How to Start Saving for Retirement (or Any Financial Goal)

How to Start Saving for Retirement (or Any Financial Goal)

Slow and Steady Wins the Race Often when I meet with people who are learning good financial principles for the first time, they are anxious to get started and want to do everything perfectly right away. I am glad for their enthusiasm, but this approach may not be sustainable. I would not normally recommend that people immediately start saving 20% of their income if they are only accustomed to saving 5%. That would be like trying to run a full marathon if they had never run more than six miles at a time. Marathon trainers recommend starting with a much shorter distance than the full 26.2 miles, then adding no more than 10% to the training distance each week. Otherwise, trainees could injure themselves and lose months of progress. Likewise, too big of a sudden increase in savings could cause “financial injuries” such as increased credit card debt, marriage tension, or spending binges. We may even become so frustrated that we stop saving completely. Of course any level of savings requires some sacrifice, but starting with a realistic amount that does not hurt too much is more healthy and sustainable. Then we can gradually increase it over time. How to Get Started Saving Those who are not saving anything at all right now might even want to try starting with only 1-2% of income. Most people are surprised how little they feel the difference when they increase their savings by modest amounts. Then gradually building from there is easier. Just remember that whatever amount we decide to save now, in the future we are likely to wish we had saved...
Putting Investors’ Interests First – By Choice or by Legislation?

Putting Investors’ Interests First – By Choice or by Legislation?

The DOL Fiduciary Rule After almost a decade of wrangling over the details, the Department of Labor’s Fiduciary Rule officially went into effect on June 9, 2017. What does this mean? All financial advisors are now required by law to always act in the best interests of their clients when providing advice on retirement accounts or retirement planning. This includes greater fee transparency, ensuring fees are reasonable, and disclosing potential conflicts of interest. How Does This Impact You? The good news is that this new rule has no effect on any of our clients’ accounts and does not impact the way we do business at Capstone Capital. Since our inception as an independent registered investment advisor in 2002, we have voluntarily adhered to the fiduciary standard as defined by the Advisors Act, and have clearly disclosed fees and potential conflicts of interest to our investors. Although this new rule has garnered significant controversy in the financial industry and certain aspects of it still need to be clarified, we feel that overall it will be a good thing for investors. We are especially pleased that substantial media attention surrounding the DOL Fiduciary Rule has increased public awareness and understanding of the importance of the fiduciary standard and the benefit it provides to investors. You may be thinking, “What’s the big deal? Don’t all financial professionals already put their clients’ interests first?” Unfortunately, the reality is that until now, many financial professionals were only bound by a “suitability standard.” In other words, they could recommend investment products that would give them the highest payout or count towards sales quotas, as long as...
Debt: Self-Imposed Slavery

Debt: Self-Imposed Slavery

Perhaps the most severe cost of going into debt is the resulting loss of freedom. It truly is a form of self-imposed slavery. Too few of us enjoy the level of freedom our founding fathe24rs intended for us. We may not be oppressed by political dictators, but we often voluntarily submit ourselves to dictatorial creditors. Many of us lock ourselves into huge long-term commitments without knowing whether our future circumstances will allow us to honor these obligations. We may barely be able to qualify for the payments on a large new home, but we want it so badly that we buy it anyway, in hopes that the payment will feel more affordable as our income goes up. Then the unthinkable happens: our income actually goes down, or stops completely, and we lose everything. Consider the following observation by J. Reuben Clark, Jr: “Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; …it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”[i] Maybe part of the reason so many people readily incur excessive amounts of debt is that the penalty today for failing to meet...
Four Ways to Manage Risk

Four Ways to Manage Risk

Every risk we face can be addressed in one of four ways. Each may be an appropriate choice, depending on the circumstances and type of risk in question: Avoidance Reduction Transfer Retention Avoiding Risk The surest way to prevent the potential loss arising from a certain activity is to completely avoid it. For example, if I want to avoid the possibility of having to pay for a stranger’s medical expenses due to an auto accident, I could stop driving a car. So why not just avoid all risks? The problem is that whenever we avoid a risk we also miss out on the benefits we could have received for participating in the associated activity. In addition, not all risks can be completely avoided, such as the risks of illness or natural disaster. Avoidance may be appropriate for a limited number of risks that produce a high probability of loss, such as gambling, but it is not a practical solution for most risks. In some cases we may even create additional risks by trying to avoid a particular risk. For example, we may be tempted to keep all of our savings in cash to avoid the risk of investment losses, but then we would be subjecting ourselves to the potential risk of loss by inflation, which is practically guaranteed to significantly erode the value of our cash over time. Reducing Risk  If we are unable or unwilling to avoid an activity, we can take steps to reduce the probability and potential severity of loss associated with the activity. For example, when we choose to drive, we can reduce the risk...
How Much Should We Save?

How Much Should We Save?

The best way to calculate the proper amount to save is as a flat percentage of current income. I believe we all must consistently save at least 20% of our gross income if we ever want to get ahead financially and retire comfortably someday. Everyone I have ever met who is financially independent, meaning that they have enough money to live a comfortable lifestyle without having to work, has consistently saved a significant portion of their income, many of them more than 20%. No other reliable way to accomplish this exists, except perhaps by means of an employer or government pension that guarantees payment of a significant portion of pre-retirement income for life. Still, most people I have met who are successfully living on pension income also regularly saved a large percentage of their income throughout their careers. Keep in mind that many pensions are facing severe financial difficulty, so even if we are entitled to a pension, we would be wise to save a substantial amount of our income in case it does not pay out as expected. Ancient Wisdom for Saving Consider a famous example in the Bible from thousands of years ago which illustrates the wisdom of saving at least 20% of our income. Joseph, the son of Israel who was sold by his brothers as a slave and then taken to Egypt, was the only man able to interpret Pharaoh’s troubling dreams. Joseph perceived that the dreams were actually warnings from God that there would be seven years of plenty followed by seven years of famine. Joseph counseled Pharaoh to save a fifth part (20%)...