5 Building Blocks for Financial Success

First Republic Bank
September 26, 2018

Everyone has dreams. To turn those dreams into reality, though, you need a strategy.

Whether your vision of the future includes buying a home or vacation house, building a college fund or saving for retirement, consider tackling the following key tasks in order to realize your financial aspirations.

1. Decipher Your Debt

It may sound counterintuitive, but it’s crucial to understand — and utilize — the difference between good and bad debt. “Debt gets a bad rap,” says Megan Mulloy, Certified Financial Planner and First Republic Eagle Invest Advisor. But good debt can actually mean that you’ve made a wise investment in your future. For instance, student loan debt means you earned an education to build and secure professional success, and a mortgage means you’re building equity as a homeowner.

Mulloy notes that keeping some debt is healthy for overall financial wellness, demonstrating that you don’t have to pay off your debt in full before starting to invest. Even if it feels better to pay off your debt completely, a good rule of thumb is to maintain payments on any debt with a rate of 5% or lower.

For any loans with repayment rates above 5%, consider reducing those debts as quickly as possible. Reducing your debt can be achieved by paying down or consolidating student loans, or by refinancing your car or mortgage.

Just keep in mind that all debt is not created equal. A seasoned financial advisor can help you assess different types of debt, how to create the right balance of debt maintenance and opportunities to save and invest.

2. Get Set to Save

Budgeting is a crucial part of being able to pay down debt, since setting up (and sticking to) a budget prepares you to start saving for the long term.

“Think of budgeting as directly financing your goals,” Mulloy says. She suggests working with an advisor to establish an overview of your financial roadmap. Then, consider the most straightforward routes of budgeting and saving automatically, such as setting up an automatic transfer to move money from your checking to savings account each month. If you can, aim to devote 20% of your take-home pay to your financial priorities.

You’ll also want to have money accessible in a liquid fund, such as a savings, checking or money market account. Ideally, your emergency or “rainy day” savings could fund 6 to 12 months of your basic expenses. Hopefully you won’t ever have to touch those funds, but if a sudden job loss or other life change catches you off guard, having a backup plan reduces the likelihood of you having to make other difficult liquidation decisions right away.

There are also special tax-deferred and tax-free types of savings accounts you can open in advance of a life event, such as a 529 plan. Your child doesn’t have to be born — or even be on the way — to establish an education savings fund. However you choose to save, First Republic Managing Director and Relationship Manager Gigi Garza recommends, “Save early and often.”

3. Build Credit to Build Your Future

If you know your credit score, then you know how financial institutions view you, says Garza. But don’t check your credit score constantly. Every time you (or an institution on your behalf) request a creditor for a “hard pull” of your complete credit report, it can bring down your overall score. Checking your score once every six months should suffice, and many credit card companies provide “soft” monitoring services that won’t damage your score so you can check more often.

Healthy credit is the number one way to ensure you’ll be preapproved for the luxury car of your dreams, or be able to buy that first (or second) home. But no matter what goal you’re trying to finance, Garza advises against spending every last dime you have. Even when you’re buying a home, it’s crucial to keep that emergency savings fund liquid to avoid being caught financially flat-footed.

The following steps should get you on track to proper credit-score hygiene:

  • Pay off your credit cards on time, or even early, each month.
  • Ask for credit line increases as appropriate.
  • Keep older lines of credit and accounts open (even if you don’t use them).

4. Invest in Your Goals

When it comes to investing in the stock market and mutual funds, the best time to start is always as soon as possible. “There’s no necessary age, life situation or amount of money to begin building your investment portfolio,” Mulloy says. In fact, starting young or with little money means you’ll compound more interest for a longer period of time.

Each investment type serves a purpose, such as steady or accelerated returns. “Stocks are the growth engine of your portfolio,” says Jeff Kuhlman, Chartered Financial Analyst and First Republic Vice President and Research Analyst. He advises finding the right balance of stocks and bonds that align with your appetite for risk. Then stay the course — avoid trying to time when to get in and out of the stock market. 

When it comes to investing for retirement, it’s important to make the maximum contribution you can, especially if your employer offers 401(k) matching. Take advantage of the tax break while also building for your post-employment years. If you’re self-employed, ask a financial advisor what type of Roth or Simplified Employee Pension (SEP) IRA, or even a personal 401(k), may be available for alternatives to traditional retirement contributions.

5. Insure Your Future

In addition to an emergency savings fund, insurance policies can help insulate you and your loved ones from unforeseen life changes. As with investing, it’s never too early for estate planning. Write down your wishes and select trusted loved ones you’d want to handle your affairs, both personal and financial, in a crisis. It’s always better to be prepared.

It also pays off to open life insurance policies early, as coverage is based on your health and will only get more expensive as you age. Lock in a low rate when you’re young, and you’ll likely be able to afford superior coverage.

Employers often offer various types of coverage as well. Ask if your employee benefits include information about life or disability insurance, or perhaps even cover some premiums.

As Garza says, “Dreams cost money.”

Every opportunity to boost your savings and investments and secure your financial future will bring you one step closer to achieving those dreams. 

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. First Republic does not provide tax or legal advice. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.