Advice to Advisors

Advice to Advisors: For many families its just the BASICS

•  5 minute read

Many advisors make advising unnecessarily complex. Often, many potential clients just need to know the basics. First.

So before we get into crafting the right estate plan, vetting tax strategies or talking about how to hedge your portfolio against various risks, here are eight basic pieces of advice for ALL investors from an advisor that has seen years of good (and bad) decisions made by investors.

As advisors we can get caught up in all we think we know, complex strategies or designing the best portfolio. But sometimes we need to remember that many families are simply hungry for the basics.

As advisors we can get caught up in all we think we know, complex strategies or designing the best portfolio. But sometimes we need to remember that many families are simply hungry for the basics.

They want a preventative checkup, to review what they have and feel connected to their money and their family’s plan. Simply to feel that they are on the right path and on track to be ok in the future.

 

So before we get into crafting the right estate plan, vetting tax strategies or talking about how to hedge your portfolio against various risks, here are eight basic pieces of advice for ALL investors from an advisor that has seen years of good (and bad) decisions made by investors.

 

Pay Yourself First (Starting Yesterday!)

 

The most important advice I can give any pre-retiree investor is to start saving a portion of every dollar earned. Think of it no differently than paying your electric bill, building it into your budget as a mandatory expense. Better yet, automate it so that it occurs each month. Start by building your savings so that you have cash reserves for emergencies and unexpected expenses, follow by contributing to your employer retirement plan or an IRA (likely a Roth) and then continue to non-retirement savings. But more important than where the money goes is the simple act of starting. And the earlier you do it, the better off you’ll be.

 

Always Maintain Some Dry Powder

 

No one knows what life may deal them, so access to cash on short notice is important. The most important form of dry gunpowder is your emergency reserve fund to deal with the unexpected. As you build up savings that allow you to tackle a new water heater, a surprise medical bill or other expense, you’ll transition to creating some cash to take advantage of future opportunities. You’ve heard the phrase the rich get richer, part of the reason for that is they maintain cash to take advantage of opportunities as they present themselves. And over time they will.

 

Know Where Your Money is Going

 

You should know where your money is going every month. For some that means building a detailed budget that accounts for every dollar. But even if you aren’t inclined to get that detailed, you must at least categorize your expenses (usually easily accomplished through your financial institutions website) so that you know where your money is being spent. This can allow you to trim expenses to create money for savings, as well as identify bad habits. I’m admittedly not one that budgets to the dollar each month, but I can tell you where our money goes. So pick up a free tool, rely on your financial institutions reporting or develop your own method, but don’t lose attachment to where you spend your hard-earned money.

 

You Can Still Go to Starbucks

 

While on the topic of budgeting, please don’t mistake shaving a percentage off of your budget or skipping your latte as being more powerful than increasing your income. While you have to be aware of how you spend, it is much more important to invest in yourself and build your income, as your earning power is your greatest asset. So start a new business, earn that raise (you have to ask) or build the resume that leads to being rewarded for the value you add to your company.

 

You Don’t Have to Own a Home, Really

 

The American dream has long been said to be to own your own home. But don’t assume that means that as soon as you can convince a bank to loan you the money that means it is time. If you don’t plan to be there for the next decade you are gambling on the real estate market. Homes often get confused as investments, and sometimes homeowners are rewarded. But my experience has been that a home is more savings tool than investment. That is not to say that you shouldn’t ever own your home, it is still a worthwhile aspiration for those that are really ready to plant their roots. But if you don’t plan to be there and eventually pay your home off, you may not like what you find if you really compare the costs of home ownership (with taxes, insurance and maintenance) relative to the cost of renting. And when you do buy the shorter the mortgage the better off you’ll be, so go for that 15 or 20 year mortgage instead of the standard 30 and save yourself tens (or hundreds) of thousands of dollars.

 

Know Where Everything Is

 

Whether at this stage you have a little or a lot in the way of assets, you should be responsible for all of it. There are plenty of account aggregation tools available that can help you tie things together in one place, allowing you to check in periodically to make sure your funds are allocated as they should be and to help you uncover problems without waiting for your next quarterly statement to show up.

 

Always Accept Free Money

 

If someone is offering you free money you’d be foolish not to accept it. So if your employer matches your 401(k) contributions in any amount, take full advantage. At a minimum you should find a way to contribute to receive the full employer match. And don’t neglect other benefits that might be available like free life insurance just for signing up or an employer HSA (health savings account) contribution if available.

 

Don’t Get Caught Up (and into Debt) By Watching Others

 

Don’t let someone convince you that debt is good. This isn’t to shame anyone with debt, we all either have or have had it in some form. But nothing can be more financially stressful than owing money to credit cards, auto loans, consumer debt and having a mortgage. So work to get yourself out of it if you are in it, prioritizing that task above all other savings outside of making sure you have an emergency fund (sounds like Dave Ramsey, I know). And once you are out of debt I guarantee you will be happier and less stressed.

 

Either Become a Student or Hire a Teacher

 

Finally, you have to follow one of two paths. Either hold yourself accountable to the importance of planning financially and become a student. If you enjoy it and will spend the required time, you are capable. But if you don’t enjoy it, don’t have the time or would just simply rather allocate your resources elsewhere, work with a professional you can trust to help you create a plan and help you stay the course.