Finding the right financial advisor can be an invaluable tool for you. The key to not feeling financially intimidated by a financial advisor is by knowing the right way to use their services and understand what they can offer. A good financial advisor will have the ability to identify financial opportunities and then teach you those opportunities.
Everyone knows what financial advisors are supposed to do for you: give financial advice and provide investment information.
You should be able to ask your advisor about different types of investments. They should be able to provide you information about the two most common investments individuals use when planning for retirement: IRA’s and 401k’s. Seek advise on the difference between investing for example in an IRA versus 401k and Roth IRA’s vs Traditional IRA’s.
You can also ask a good financial advisor for suggestions on developing good financial habits. Ask the advisor to then hold you accountable for changing old, ineffective financial habits into new ones. If you can develop new, efficient financial habits you may actually find out that you have extra money, can save more and avoid some unnecessary financial repairs. Let’s review how to get the most out of your financial advisor.
Tips On How To Use A Financial Advisor The Right Way:
Tip #1 – Teaching You Investments
Before seeking help from a financial advisor, knowing some basic investment information ahead of time will prevent you from just following them blindly. Learn as much as you can about the topic you will be discussing with them.
IRA vs 401k
- IRA’s and 401k’s have different financial advantages
- Your age, income level, time horizon and job stability all help to determine if an IRA or a 401k works best for you
- If your employer matches your 401k contributions, a 401k plan may be a better option than an IRA because of the free money you get from an employer match
- Depending upon your income level, you may be able to invest in both an IRA and a 401k plan; check with your accountant
- Both IRA’s and 401k’s may or may not be tax-deductible, depending upon your income level
- Both are tax-deferred
- You can take out a 401k loan, but you cannot take a loan out against an IRA
Roth IRAs vs Traditional IRAs
- Roth IRA investing is not for everyone
- If you are close to retirement, a Roth IRA is not a good investment for you
- If you cannot keep the money invested for at least 5 years, a Traditional IRA instead of a Roth IRA is a better choice
- Traditional IRA’s do have restrictions on when you have to take a distribution
- With a Traditional IRA, you must begin minimum distributions at age 70 1/2
- With a Roth IRA, there are no distribution requirements
Tip #2 – Identifying Financial Habits
A financial advisor should help you identify your bad, bad, bad financial habits; and teach you how to modify them into good, good, good ones. Identifying a few of your own financial habits will help when you meet with the advisor. Here are 3 of the most common bad financial habits.
1) Carrying credit card balances
One of the first bad financial habits that financial advisors usually advise clients away from is carrying high credit card balances. If you want to avoid the hassles and expense of credit repair try your hardest to avoid carrying credit card balances. If you make all of your purchases with your credit card and then just make the minimum payment change that. By making the minimum payment every month you are in effect doubling and even tripling your original debt after you add in the cost of interest, fees and maybe late fees. That is a very bad, bad, bad financial habit to start because you never get ahead, you will always be in debt.
A better habit to develop is to pay off your credit card balance every month and not carry a balance. The first step towards that improving on the credit card balance habit is to avoid buying something if your only way to pay for it is on a credit card. If you cannot pay off the item within the month, do not buy it. That sounds harsh, but it’s the first step towards improving your financial habits.
2)- Taking out 2nd mortgages
The habit of taking out a 2nd mortgage to pay for other purchases is strongly discouraged by financial advisors. If your advisor does not discourage it, get a new advisor. The interest on a 2nd mortgage is usually higher so you end up paying twice as much for the merchandise due to the interest. And the payback period is usually shorter, so you just pressure yourself into a financial corner. Is that what you want?
A good financial advisor will tell you that if you cannot afford it hold off buying it until you can afford it. If you feel the need to buy a big screen television or a new car, it’s best to avoid sacrificing your home to do so.
3) – Separate your paychecks
Get in the habit of using your first paycheck of the month to pay for your fixed expenses. Your fixed expenses would be you mortgage or rent, car payment and real estate taxes. Then use your second paycheck to invest and pay for your variable expenses. These expenses would be your utilities, food, entertainment costs and transportation costs. Is this step easy, no, but neither are the other ones. Old habits take a time to develop so they will take time to change. Be patient with yourself and work closely with your advisor.
Your Financial Puzzle
Working with a financial advisor is similar to working on a puzzle. There are many pieces to a puzzle. Individually they make no sense, but when put together they make a beautiful picture. We have just presented you with a few of the puzzle pieces that you will need to work with a financial advisor on. There are many, many other financial issues that individuals use financial advisors for. We just identified for you a few of the more popular issues. Just as there are other financial investments that exist besides just IRA’s and 401k’s…we have just talked about those two because they are the investments most often used by investors for retirement planning. Each investor has different financial needs and situations which is why you want to work closely with an advisor you understand and trust to help you identify your personal needs and direction.