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Clients often refer me to their young adult kids as they get started in their financial lives. Other times people contact me through my website or a Google search. Frequently, people are getting started in their financial lives and are curious about working with a financial advisor.
They may even offer to pay me to do a comprehensive financial plan analyzing their situation, detailing action items, and recommending next steps to help them reach their financial goals.
I appreciate these conversations and am always happy to help out.
More often than not, however, I can point people in the right direction with just a few questions over the phone. This avoids creating a financial plan and charging the fee that goes along with it. Frankly, if I can answer your questions in a 15-minute phone call without charging you for a full-blown financial plan, it’s just the right thing to do.
A financial plan can cost $1,000 or more. Before you part with your hard-earned cash to hire a financial advisor, make sure you can clear these hurdles first.
Eliminate credit card and other forms of consumer debt. By “consumer debt” I mean debt other than your primary mortgage.
You don’t need to be completely debt free to work with a financial planner, but if you owe more in credit cards or student loans than you have saved in financial assets, the first recommendation by any respectable advisor is going to be “Pay off your debt”.
You don’t need to pay for a financial plan to get that advice.
If you have investments or savings, use that money to pay down your debt as quickly as possible. An accountant once explained it to me this way. “If you owe someone $10,000 and you have $10,000 in the bank, you really don’t have $10,000. You just feel like you have $10,000 because you can see it in your bank account. But you’re actually broke because you owe that money to someone else”.
He didn’t mince words. If you have the money, pay off the debt now.
Commit to contributing 10% or more of your gross income to long-term savings. Every person I know with $1 million or more in their retirement account got there because they committed to contributing a percentage of their paycheck to their retirement plan at work AND THEY NEVER STOPPED.
Frequently, they make the maximum contribution. If you can’t do that now, start where you are and increase your savings rate over time.
Every financial plan I do recommends people commit to saving at least 10% of their gross income. Your plan won’t be any different.
Build up your cash reserves. Cash reserves are different than long-term savings. This is the money you use when emergencies come up.
“Cash reserves” includes any money that is not retirement money including include I-bonds, mutual funds, brokerage accounts -- anything other than IRAs and 401ks, etc.
How much? It’s all relative. Six to twelve months spending needs is the standard rule of thumb.
The more you earn and the more you have, however, the more money you will want to have on hand – just in case. A one-income, self-employed married couple living in an old house with three kids, two dogs and a mortgage will need a bigger cash reserve than a 25-year-old software engineer living in their parents’ basement.
Make sure you have enough term life insurance (outside of work). The right amount will depend on your situation.
The software engineer mentioned above can arguably get by with no life insurance other than what she gets through her employer. However, I would argue that even then it may help to have at least a basic, 20-year term life insurance policy.
Term life insurance is cheapest and easiest to get the younger you are. Sometimes people get sick, become uninsurable and then lose their job. Getting a basic policy now (or more if you can afford it) means you will have at least some insurance regardless of how your health status may change in the future.
The self-employed couple in the example above might need $1 million or more of term life insurance. Talk to your agent about the right amount for your situation. Buying term insurance keeps your costs low, while making sure you have enough coverage to meet your family’s short-term cash needs.
I am always happy to talk to anyone about their financial situation and long-term goals. The basic entry-level financial plan, however, will always be this: Pay off your credit cards and student loans, build a small cash reserve, start saving 10% into your IRA or 401(k), and get some term life insurance.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.