Financial Planning for engineers
Are you an engineer?
Engineers help make our lives better. What I didn’t realize was that when it comes to finances, engineers are no different than anyone else, except a lot of them work for small companies and are really left doing a lot of their financial work on their own. It tends to be a lot easier working for a big firm where you get the company 401k, employer paid health insurance, disability insurance, and a safe job. Engineering jobs tend to be project based, and you tend to constantly rely upon new projects to come in and sometimes this means expanding and shrinking work forces. Depending on which engineering field you are in, this might not be a big deal because some engineers are in such high demand you can get a job just about anywhere, while others this can be a challenge. When you are on your own planning your finances, it can be a little more complicated because life has a lot of ups and downs you have to manage as well as prepare for the future.
The reason you became an engineer is because you are smart. The fact you must do things on your own is a plus. I think you probably should do most of your work by yourself. With a little research and willingness to spend a few minutes you can set yourself up to be on a great track. Financial math is actually much simpler than the math you deal with on a daily basis. The concern is you actually have to sit down to create the spreadsheets of your own financial life. Have you set up a spreadsheet of your spending versus income, determine if you are spending more than you are making? You can even draw out a chart of how long it takes to pay off a specific debt. If you are like me and get tired of too many calculations, just use someone else’s math. There is a really cool debt calculator site I use for paying off debt called http://whatsthecost.com After setting up your spreadsheets, have you figured out how much you might need for specific goals such as buying a house, saving for college or even retirement? A lot of financial math uses statistics and probability. Saving for something like retirement can be broken down to the simplest formula. If you want to receive a paycheck for your entire life from your investments, you should take out no more than about 4% of your money every year and be totally safe from running out too early. To make it easy, just multiply your current income by 25 and you will get your magic number. You know that to get there you just need to invest as much as you can and hope to make a decent return on your investments. The other challenge you have is the fact life gets in the way sometimes and you don’t always get to do the things you want because your needs get in the way. Here are a few tips that might help.
It might be a good idea to hire a financial engineer (financial advisor) at some point to make sure you aren’t missing a crucial step, but be cautious on who you hire. There are many people in the profession who are non-professional advisors or life insurance agents in advisors clothing. A great picture of good advisor is outlined in this blog I really like for physicians. http://whitecoatinvestor.com/the-perfect-financial-advisor/ you might also want to start a will or trust so find a good estate planning attorney. I have even found paralegals who can draft wills and trusts for a fraction of the cost. If you like to do your own taxes you might not need a tax professional, but as you start accumulating wealth and start moving money around, having a good CPA (purposely didn’t put tax professional as you want a certified accountant) is a great asset.
So what are some common areas that engineers tend to miss in their finances or at least could use some tips?
Life Insurance. I believe the statistic is that less than 50% of Americans even have life insurance and even fewer have enough. I used to not care about life insurance because statistically the chances of dying young are minimal, but having friends and family who have had untimely deaths happen, I have come to find it is worth more than you can ever imagine. Do you have adequate insurance to help your family out if you have an untimely death? Getting 10-20x your income in term life insurance is key. With average salaries around 60-100k, having an even $1million is easy and typically has a good price break. Keep the term at 15-20 years or tie it to maybe the ages of your children. The goal is to save and pay off enough debt so there isn’t much of a need later.
Disability Insurance. This is the number one missed item on everyone’s financial plan. Probably because it isn’t cheap and it isn’t talked about because we have a social program for disability. You have done a lot of schooling and taken time to get licenses for your job. If you were to be unable to work for whatever illness or sickness, it would be devastating to lose that paycheck. If you are concerned about moving jobs, there are disability insurance policies that let you pause the insurance for a short time.
Saving. Do you have at least 3-6 months of your income saved up for unexpected expenses? If you make $7k/month, that would be at least $21,000. You might be thinking of better ways to spend it, but it can mean a lot as you wait for a new project to start or must take time off. Once you start putting money away for retirement, pay attention to how it is sheltered from the IRS and be aware of how withdrawing money can affect you. If you put money in a 401k or an IRA, you are locking that money up for retirement and avoiding paying taxes until that time. If these accounts ever become a possible piggy bank for a financial emergency, then you are saving too much in these accounts. The financial penalty for touching them early typically outweighs any gains you might have made along the way. Take time to saving in a Roth IRA (money that’s already been taxed then saved for retirement) or even set up a personal individual investment account. These accounts require you to put money away that’s already been taxed and invests the money. This allows you to access the money if you need to prematurely without penalty because you already paid the IRS their taxes.
One of the most common concerns I get from engineers is when their kids get ready to go to college or get married. You as the parent typically make a decent wage and can help pay a small portion of your child’s schooling. Financial aid will typically be diminished because you aren’t struggling to pay the bills, but it might not be enough. Having personal savings from retirement or individual accounts can really help. If you were prudent throughout the child’s life, you could open a 529 plan and save your already taxed money in an account that gets special tax treatment if used for paying for school. Some states have matching grant money and lower fees if you participate. You don’t want to overburden your finances though by saving everything for a child and forget about yourself. Far too many people have to play catch up later on in life after the kids are gone only to find themselves falling short. The more you save earlier on, the larger your money grows in the future.
Health Insurance. This is an ever-changing topic with healthcare reform and person preference. If you can save money by paying less in monthly premium you will probably do better in the long run. Take your savings in monthly costs and save it for doctor visit copays and deductibles.
Property and Casualty Insurance- You have 3-6 months in savings, so having a higher deductible shouldn’t scare you. Make sure you are adequately covered in case you get in an accident, but don’t expect the insurance to constantly bail you out of the small stuff. You might want to consider an umbrella policy for personal liability. As you accumulate wealth, having a protection against lawsuits and losing that wealth can be a great tool.
These are just some short tips I hope can help. Engineers are really in a good position to draw a steady income and live comfortably. I think you have most of the tools already embedded in your mind to do it all, it really just takes a small amount of action and willingness to make it work.