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.
Much of the personal finance advice out there can be summed up in 3 words: Save more money. While the road to riches isn’t really that simple, saving money is a good place to start. That said, saving money involves a lot more decisions than you would think. Just for you, I’m going to tackle the 3 biggest saving questions:
- How much should I save?
- What should I save for?
- Where should I put my savings?
1. How much should I save?
- The general rule of thumb is that you should save at least 10% of your income (think of it as tithing to yourself). (FYI: If you ask 10 different financial gurus what percent of your income should go into savings, you’ll get 10 different answers. When you really get down to it, the percent of your income that you should save obviously depends on you – your income, your debt, your expenses, etc…)
- Saving 10% of your income may be hard: For people that are severely in debt or have a serious love of shopping, this number may feel huge, but I’d recommend saving something even if you can’t commit to 10% of your income. Even David Bach, the author of Automatic Millionaire and super promoter of saving (his plan, which he calls “paying yourself 1st,” encourages you to put money into savings before paying bills or even paying off debt) acknowledges that saving even 1% of your income is better than saving none at all.
- For saving inspiration: check out the book A Million Bucks by 30. The author, Alan Corey, lived in the Spanish Harlem and ate Ramen noodles every day for several years in order to save more than 50% of his meager income. Lots of Ramen and several lucky real estate deals later, he was able to add himself to the list of American millionaires before his 30th birthday. While I wouldn’t necessarily recommend this strategy (can you say “high blood pressure”?), if he can do that, you can put away 10% of your income to pay for your future.
2. What should I save for?
- Retirement: Saving for retirement is easily the most common savings goal. Most companies offer retirement savings in the form of an IRA, or individual retirement account. Saving for retirement can be especially beneficial if your company has a program that matches contributions you make to your IRA. Most companies do this up to a certain limit (often around $1000). If you are not putting in enough money to take full advantage of your employer’s IRA matching plan, you might as well be throwing your money out the window. (Email me and let me know which window).
- and Beyond: After retirement (a no-brainer), savings goals can get a little confusing. For some people, dividing your savings into various pieces can be motivating (i.e. having a different bank account in which to put savings toward your new motorcycle versus savings for unexpected emergencies). Nonetheless, I think finance gurus spend their spare time brainstorming outrageous new “must have” savings funds for the average American (having a vacation fund is one thing but having a separate savings account for unexpected pet expenses? For each pet? Come on.) For me, it all just seems more of a hassle than it is worthwhile. (For a good example of mini – savings funds gone wild, check out iwillteachyoutoberich.com. While I normally love Ravit’s blog, he’s gotten carried away here.) My advice: Open a savings account and write a list of clear definitions about what it can be used for (Unexpected car maintenance? Yes. Unexpected bar tab? No.).
3. Where should I put my savings?
To keep it super simple, here are 3 basic options.
- Open a savings account in a traditional bank: Offers easy access to your money and a (gasp) real person to talk to if you have any problems. Check out http://www.bankrate.com to compare the interest rates of banks in your area.
- Open a high yield online savings account: Upside is that interest rates are usually slightly higher than traditional banks. Downside is that you’re likely to spend a lot of time listening to awful elevator music if you ever need help (customer service hotlines suck) and your money isn’t an instantly accessible as it is in a traditional bank. I use E*Trade because they have a $1 minimum and a simple user interface. No matter what, always ensure that the online institution is FDIC insured (i.e. legitimate).
- Buy a CD (Certificate of Deposit): I would explain CDs, but I think JD Roth, the author of Get Rich Slowly, has already written the best description of CDs known to man, so I’m just going to send you check it out.
Ok. That’s it. Go save like a champ.
- Get Rich Slowly: http://www.getrichslowly.org Easily one of the most popular personal finance blogs out there, “Get Rich Slowly— recently named most inspiring money blog by Money magazine — is devoted to sensible personal finance. I share stories about debt elimination, saving money, and practical investing. I also post occasional reviews of books, magazines, and software. And, of course, I scour the web for the latest personal finance tools and articles.”
- I Will Teach You To Be Rich: http://www.iwillteachyoutoberich.com Focuses on personal finance and personal entrepreneurship. Good emphasis on both spending less money and earning more.
- Money Under 30: http://www.moneyunder30.com “Money Under 30 provides weekly financial advice articles for twentysomethings. The blog features a mix of articles on budgeting and money management, saving and investing, using credit wisely and getting out of debt. The site also covers career issues and offers advice for young entrepreneurs.”
- Poorer Than You: http://www.poorerthanyou.com/“Poorer Than You is a personal finance blog for college students and twenty-somethings. Topics include credit cards, savings, budgeting, earning more money, evaluating job offers… from big financial decisions down to small ones, from the latest news to time-tested advice.”
- Young Professional Finance Blog: http://www.youngprofessionalfinance.com Great variety of posts on entrepreneurship, career advice, and financial independence written in a very accessible way. Also check out the author’s other site www.ypblogs.com for a compilation of money, career, and personal advice for young professionals.
- Bargaineering: http://www.bargaineering.com/articles Written by a recent college graduate, Bargaineering offers everything from dumpster diving stories to salary comparisons between public and private college grads.
I’ll break down key points from many of these books in upcoming posts, but for the overachievers out there that want to get ahead, here are some of the best books on personal finance for people in their 20s. The links lead you to Amazon.com but in true Beyond Beer Money style, I’d suggest you head over to the library.
- Your Money or Your Life – Dominguez & Robin. A class that presents a holistic view of money focusing on simplicity. Great ideas such include how to figure out your real hourly wage (including travel time, miscellaneous expenses- warning: it can be really horrifying). Time is money.
- Millionaire Next Door – Thomas J. Stanley. A fascinating study of millionaires and how they earn and spend their money (How much do they spend on suits? What cars do they buy?). Shatters the myth of millionaire wallpapering their bathrooms with $100 bills by demonstrating they get rich the same way everyone else does – hard work, understanding their finances, saving, and a little luck.
- A Million Bucks by Thirty – Alan Corey. Funny (how many personal finance books can you say that about?). Although Corey’s millions are the result of smart (and somewhat lucky) real estate decisions, the advice he presents on saving and making smart money choices are timeless. Also, any man who starts out eating nothing but Ramen for an extended period of time and living in the Spanish Harlem and ends up a millionaire is doing something right.
- Millionaire by Thirty – Douglas Andrew. Includes fairly unconventional advice about buying a home early with no down payment and investing in life insurance to build assets tax free. Interesting book written by 2 brothers that built net worths over $1.5 million before their 30th birthday.
Did I miss something good? Write me and tell me.