April is Financial Literacy month, and in that vein I will be the guest speaker on two upcoming podcasts- one is focused on business owners and the other seeks to educate and empower women. 23 years ago, when I started practicing family law, if you told me I would be presenting on financial literacy I would have thought you were nuts. After being a student for two decades, all I had was over $100,000 of student debt with an undergraduate degree in diplomacy and a J.D., both of which were nicely framed and displayed in my Washington, DC office.
Thankfully, over the past two decades that investment in my education has largely paid off, despite multiple life setbacks, and in addition to what I experienced in my own financial journey, I have had to weather hundreds of other storms as my divorce clients grapple with creating new monthly budgets and reassessing their financial investments as part of their divorce. In the process, I found there are a ton of resources out there available to people of any age that need help with establishing a budget and understanding the financial options out there. Take it in baby steps.
Step One: Get Educated and Organized
Educate yourself as to what your total household income is and how much you are actually spending vs. saving. Tax season forces all of us to reckon with our numbers, and once you have all this information readily available take some time to really analyze what your cash flow situation looks like. Ideally, the rule of thumb is 50% of your net income (after taxes) goes to needs (such as housing and food), 30% to wants (such as travel and entertainment) and 20% should be for savings (not just retirement because you need liquid assets in the event of an emergency). If this is all overwhelming, invest in a financial literacy class or a financial coach who can help guide you.
Step Two: Establish a Monthly Budget
There are plenty of free forms available to help you lay out your monthly expenses, including housing, food, clothing, medical care, insurance, student debt, transportation, travel and entertainment. Don’t forget to set aside some amount for a rainy day fund. Whatever your net monthly expenses are, make sure that they do not exceed your net monthly income. Remember this is basic math, not creative writing so if you are spending more than you are earning, you either need to find a way to increase your income or cut your expenses so that you are not running at a deficit. Make sure to review this annually, or sooner if your numbers change significantly.
Step Three: Get a Financial Advisor
As an adult, there are so many important financial decisions you need to make, including purchasing or refinancing a home, saving for retirement, getting the right amount of life insurance, disability and long-term care insurance, not to mention providing for your children, if you choose to start a family. The cost of raising one child through age 18 in the U.S. is now currently estimated above $234,000. All these decisions should be discussed with someone you can trust to develop a plan, identify all the viable options with you and go through a cost/benefit and risk analysis for each possible scenario.
Step Four: Find a Trusted Attorney
Once you have kids and/or start accumulating assets, it is highly recommended that you create an estate plan rather than leaving it up to the government/courts to decide what should happen upon your death– especially if you have minor children, who need a guardian and trustee to manage their assets until they attain the age of majority. Furthermore, if you decide to open your own business, enter into a partnership, want to register a patent or trademark, or you are asked to sign a significant employment contract, or an NDA (non-disclosure agreement) you probably will want a business attorney to review these documents with you. And finally, if you decide to marry or cohabitate with a romantic partner, you may want to consult a matrimonial attorney to review the pros/cons of having a written agreement, e.g. a prenup (or post-nuptial for procrastinators) that outlines your legal obligations to one another. In all of these scenarios the point is to prepare for disaster and minimize the financial downside for you.
In the end, I wish these 4 steps could be given to every young adult as a guide to adulting because becoming financially savvy is the key to success for every individual, both professionally and personally. By learning to live within your means, having a plan for some basic level of financial security, and working with professionals that are looking out for your best interest, you are investing in peace of mind. Financial uncertainty is the biggest source of stress for my clients (both during the marriage and as part of the divorce), and the sooner we can address that issue, everything else usually calms down.
Simply stated, it’s not healthy or sustainable to live in perpetual financial chaos. At least half my divorce clients want to escape this, because ultimately it comes down to an issue of feeling safe and secure. It goes back to Maslow’s hierarchy of needs– and until your basic needs are met, I do not think it’s truly possible to build up your self esteem or self-actualize, which are at the top of his pyramid.
Ultimately, this is all a work in progress for most, unless maybe you are a one-percenter, and it takes time to develop the right contacts and skills to prudently manage your finances. Just remember, it’s a marathon not a sprint, so make sure to enjoy the journey.
By Regina A. DeMeo
