(Note to readers: I considered writing an entire article on the nuances of why young professionals do and don’t take advantage of company 401(k) retirement plans and why you should contribute to one. I read a lot of whiny articles and blog posts about confusing paperwork and not having “extra” money to put toward retirement. Lame excuses aside, if you are not contributing to your company’s 401(k) plan (at least up to the point where they will match your contribution) you’re an idiot.
- You probably do not want to work your whole life (at least not in a 9-5 kind of way).
- Any money you put in a 401(k) today is going to have plenty of time to grow, meaning you will have WAY MORE MONEY in the future.
- Many companies will match a percentage of your contribution (They are giving you FREE MONEY)
- You can usually make your contributions automatic by taking them directly out of your paycheck (I promise you won’t even notice the money is gone until you’re sitting on top of big retirement bucks and thanking your younger self for not being a moron).
Contributing to a 401(k) won’t make you a guaranteed millionaire, but if for the cost of a couple bottles of alcohol a month, you can ensure you’re jet setting around the world while your peers sit in a smelly retirement home, why not do it?)
P.S. Want to learn more about your company’s 401(k) plan? Curious what their matching policy is? ASK.
I know what you’re thinking, “I’m 25. I don’t need a financial advisor. I need a hot new boy/girlfriend and maybe a new car.” While all of the above sound great, I’m going to argue in favor of the financial advisor. Here’s a quick rundown on why you might want one, what a financial advisor can do for you, and how to choose a good one.
Why Should I Have a Financial Advisor?
- Because millionaires have one. For his bestselling book, The Millionaire Next Door, Thomas J. Stanley researched the habits of America’s millionaires to draw out things they did and did not have in common with the rest of us. One of the main differences he found? Most millionaires pay top dollar for good financial advice. (Other differences he found? Millionaires are not caught up in conspicuous consumption, usually don’t drive new cars, and donate a larger percent of their income to charity than the average Joe, but that’s for another post…).
- Because you don’t have the time (or desire) to learn everything there is to know about personal finance. As much fun as checking out BeyondBeerMoney can be, I’m guessing most of you would prefer spending time at the local town dump to reading the latest tax laws. A personal finance advisor spends all of his or her time learning money strategies. Could you learn the latest in money strategies given enough hours of research? Yes, but by letting someone else do the work you’ll have more time to pursue your passions.
- Because, if nothing else, having a financial advisor will force you to spend a minimum amount of time thinking about your finances. When you go into your 1st meeting with a personal finance advisor he or she will know how much money you have in the bank, what sorts of investments you have, and what your financial goals are. Even if you’ve never thought about any of the above in your life, my guess is that you’d rather sit down and think them through beforehand than go to a meeting (that you’re paying for!) unprepared and feeling like an idiot. “Uh….bank account. Yeah, I got one of those.” No.
What Will My Financial Advisor Do for Me?
- Help you see the big picture. Financial advisors are especially useful for recent college graduates who often have no idea what a “good” financial plan looks like. A good financial advisor will spend time looking over your current financial status (including assets, debts, insurance, taxes, and investments) and will help you see what you can do to manage risk and strengthen your current finances.
- Help you set financial goals. You’ll work with your financial advisor to figure out what your financial goals are (being a millionaire, buying a house, putting kids through college) and how you can work to achieve them.
- Keep you up to date on the latest finance knowledge. While you’re off saving the world, a good financial advisor will be researching and keeping you up to date on changes in tax laws, new investment strategies, and other ways for you to save and earn more money.
How to Find & Choose an Advisor
- The best way to find a financial advisor is through a personal referral. While I respect that you can find pretty much anything online, a financial advisor is not one of those things. There are a lot of professional-looking websites advertising financial advisors that are total scams. Ask parents, coworkers and friends (and accountant and attorney if you have them) for their recommendations. The financial guru David Bach recommends you start by asking the wealthiest people you know where they get their financial advice and getting at least 3 different recommendations (i.e. don’t hire the 1st person that’s recommended to you. Ask around). Finding a financial advisor through a referral will also ensure that you get great service. Professionals don’t want to disappoint clients from a strong referral network and risk missing out on future referrals.
- Treat the 1st meeting like an interview, and you’re the interviewer. Click here for the top 10 questions to ask your advisor.
- Do your homework. Check out the National Association of Securities Dealers website to find information on your potential advisor’s track record and any disciplinary action taken against him or her.
What Not To Do With A Financial Advisor
- Accept his or her word as always right. Always do some of your own research and ask questions (better to feel stupid than be broke). If your advisor suggests a new investment, sleep on it and ask friends or colleagues for advice. While a financial advisor can push you in the right direction, the final outcome is in your hands. No one cares more about your money than you do.
- Stay with someone that isn’t giving you the service or returns that you want. There are plenty of financial advisors out there. If you don’t like what you got, find a new one!
Not everyone wants or needs a financial advisor. Similarly, not everyone with an advisor has great finances. That said, for a recent college graduate with little idea how they’re doing financially and what they can do to reach their goals (or, more importantly, what their financial goals might be), doing your research and finding a good financial advisor early can save you lots of money and headaches later on.
By now you’ve probably figured out that I’m completely in favor of 20somethings saving more money, (Compound interest anyone? Small amounts saved today -i.e. fewer meal at restaurants- turn into big amounts later on in life -i.e. more tropical vacations ). That said, there are good and bad ways of doing so. Here is my tribute to the 3 most common ways in which smart people do stupid things with the belief they are “saving” money……..
3. Ignoring Small Problems Until They’re Big Problems
- Health problems: While many health problems (an achy muscle, a weird pain) go away for free with some rest and relaxation, some pains (a painful tooth or an ignored cold that turns into a sinus infection) lead to larger expenditures down the line. You have to be the judge – if the potential cost (i.e. getting a tooth pulled) is much larger than the cost of catching it now (i.e. getting a check up), suck it up and fix it now.
- Financial problems: The same goes for financial problems. Cost of paying a financial consultant now to sit down with you and map out your financial future? Fairly small. Cost of 19% interest on $20,000 in credit card debt (not to mention the wear and tear of the anxiety that debt creates)? Huge. Same goes for taxes. As prices for tax prep services get more competitive, there is little reason not to take advantage of software of even a live professional to help you out if you’re tax clueless (for more information, check out my previous post “Beating the Tax Man in 4 Steps”). Doing your taxes right the 1st time is much, much cheaper than an audit.
2. Buying Things Because They’re Cheap or “On Sale”
- Extras of things you already own: You see your favorite (fill in item here – shirt, widget, pair of pants, electronic doohickey) on sale and you think “Well, I use the one I have all the time, couldn’t hurt to have another one. And it’s 50% off! What if mine breaks? What if the neighbor’s pet snake eats it?” and the item goes home with you. The problem is that the second of anything is rarely as exciting as the first, and by the time you break/lose/throw out an item there’s probably a newer, shinier version of it on the market you want instead. Resist buying things “just in case” and you’ll save yourself both time and money (remember that you’re paying not only the sticker price but also interest if you bought it on a credit card, the cost of a larger home or storage space to store extra items, and the lost opportunity cost of time spent cleaning your extra widgets that could be used traveling, hanging out with friends, or working).
- Food: Yes, Burger King Whoppers and Ramen noodles are cheap now, but they lower your productivity (ever tried to write a stellar paper after eating a package of Ho-Hos? Can anyone say “sugar crash”?) and can lead to more expensive health problems down the line (obesity, diabetes, high blood pressure to name a few). Full disclosure: I am the #1 culprit of this mistake (“but Beyond Beer Money, I’m skinny, I’m young, I exercise, I eat Ho-Hos and still write “A” papers”…) but even being the cookie monster that I am I’ve noticed a big difference after making simple changes. I’m not recommending you start buying everything from Whole Foods Market ($7 for strawberries? No thanks.) but shopping at cheap, healthy places like Trader Jo’s (my personal favorite) and making small substitutes (spinach leaves > iceberg lettuce, juice > soda, lean meats/fish like chicken and salmon > hamburgers) can make a huge difference. It’s hard to change the world while you’re pumped full of processed sugar.
And the #1 Way People Waste Money Believing They are “Saving” It?
1. Not Having Enough Health and/or Auto Insurance!
- Yes, paying lower premiums now feels great, and no, no one out there really needs all of the kinds of coverage insurance companies will try to sell you, but paying for a reasonable level of insurance now can help you avoid bankruptcy later. It can be confusing to figure out how much to get, but there are tons of good guides out there.
- For car insurance, check out Smart Money’s Guide to Auto Insurance which offers a full explanation in real English.
- For info on lower coverage health insurance plans for young people (such as temporary insurance and high deductible plans) I recommend starting here. Most companies offer some sort of health insurance option so go to HR and ask questions. You’d be surprised how much people miss out on great deals and benefits from the company they work for solely because they never asked.
If some readers feel they may notice a trend here, you’re right. Your health is your greatest asset. It allows you to work and to enjoy the fruits of your labor. When it’s in trouble, it can easily drain your assets dry. Protect it.
Other stupid money “savers” I’ve left out that you or “your friends” (i.e. you) commit?
Comment or email me at firstname.lastname@example.org
Are you ready for this? Are you sure? The one thing financial gurus, blogs, talk show hosts, authors and billionaires all agree is the most important step to being financially independent (and certainly to being rich). If you do this for 2 months you will blow yourself away. Here it is………..
TRACK EVERY DOLLAR YOU SPEND!
(for at least 2 months)
- You can’t fix it if you don’t know it’s broken – I started doing this last summer and within the 1st 2 months realized I was spending more than 25% of my food budget on ice cream!! 25%!!!!! Ice cream!! I like ice cream (obviously) but I like having the money to do whatever the heck I want more. Needless to say, I now think twice before making a Ben & Jerry’s run with friends.
- You’re likely to spend less money. – 1. Because you’ll be more aware of your spending ($5 of my hard earned money on a crappy magazine? I don’t think so.) and 2. Because keeping track of your spending is a pain in the butt. (I all but stopped buy gum at convenience stores when I started keeping track of my spending because recording it was annoying. Now, I buy gum in bulk when I go grocery shopping – which is cheaper than buying a pack at a time anyway.)
Create a log that’s convenient for you (the key goal here is that you use it, so keep it simple)
- Microsoft Excel Spreadsheets – This is how I do it. I like this because it’s simple and makes it easy to divide the money I spend into categories. Also, seeing it on my desktop while I’m wasting time stumbling around online reminds me to fill it in. To get a free sample templates of how I organize tracking my expenses, email me at email@example.com.
- By hand – A moleskine or other small notebook works well and is portable. I’d suggest coming up with 5 or fewer categories and for each month, labeling the top of 5 consecutive pages w/ your categories (i.e. Pg.1 – Transportation, Pg. 2 – Rent + Utilities, Pg. 3 – Entertainment, etc…)
- Online – For technology geeks out there, Quicken now offers its software for free online. I’d recommend this only if you feel comfortable using it and are likely to stick with it.
- Fill it in at least every few days – if you wait any longer you’ll forget what you bought
- Use your debit card -that way you can check what you remember buying against the online log of debit card transactions (Note: Looking at your account online does not substitute for tracking it on your own. It’s not divided by categories so you won’t see your spending patterns as clearly)
- Make it part of your procrastination routine – We all waste time on trivial things (facebook, twitter, etc..). Why not spend a couple minutes updating your budget whenever you’re tempted to check the facebook status of that kid you went to 3rd grade with? Hey, whatever works.
- Be Honest . – The goal is to “track your spending” not “track your spending on things that you’re proud to spend money on” If you spend $80 at Fuzzy’s Liquor store, that needs to go in your record (although maybe not in your next letter home). Remember: this is for your benefit and your eyes only. Be honest.
- Include everything. -Example Categories: Food (Groceries, Eating Out), Transportation (car payments, bus pass, gas), Housing (rent, utilities – gas, water, electric, phone, internet), Entertainment, Insurance, Financials (student debt, credit card payments), Health/Beauty (clothes, gym membership, toiletries), Pets, Misc
GOOD LUCK!!! Email me and let me know how it’s going at firstname.lastname@example.org