Chances are if you are reading this article, you fall into one of three categories. You are either one of the 40 under 40 featured in the magazine, you’re aspiring to be one of these up and coming chosen 40, or you remember when you were under 40 and wish you knew then what you know now. Whichever category you may fall into, I pose the question – are your financial goals keeping pace with your career accomplishments?
So often we see driven individuals who have put their heads down and worked their tails off only to look back 30 years later and have less than what they expected to show for it. This article will address which financial services are worth paying for as well as some financial basics that are the foundation for anyone hoping to be financially successful. Let’s start with the fundamentals.
Pay Yourself First
Too often we find people saving whatever is left over. That strategy simply does not work. Instead, you must pay yourself before your paycheck gets eaten up by expenses or you’re tempted to spend it. We recommend building up to saving as close to 20 percent of your gross income as possible.
Automate
Generally, the largest liquid asset people have is their work-sponsored retirement plan (e.g., 401(k), 403(b), 457). The reason for this is that systematic savings come right out of their paycheck. If you’re not taking advantage of an employer-sponsored plan, it’s probably a good idea to start. If you’re already taking advantage of such a plan or these types of plans aren’t available to you, you can still set up automated savings using your online banking resources to set up auto deposit from your checking account into your savings, individual retirement account, or any number of accounts.
Maximize Your Benefits
Take advantage of company-sponsored health insurance, life insurance, matching retirement savings plans, and transportation reimbursement. Not only are these types of benefits usually very cost effective, but they can sometimes also help reduce your taxable income. The less you have to pay for these items, the more money you have to save for your rainy-day fund.
Establish an Emergency Fund
Whether it be an unexpected bill or loss of employment, having a liquid reserve set aside to help get you through any of life’s many surprises is important. Households with two income earners should set aside at least three months of expenses while single income earners should have six months.
Once you’re on your way to covering these items, you may be in a position that requires more personalized advice. But it’s not always easy figuring out which professional services are worth paying for and which aren’t.
In my opinion, here’s what you should pay for:
Planning & Tax Advice
No one likes paying taxes. Finding ways to be more tax efficient can save you more money than any normal investment rate of return can usually make you. The higher your tax bracket, the more substantial the savings. For example, if you’re in the 25 percent top marginal federal tax rate and 6 percent state tax rate, every $10K you can shelter from taxes essentially equates to a 30 percent savings resulting in $3K staying in your pocket. Research shows that tax strategies can add 30 to 40 basis points to after-tax investment performance. You need a qualified and coordinated team around you to help you maximize the best tax strategies.
Estate Planning Advice
A trusted estate planning attorney can help you set up an estate plan that ensures your wishes are carried out upon your passing, help you save money in taxes both in life and at death, and minimize family discontent down the line.
Financial Planning
Financial planners don’t just advise on your investments. They help you understand everything that does or could impact your financial life. Their job is to coordinate all of the other advisors in your life (attorneys, accountants, etc.) to get you to your goals in the most efficient way possible. Financial planners wear many hats and create customized plans that cover much more than just investments.
Asset Allocation
Research suggests that roughly 90 percent of a portfolio’s return and volatility can be traced back to how closely it adheres to the investment objective. So, making sure your portfolio’s asset allocation is in line with your tolerance. The real value here isn’t derived from paying someone to slap together a portfolio of mutual funds, stocks, and bonds. Instead, value is created through finding someone who understands you and your goals and who will grow with you as those needs change.
What to watch out for:
Suitable Advisors
When it comes to financial advisors, not everyone is held to the same standards. It’s hard to tell who is trying to help you versus who is trying to sell you unless you know what to look for. Advisors who are held to a suitability standard just have to sell you things that are suitable for you or, said another way, sell products that are good enough. Advisors who operate as fiduciaries for their clients have to do what’s in their clients’ best interest at all times. The difference between the two is huge, and we recommend you ask your financial advisor to which standard they adhere.
Stock Pickers
The likelihood of a one-man shop consistently beating the market is unlikely and, often, these types of speculative relationships can lead to an investor chasing unrealistic returns and taking on more risk than they could be comfortable with. If an advisor’s only value-add is “they can beat the market,” run away. They’re probably lying.
When it comes to being rewarded for hard work, people tend to focus solely on how much money they’re making or what rate of return their investments kick out. Unfortunately, that’s just the tip of the iceberg. Long-term financial success depends on so much more. Most importantly is the value being created by the plan you have in place and the professionals around you. Are you on track to meet not just your career goals, but your financial goals as well? We encourage you to pause and evaluate. If you’re not on track or you’re not sure, use this article to begin changing your trajectory.
Jonathan Benner is a Certified Financial Planner™ with LPL Financial in Chesterfield, Missouri. He can be reached at jonathan.benner@lpl.com.