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.
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
“Yesterday the IRS announced that obese Americans are entitled to certain tax breaks. Apparently, under the new rules, you’re allowed to claim two or more chins as dependents.” —Conan O’Brien
Taxes suck. Nonetheless, if you know the basics and make smart decisions, you can avoid handing over your hard earned dough to the Tax Man. Here are 4 steps to get you started.
1. Prepare ’em
- Figure our which form to file. 1040EZ? 1040A? 1040XYZ? OK, I made that last one up, but the best starting point in doing your taxes is to figure out which form you should file to save the most money. Which form you file depends on a range of factors (single or married, income, etc…). For a handy dandy chart to help you decide, click here.
- Decide who’s going to fill them out. For the truly tax clueless, tax preparers such as H&R Block and Jackson Hewitt can fill out simple returns and answer your questions for about $100. (A word of caution: NEVER use their service that gives you your rebate immediately. What they are really giving you is not your rebate but a loan based on your expected rebate at exorbitant interest rates.) For the DIY-ers out there, tax prep software has come a long way in the last few years. Turbo Tax and Tax Act dominate the market right now with increasingly easy to use interfaces and how to videos. Prices are low, they maintain your info from federal taxes to help you file state taxes, and you can avoid ever touching a piece of paper by filing them online.
2. Maximize Deductions & Credits. Deductions and credits reduce how much you owe in taxes. Keep in mind that if you don’t owe many taxes to begin with these won’t help you. Here are a few that are especially relevant to people in their 20s.
- In school? Hope Scholarship Credit: A tax credit for up to 100% of your first $1,000 in tuition and fees and up to 50% for the second $1,000. You’ll get $1500 max. Can only be used in 1st 2 years of college.
- In college more than 2 years? Lifetime Learning Credit: A tax credit of 20% of your tuition, room, board and expenses up to $10,000. Max is $2,000.
- Moved over 50 miles last year? You can deduct the cost of moving your body and your things to your new spot (Driving? You can deduct gas mileage, parking, and tolls). Check with your tax preparer of tax prep software to get current specs on what you can deduct and how much.
3. File ’em
For information on where to file…
Note: MSN Money reminds you, “If you’re going to college in one state and spending summers at home in another, you could have two states vying for your tax dollars.”
4. Celebrate! Bored w/ playing beer pong every Friday night? Check out IRS’s attempt at providing resources that are relevant to today’s youth. The 75 (No, seriously. 75.) interactive activities and games include Tax Word Scramble, and Tax Your Memory. Friday nights will never be the same.
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
1. Don’t carry a credit card balance!
Weird advice, I realize, considering the whole idea of credit is the joy of spending money you don’t have. That said, paying 18% interest to a credit card company is pretty similar to throwing your cash out the window. I recommend getting a credit card because they are convenient and it’s important to build your credit – but only if you can pay off the minimum balance each month.
2. Pick a good credit card
…Preferably one that will give you rewards you will actually use (like cash back, but check the percentage, 1% cash back is not going to fund your trip to Tahiti) and has an easy online interface. I’m a big fan of Capital One credit cards because they’re very customizable, customer service is good, and their website is easy to navigate.
For other card recommendations, check out credit card recommendations for new college grads on www.moneysmartlife.com and/or www.moneyunder30.com.
3. Get your FREE yearly credit report. Every year.
A better use of the time you spend facebook stalking ex-boyfriends and girlfriends, go to: www.AnnualCreditReport.com.
There are 3 companies that track your credit. Check all once per year or 1 every 4 months. Make sure to fix any mistakes before they can negatively affect your credit score (making it harder to borrow money for a home or other investment).
4. Ask for a lower rate!
Call your credit card company once every 6 months and ask for a lower rate. They’ll usually say yes, and while it’s best not to carry a balance, if you’re going to have a balance might as well have a low rate.