Most people are not comfortable dealing with their finances and in many instances having a qualified financial planner is not a bad idea to keep emotions out of the equation. After all, many people let their emotions dictate what it is they do when it comes to their personal finances. And let’s face it we can all use extra help when reviewing our own decisions when it comes to proper financial planning. The following are ten ways a financial planner can instantly assist you in reaching your financial goals.
- Most people who use and those who do not use financial planners tend to be overpaying for their mutual funds in their portfolio. Here is where a planner is a double-edged sword unless they are fiduciaries, they may not have your best interest at heart when they make recommendations for mutual funds. Actively managed funds tend to have fees over 1%, and many sold by planner may also have a sales load or a fee of up to 5% or more to buy into the fund. That means an actively managed fund with a sales load needs to beat the market by at least 6% or you would have been much better off buying a passively managed index fund that may charge around 0.25% on the higher end of the fee spectrum. And since over 95% of actively managed funds do not beat index funds after fees see a planner to locate a fund that is low cost and serves your investment needs.
- Another issue with mutual funds is that many people tend to own too many of them. By owning too many mutual funds, you may actually do the opposite of what you intend to do, and that is proper diversification as many funds tend to own the same companies by owning five or more of these funds you may be overextended in a particular company or sector. Ideally, if you own a few mutual funds, you will have a planner see that there is little or no overlapping of your securities in the funds. Most financial websites such as Yahoo Finance or Morningstar will list the largest holdings of a fund, and that is a good place to start as the top ten holdings may make up the bulk of a fund’s position.
- Many people who work for a public company may be allowed to purchase stock in the company at a discount while this may seem like a good idea, it does pose some potential issues with becoming overexposed to that company. By buying only stock in the company you work for, you have tied your investment and your income to the success of that company. And just because you work there does not mean that you understand the complexity of the company and all the risks associated with it. Here you want to think Worldcom or Enron.
- But if your company offers any match be it either in company stock or a more traditional 401(k) you want to always take full advantage of the match. Otherwise, you are leaving free money on the table and costing your financial well-being. If the match is limited to your company’s stock that is not a reason not to contribute, make sure you are well diversified outside of your work’s plan. And if you contribute to a Traditional 401(k), you will reduce your taxable income and thereby your tax liability. And for those who are starting their careers at a lower salary than someone who is paid more will benefit from a ROTH 401(k) of that is an option. In a ROTH account, you do not get the tax breaks now but enjoy tax-free income in retirement. But ROTH accounts may be a negative if you are in a higher tax bracket so always consider the effects both now and when you are retired.
- Many people tend to overlook the simple yet effective results that a budget can provide. Think of it this way; how can you be expected to save or reduce your expenses if you do not know where your income is going. That is why it is so very important always to maintain some budget to track your income and expenses. This can be done very easily in an Excel spreadsheet, a program like Quicken or an online tool such as Mint.com. Regardless of what you decide to use, make sure you use it to help you cut expenses to get out of debt or to save that extra amount for your retirement.
- And speaking of your retirement savings most people today tend not to be saving enough for a comfortable retirement in 20 or 30 years. It is extremely important to start saving when you are younger so that your money will have as long as possible to work for you by compounding. At a minimum, you need to save 10% of your salary and ideally 15% at a young age to get maximum benefit from the power of compounding over 25 plus years. Many people put off saving for retirement due to lack of funds, or they think that they will have time later to save. The problem with this logic is by waiting until later you are missing out on the most powerful component of any retirement accounts and that is the extremely powerful compounding of your money over as long a period that is possible. Yes, you may be able to save later in life, but you will still end with a smaller retirement account when compared to someone steady in their savings for 25 plus years.
- An area that many people tend to make mistakes is where they hold certain types of bonds. In particular, it is not in your interest to have any municipal bonds in a tax-advantaged account. The reason is simple, they by their simple nature are tax-free to the owner so by placing them in a retirement account you will now be forced to pay ordinary taxes on the interest you received on them when you make withdrawals in retirement if you want tax free income from municipal bonds to buy them but do not place them in a retirement account. If you want to use bonds in retirement accounts, place corporate bonds or mutual funds that specialize in high-yield bonds to maximize the benefits of a retirement accounts tax deferral.
- Most people tend to not have enough cash on hand for emergencies or when an ideal investment presents itself. Now cash on hand for an emergency is much more important than simply having the cash for investment purposes as you never know when you will need to repair your car or have a lapse in employment. Here you would want to have at least three months’ worth of expenses saved and ideally six months’ worth saved for the unexpected.
- The level and coverage of life insurance can be essential in someone’s financial plan if you are young and just starting your life with someone, you need to plan for you or your spouse’s early death properly. Many families are left in a tight and tough position by not properly planning for their family’s needs in the event they were to die suddenly. Here you want enough coverage to provide for your children’s education, pay off most of your debts and the mortgage and provide your family with several years’ worth of income replacement for the person who dies. Here I do recommend the use of affordable term policies that can be purchased for a specific purpose and for a specific length of time. Save you have just purchased a house with a 15-year mortgage go out and purchase a 15-year term policy for the same amount as the mortgage. Have a newborn? Get a 25-year policy to cover the cost of their education. Use these policies to plan for the unexpected passing of a key member of the family with an appropriate term life insurance policy.
- Finally, people tend to get emotionally attached to their investments for a variety of reasons and fail to rebalance their portfolios. Yes, the idea of selling something that has made you money and buying something that may have not made as much or might have even lost money is not appealing to most people. But if you do not rebalance you run the risk of creating a situation where you may have created a riskier portfolio than you intended. Rebalance on a schedule or when it becomes unbalanced by a set percentage from your ideal allocations. Do this, and you will enhance your returns and limit potential overexposure to any one asset class.
While you certainly do not need a financial planner to achieve these ten things one reviewing your work on an annual basis is not a bad idea. Find a fiduciary fee-only financial planner to work with and stay on top of the things that will ensure your retirement and your loved ones are properly cared for.
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