goals, then you really have to get focused on that because, as you mentioned, there are no loans for retirement. There are no scholarships for retirement, not in your old age. So really focusing on that.
And, in addition, as Catherine and Karin mentioned, when you put money into your retirement plan, you may get the benefit of an employer match. You get the benefit of tax deferral. You get the benefit of compounding over time as we've talked about. So if you start now and do that and meet that retirement goal, it goes a long way towards meeting your multiple objectives.
Rebecca Katz: Great.
Karin Risi: Can I add just one thing on that because I think it's hard not to acknowledge. This comes up with clients so often as well, clients where we advise their portfolios. And it is so easy to say prioritize retirement over your child's education.
In reality, when we talk to clients, and practically speaking, clients have a very tough time doing that. Not all clients, but the emotional pull of wanting to save for your child's education can be really tough to rationalize intellectually the prioritization that Sarah just described. And she's absolutely right, but I just want to acknowledge for people listening that say, "I'm not sure I could do that," they're not alone.
The other thing that Sarah mentioned was, if you find you're falling short of your retirement goal, then you would want to make sure that you prioritize retirement savings. I think, in practice, many people don't know if they're falling short of their retirement goal.
First you have to have a plan and understand how much are you really trying to save for retirement? People don't know what their "number" is. A colleague of ours had done a great blog post around, "What's my number?" And the central focus of that was you first have to have a plan to understand, are you trying to save $1 million, $2 million, what's reasonable? What's going to fit with your lifestyle and your constraints and your time horizon?
Once you know what you're saving for—for retirement, in particular, it tends to be the largest goal for most people— then you can figure out if you're falling short. Then the prioritization of goals becomes real. Without that, you're kind of just blindly hoping to put as much as you can here and here and here, and it's hard to advance on all fronts.
All investments are subject to risk, including the possible loss of the money you invest.
Withdrawals from a tax-deferred account before age 59½ are subject to a 10% federal penalty tax unless an exception applies.
Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
Advice services are provided by Vanguard Advisers, Inc., a federally registered investment advisor. Eligibility restrictions may apply.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.
How to deal with competing financial priorities
Balancing saving for retirement with other financial needs is challenging under the best of circumstances. It can be even more difficult when your financial history is less than ideal, but there are steps you can take to help focus your efforts. Sarah Hammer of Vanguard's Investment Strategy Group and Karin Risi, who leads Vanguard Advice Services, offer some suggestions.
Other excerpts from this webcast:
- Starting over and overwhelmed
- Why ignoring your finances can be a critical mistake
- Becoming financially well-informed should be a priority
- All investing is subject to risk, including the possible loss of the money you invest.
- Withdrawals from a tax-deferred account before age 59½ are subject to a 10% federal penalty tax unless an exception applies.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
- Advice services are provided by Vanguard Advisers, Inc., a federally registered investment advisor. Eligibility restrictions may apply.
- This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.