How Financially Literate Are You? 3 Things You Should Know About Your Money

Most of us received little guidance or instruction on how to handle money when we were growing up. That’s OK — we can learn now, a little bit at a time. Let’s start with the basics.

How do most of us learn how to use our money wisely and well? When we’re growing up, we’re given special instruction in important subjects — swimming, driving, sex — to arm us with info and keep us from harm.

Yet when it comes to managing our money — an activity that every one of us needs to do, every day — we receive surprisingly little preparation. We’re not taught much about it in school, because education systems leave it to us to learn from our families and friends. However, those people often don’t fill in the gaps because money can be such a loaded or taboo topic.

Natalie Torres-Haddad, who grew up in southern California, saw many people around her struggling with debt and financial instability. She was determined to be the exception, and she purchased her first rental property in her early 20s and earned an MPA in Finance & International Business. In the process, however, she became buried in debt. Only by teaching herself the basics of money — basics that she’d never learned — was she able to steady herself and her finances.

Today she leads workshops and sessions to prevent others from falling into the money pit. (She’s also the author of the self-published Financially Savvy in 20 Minutes ). She’s found that even among the college-educated people she meets, “the majority feel confused and overwhelmed about balancing their income and expenses,” she says. The stats show they’re not alone. A 2015 Ohio State University study reported nearly 70 percent of college graduates in the US say they don’t feel equipped to manage money and deal with their debt.

Not only must we get up to speed on the basics, we also need to start having honest conversations with each other about money, says Torres-Haddad. In the same way we’d tell family and friends that we’re cutting out refined sugar from our diets or practicing yoga to increase our flexibility, we should be open with them about the steps we’re taking to boost our financial health. That way, we can get advice and support. This transparency, she adds, can also make us less susceptible to peer pressure-related spending. How many of us have agreed to a pricey meal or weekend trip because we didn’t want to come clean about our money concerns?

Becoming financially literate does not require a huge time investment. Torres-Haddad believes we can start by dedicating 15 – 20 minutes a day to developing our skills and knowledge by learning new terms and resources. Just like attaining literacy in a foreign language, she says, “it’s an ongoing education.” Here are three things you need to know about your money.

1. Know How Much Money You’re Bringing in Every Month vs. How Much You’re Spending

Most of us can rattle off our salaries in our sleep, but could you do the same for your monthly after-tax income and where you’re spending your money every month? If you can’t, that’s normal. But now is the time to learn your actual take-home pay and your actual expenses (and not just ballpark figures or estimates).

For your income, look at your physical or online pay stubs, and start keeping a record of the after-tax amounts. If you’re a salaried employee, that number should be fairly steady; if you’re not, those numbers will vary.

For your monthly expenses, Torres-Haddad suggests writing down — whether it’s in a physical or online notebook — every single daily purchase (coffee, take-out, Uber, online shopping, etc) you make and every single ongoing payment you make through autopay or credit cards (Netflix, gym membership, car insurance, utilities, etc.).

If you’ve never done this before, you may find this uncomfortable — even painful — but it will force you to face up to your spending habits. It will also make these purchases visible. Often, our regular outlays (such as Netflix, Hulu, etc.) can go unnoticed or unquestioned, and our daily spends — especially if we pay by debit card so the funds are instantly drawn from our bank accounts — can go forgotten. Torres-Haddad calls the latter “runaway spending” — “when the little things that you thought cost only a few dollars actually cost much more” in the long run. Take a daily $5 green smoothie. By making them at home, you could save yourself a few hundred dollars in a month.

After you have a fundamental understanding of income and expenses, you can download an app to help you track these categories; see your bank account, credit-card and loan balances; and organize your purchases into buckets so you can identify areas where you might cut back. Two free apps to try are Mint or Charlie, says Torres-Haddad. But, she cautions, apps can be a little “out of sight, out of mind,” meaning if you need extra help to be aware of your spending, stick with the pen-and-pad (or fingers-and-keyboard) method a while longer.

2. Know Your FICO Score and Your Other Credit Scores

While you don’t need to have a good credit score to be financially literate, you must know what it is. ( Note: Most of the information in this section applies to people living in the US.) In the US, FICO was the first company to offer a three-digit credit-risk score for lenders to use when deciding whether or not to approve a loan or line of credit, a credit limit, and an interest rate. There are three other national credit reporting bureaus — Experian, Equifax and Transunion — which also keep track of all your loans (student, auto, personal, etc.) and your balances and histories for all your credit cards (whether issued by banks, stores or businesses).

However, the FICO score is the one most frequently used when you apply for credit cards, mortgages and most types of loans; rent an apartment; or sign up for utilities. FICO scores range from 300 to 850; 670 and up is seen as a good score and 800 and up is excellent. While the FICO score is calculated with a proprietary algorithm, the primary factors that go into it are your repayment history (do you pay your credit-card bills on time? how late are you?), how much debt you’re carrying on cards and loans, how long you’ve successfully held a credit card or loan for; and whether you’ve managed to hold a mix of different kinds of credit.

Most banks and credit cards offer free access to your FICO score on their mobile apps and websites ( here’s a list of the ones that do). If you don’t use one of these companies, you can also find out how to access your score on FICO’s helpful FAQ, including a chart showing where your score falls between “Poor” and “Exceptional.”

Besides checking your FICO score every year, do an annual check of the reports issued by Experian, Equifax and Transunion. This is so you can verify that they’re correct, make sure no one has opened up a line of credit in your name, and see where you might improve. You are entitled to a free copy of a credit report from each bureau once a year. Beware: Many sites will charge you a fee, so use the federally approved and secure Annual Credit Report site.

If it’s your first time checking or you’re about to make a big purchase (such as a car or a home), Torres-Haddad suggests getting all three reports at once. After that, she recommends spacing them out throughout the year. That way, you can quickly catch any errors, fraud, identity theft or any other actions that could hurt your credit history. Mark your calendar so you know when you can request your next free credit report.

3. Know How Much Credit Card Debt You’re Carrying

Knowing how much credit-card debt you’re carrying — and how quickly it’s increasing due to interest — is critical to your financial literacy. Make a list (on paper or on a computer) of each of your credit cards, their current balances, and their current interest rate. Then, put them in order from highest interest rate to lowest.

In general, says Torres-Haddad, this should be how you should prioritize paying them off, paying as much as you can towards the card with the highest interest rate while paying the minimum on the other cards. Called the “ debt-snowball method,” this was popularized by money expert Dave Ramsey.

If you have any cards that offered a 0% APR as a promotion when you signed up, mark down the date on which the promotional rate expires because that’s when you can expect your debt to accumulate at a high interest rate (20% or more). Try to budget your monthly payments so that this card will have little to no balance when that expiration date arrives.

Believe it or not, having a credit card can be a great thing for a person’s FICO and credit scores — if you use it responsibly. Of course, carrying no debt on your cards is best. Otherwise, Torres-Haddad recommends using no more than 30 percent of your available credit limit. So if you have two credit cards with limits of $6K apiece, totalling $12K in available credit, make sure the total balances you’re carrying do not exceed $4K.

If you’ve managed to pay off a credit card, congratulations. But while you may be tempted to close it, Torres-Haddad advises against it. Why? Closing the account will shrink your total amount of available credit and cause your credit score to dip. Instead, delete the card number from any online shopping accounts, cancel any auto-pays billed to it, and freeze the card in ice. It may sound silly but it means that if you want to use it, you’ll be forced to wait for it to defrost — and forced to take a little time to think about your purchase.

When choosing a new credit card, look for ones that offer incentives — such as travel points or cash back — which could help you and your finances. Torres-Haddad recommends going to nerdwallet.com and bankrate.com to compare credit card offers.

Obviously, these three points represent just a small part of financial literacy. That’s why Torres-Haddad urges people to be patient and to learn gradually. Two books she recommends are Napoleon Hill’s Think and Grow Rich!  and Robert T. Kiyosaki’s Rich Dad, Poor Dad. For those who like to get information through listening, she suggests the “Popcorn Finance” and “Her Dinero Matters” podcasts.

When you can, supplement your research with an in-person workshop, adds Torres-Haddad. “Even going to one financial literacy workshop can have a life-changing effect,” she says. A good time to find free workshops is April, which is Financial Literacy Month in the US. One of the best investments you can make in your life is to educate yourself about money, says Torres-Haddad. “It can really give you a lot of peace of mind.”

By: Erin McReynolds

Source: How Financially Literate Are You? 3 Things You Should Know About Your Money

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5 Pieces of Money Advice No One Ever Wants to Hear From Me

You know how adults always told you to “eat your veggies” and greens when you were a kid? Well, that nagging advice doesn’t necessarily stop in adulthood. As a financial planner, I’m constantly giving people good advice they don’t want.

I know no one wants to hear this kind of money advice. But those who do listen — and more importantly, implement these ideas — tend to have better control over their cash flow, higher savings rates, and more financial power.

You might not like it, but much like eating broccoli and kale, taking it in is often for your own good.

1. Don’t buy so much house

Buying a home is rarely a data-driven decision. It’s an emotional one, and for good reason. For many people, homeownership represents stability, security, and even status.

These are not unimportant things, but too many people use their emotions as excuses to throw financial reality out the window when it comes to house hunting.

Set a budget and stick to it. We often recommend keeping your total annual housing costs to no more than 20% of your gross annual household income.

This helps ensure you retain flexibility in other areas of your cash flow so that you can own your home and keep pursuing other important goals or have money available for your other priorities.

2. And don’t assume your house is a good investment

I often caution people against thinking of their home as an investment. Again, that doesn’t mean buying is a bad idea or your house isn’t worth as much as you think it is. But an investment should provide a return.

A single-family home that serves as your primary residence (and does not provide rental income) may be an excellent utility. It is not, however, what I would consider a good investment.

Home values do tend to rise over time, but the cost of ownership, maintenance, and upkeep often erode most of the “gains” you might see when just looking at the transaction of buying and then selling your home on paper.

A reasonable, real return on single-family homes runs about 2%. That’s not nothing, but it’s also not something you can assume will fund your full retirement, either (especially when you have to live somewhere, retired or not, and most people put the equity from a home sale into their next purchase).

3. Save more than you think you need to

It’s really important to me that I help my clients strike a balance between enjoying their lives in the present while also building assets and future financial security. This would be much easier to do if we had a crystal ball and could accurately predict what life would be like in 10, 20, even 30 years.

We’d know your budget. We’d know what kinds of emergencies you’d have to deal with, and prepare accordingly. And we’d understand what your life would look like (including how long it would be).

With that clarity, it would be possible to say, “you need $X. Save just that and feel free to spend the rest.” That is, obviously, not how life works.

The solution? Save more than you think you need to, because then you give yourself a margin of safety. By saving more than you necessarily must save to “be OK,” you can better:

  • Handle emergencies
  • Take advantage of opportunities when they come up (either to spend on an unexpected trip, for example, or to use money on an investment you feel passionate about)
  • Incorporate new goals into your planning over time

Saving more that you think you need today also buys you more choice and freedom in the future. The usual guideline I give to clients to help them achieve this is to save 25% of annual gross income.

4. Have a backup plan

It might sound like a doom-and-gloom approach to finances, but I preach about always having a backup plan — or those margins of safety, or wiggle room, or contingencies.

No one wants to imagine a worst-case scenario, but if something actually went sideways in your financial life, you’ll be glad you had multiple levels of safety net built into your overall plan.

You can do this in a number of ways, including some we’ve already talked about, like saving more than you think you need to save.

Other ways of building in backups is by maintaining an emergency fund, using conservative assumptions around income, and overestimating your expenses when you do any kind of long-term financial projection, and not counting on any kind of windfall (from bonuses and commissions to inheritances) to make your plan work.

5. Stop trying to time the market

It is so tempting to think we can successfully time the market. Why? Because drops and spikes in the stock market look stupidly obvious with hindsight.

It’s very easy to look back at something like 2008 (or maybe even the spring of 2020 at this point) and feel like you know when the best times to buy and sell would have been… because they already happened. 

Guessing what comes next without the benefit of knowing how things played out is not the same thing. Data shows us that even professionals fail to time the market repeatedly. You may get lucky once, but repeating that performance over and over again for the next few decades is virtually impossible.

Build a strategic investing plan — and then stick to it, regardless of current events.

It’s probably not as fun and may not be as sexy as bragging about your stock picks on Robinhood, but it works a whole lot better in the long run.

By:

Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money.

Source: 5 Pieces of Money Advice No One Ever Wants to Hear From Me

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More Contents:

Your Financial Year-End Checklist

2020 is over, and for many of you, it can’t end soon enough. There will be plenty of time to celebrate the end of one year and to hope for better days in the one ahead. But before we get to that, take these steps to get financially ready for 2021.

1) Review your goals: The end of the year is a great time to review the goals you made at the beginning of the year and set new ones for 2021. How did you do this year? Is there anything you’re proud of accomplishing? I like to start with bright spots because they can guide you toward success as you set new goals. But let’s be realistic, too; 2020 threw us a lot of curveballs.

Was there anything you wish you could have done better? You can also learn from any potential stumbling blocks and figure out how to use them as stepping-stones next year. You may also want to take time now to review your net worth. That’s one way to gauge the progress you’ve made in your financial health this year.

2) Update your budget: Did you save the money that you wanted to? Pay off the debt that you needed to? The end of the year gives you a solid end point to assess whether met the goals you set at the outset of 2020. What if you didn’t have a budget or financial goals? You’ve got a blank slate ahead. Why not create a budget that works? 

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3) Create a holiday bucket: Holidays can be budget breakers, so why not incorporate them into your spending goals right from the start? Christmas may look a lot different this year. But you can still create a separate bucket for holiday spending and when that money is gone, stop spending. You’ll thank yourself in January when you don’t have an unusually large credit card bill.

4) Use it or lose it: Some of your benefits—like vacation days or a medical or dependent care flexible spending account (FSA)—expire at the end of the year. Take stock of what you have left and use these benefits to your advantage. MORE FOR YOUPPP Loan Forgiveness Application Guidance For The Self-Employed, Freelancers And ContractorsSBA Approving Economic Injury Disaster Loans (EIDLs): What You Need To KnowWhat You Can Do Now To Maximize Paycheck Protection Loan Forgiveness

5) Make any last charitable contributions: December 31st is the last day your charitable contributions can be deducted on your 2020 tax return. If giving to charity is a part of your spending plan, you can use these questions to help make the most of your charitable giving.

6) Pump up your 529: Just like charitable contributions, contributions to your 529 college savings plan must be made by December 31st to count for this tax year. Find out if your state is one of over 30 that allow you to deduct your contribution. You can find the specific deduction here. If your state is one of the four that allow an unlimited deduction, keep in mind the yearly gift-tax and super-funding rules.

7) Max out your 401k: While you have until April to make contributions to your traditional IRA, Roth IRA and HSA, you can only contribute to your 401k through December 31st. So, if you have extra cash and are looking to boost your savings, consider contributing your last couple of checks entirely to your 401k. Business owners can do the same with the employee portion of your Solo 401k contributions.

8) Find your tax return: You’ll be doing your taxes before you know it, so use this time to get prepared. Review last year’s return and make a mental list of records you’ll need to assemble. Year-end is also a good time to decide whether a Roth conversion makes sense for you.

9) Review your business structure: Evaluate your business structure and the QBI deduction to identify any changes you need to make to your business. You might want to set up a solo 401k, for instance, and if so, you’ll have to act before December 31st (although you can make employer/profit sharing contributions up to the business tax filing deadline).

10) Defer income and incur expenses: If you’re a business owner, you may also want to look at ways to defer income into 2021 or pay for business expenses you anticipate for early next year. This is any easy way to reduce your tax liability for 2020. However, remember not to spend money on business expenses that you wouldn’t otherwise incur just for a tax deduction. Spending a $1 to save 24 cents still costs you 76 cents.

 11) Will and trust review: The end of the year is a good time to take stock of changes in your life—like getting married or divorced, having children, starting a business or retiring.  Your estate plan should reflect these changes. Get out your will, documentation for trusts you’ve established and powers of attorney and make sure they match your current situation.

12) Insurance documents: Insurance documents also need to cover your current situation. Take a look at your life and disability insurance policies to make sure they protect your current income and those dependent on it. Your renters or homeowners insurance should cover any additional big purchases you made during the year. And lastly, you should review your health insurance policy for any upcoming changes for 2020. For those of you enrolling in the Market Place, you have until December 15th to pick your plan.

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My last bonus task is to enjoy this holiday season. I love the holidays because you can reflect and appreciate what you have. We’ve been tested a lot this year, living our lives through a pandemic, racial unrest and a contentious election. I hope the end of the year brings you comfort and peace. Follow me on Twitter or LinkedIn. Check out my website

Brian Thompson

Brian Thompson

As both a tax attorney and a CERTIFIED FINANCIAL PLANNER™, I provide comprehensive financial planning to LGBTQ entrepreneurs who run mission-driven businesses. I hold a special place in my heart for small-business owners. I spent a decade defending them against the IRS as a tax attorney and have become one as a financial advisor. It’s a position filled with hope and opportunity. It gives you the most flexibility to create the life that you want. I also understand the added stresses of running a business while being a person of color and a part of the LGBTQ community. You may feel like you don’t have access to the knowledge that others do. I’m here to help lift some of that weight from your shoulders.

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Critics:

A personal budget or home budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget. There are several methods and tools available for creating, using and adjusting a personal budget. For example, jobs are an income source, while bills and rent payments are expenses.

Contents

What No Student Loan Payments Until 2021 Means For You

You don’t have to make another federal student loan payment in 2020. Now is the time, though, to decide what to do before your bill arrives in January 2021.

Federal student loan borrowers were already in an automatic interest-free pause on payments as part of the original coronavirus relief bill, known as the CARES Act. This pause was expected to expire Sept. 30, but an extension of the forbearance through Dec. 31 was directed in a memorandum signed by President Donald Trump on Aug. 8.

However, it’s uncertain that all the student loan relief measures included in the original CARES Act, such as a pause on collection activities, will also continue.

“The language of the executive order is not clear,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. It’s also possible, she says, that Congress will make additional changes before the current automatic forbearance period ends.

For now, the forbearance extension is to begin Oct. 1 and run through the end of the year, barring any legal challenge. The Department of Education is expected to issue additional guidance in the coming days on the details of the memorandum.

Here’s what the student loan payment relief extension is likely to hold for you, depending on your situation:

YOU HAVE FEDERAL LOANS AND FACE FINANCIAL HARDSHIP

January 2021 is just a few short months away, but it’s enough time to make a change for your loan payments and avoid defaulting on your loans.

“There is no harm or downside in talking to your servicer now,” says Scott Buchanan, executive director of Student Loan Servicing Alliance, the trade association of student loan servicers. “You want to be well-prepared for whenever this does expire.”

If you know you’ll have difficulty repaying the debt, contact your servicer now about enrolling in an income-driven repayment, or IDR plan — it caps payments at a portion of your income and extends the repayment term. If you don’t have a job, your payment could be zero. If you’re already enrolled in IDR, make sure to recertify your income if it has changed.

YOU CAN STILL MAKE PAYMENTS ON YOUR FEDERAL LOANS

If your finances haven’t been affected by the economic downturn, you can use this time to prioritize financial goals.

Consider making payments toward your principal on your federal loans to lower your overall debt. Since your loans are on automatic forbearance, you’ll need to contact your servicer to do so.

Alternately, you can make a dent in other financial goals, such as paying down credit card debt or padding your emergency fund.

YOUR FEDERAL LOANS ARE IN DEFAULT OR REHABILITATION

All collection activities on federal student loans are suspended through Sept. 30, such as wage garnishment and collection calls. However, experts say, the new memorandum doesn’t specifically indicate that collections would be suspended through the end of the year.

Similarly, if you’re currently rehabilitating defaulted student loans, the original six months of nonpayment counted toward the nine needed to complete the process. But the memorandum doesn’t specify this would continue under the forbearance extension. Contact your servicer for more information.

YOU’RE PURSUING PUBLIC SERVICE LOAN FORGIVENESS

Federal student loan borrowers pursuing Public Service Loan Forgiveness don’t need to make payments until Sept. 30. Those months of nonpayment still count toward the 120 payments needed to qualify for PSLF as long as you’re still working full time for an eligible employer.

However, there is no indication yet that the new memorandum applies to borrowers pursuing PSLF, experts say. Contact your servicer to find out if the additional months of forbearance would count toward PSLF. If not, consider making payments during this time to keep on track.

YOU RECENTLY GRADUATED FROM COLLEGE

If you were expecting to start making payments on your loan within the period of extended forbearance, your first payment won’t be due until January. Usually, interest accrues during a grace period, but if your six-month grace period overlaps with the administrative forbearance period, interest won’t grow.

Use this time to find out who your servicer is and what your first bill will look like.

If you think you can’t make your minimum payment come January, you can apply for an income-driven repayment plan to cap payments at a portion of your income (it could be zero if you don’t have a job). Apply for income-driven repayment at least two months before repayment starts.

YOU’RE TAKING TIME OFF FROM SCHOOL

Federal loans typically have a grace period of six months after you leave school. If you have student loans and last attended school in the spring, your payments would start to come due this fall. The extended forbearance period would delay your first payment until January.

When you resume classes, you can defer payments until you finish school as long as you are enrolled at least half time. But student loans get only one grace period; you won’t have another after you graduate or leave school again.

YOU HAVE PRIVATE STUDENT LOANS

Your lender may offer private student loan relief in the form of a payment pause or reduced payments. While a number of lenders structured relief plans to end Sept. 30, many are open to an extension or additional relief.

Contact your lender to ask about additional deferments or payment reductions. You can also apply for existing loan modification programs for financial hardship. These will vary from lender to lender — but interest will continue to accrue, unlike with federal loans.

You’ll likely have to apply for private loan relief individually since most lenders aren’t making payment pauses or loan modifications automatic, Mayotte says.

YOU HAVE NON-GOVERNMENT OWNED FFEL LOANS OR PERKINS LOANS

Student loan borrowers with the Federal Family Education Loan (FFEL) Program or Federal Perkins loans not owned by the Education Department don’t have access to the automatic forbearance.

To take advantage of the forbearance, you’ll need to combine your loans into a federal direct consolidation loan. Consolidating loans will cause any unpaid interest to capitalize, or be added to the principal balance. Contact your loan servicer to determine how consolidation will affect the total repayment amount, interest rate and loan balance.

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This article was provided to The Associated Press by the personal finance website NerdWallet. Anna Helhoski is a writer at NerdWallet. Email: anna@nerdwallet.com.

RELATED LINKS:

NerdWallet: Income-Driven Repayment: Is It Right for You? https://bit.ly/nerdwallet-income-repayment

Department of Education https://studentaid.gov/announcements-events/coronavirus

More From AOL Associated Press:

By: ANNA HELHOSKI of NerdWallet

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NerdWallet 6.23K subscribers The CARES Act provided federal student loan borrowers with relief in the form of six months of interest-free paused payments, also known as forbearance, as well as a halt to all student loan collections. The forbearance was extended on August 8. If you have federal student loans, what does that mean for you? Should you continue to pay?

NerdWallet’s student loans expert, Anna Helhoski, provides guidance for those who should take advantage of forbearance and those who should continue to pay. She also shares tips on whether or not to refinance loans right now. What No Student Loan Payments Until 2021 Means for You: https://www.nerdwallet.com/article/lo… Federal Loans Are Paused Until 2021 — Should You Pay Anyway? https://www.nerdwallet.com/article/lo… Student Loan Refinance Calculator: https://www.nerdwallet.com/article/lo… Student Loan Forbearance: How It Works and Who May Benefit: https://www.nerdwallet.com/blog/loans… Private Student Loan Relief for Borrowers in the Coronavirus Crisis: https://www.nerdwallet.com/blog/loans… Subscribe to our channel and also follow us here: Facebook: https://facebook.com/nerdwallet Instagram: https://instagram.com/nerdwallet Twitter: https://twitter.com/nerdwallet

5 Signs It’s Time to Change Your Financial Advisor

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How do you manage your finances? Do you have a financial advisor, or do you do it yourself? If you’ve taken the DIY (do-it-yourself) road, you’re very much in line with fellow Europeans

A CNBC and Acorns survey reveals that only 17 percent of Europeans use a financial advisor for their finances. One must note that these findings are from the March 2019 edition of the survey. The October edition of the same poll puts these figures close to 1 percent. While we understand that it’s a huge difference, the rather valuable insight is that very few Europeans use a professional financial expert to manage their finances and instead rely on their knowledge, expertise to handle their money.

However, is that a brilliant strategy? The answer would be both no and maybe. Let’s take up the first part of our answer.

A survey from GoBankingRates.com finds that a majority of Americans can’t even answer basic financial questions, a finding consistent with other similar studies. So it makes a little sense for people to manage their own finances.

However, there is a flip side as well. Financial experts believe that the availability of relevant information online, videos, articles, infographics, could be a reason why more Americans are confident in handling their money.

Are you in a similar dilemma: hire an expert or DIY? We’re going to find out what a financial advisor does, when is the right time to change your financial advisor, and how to choose one?

Why should you hire a financial advisor?

If you were to get a dental implant, you’d probably go to a dentist instead of your spouse do it for you, right? Sadly, when it comes to managing finances, many spouses (15 percent) leave financial management to their partners.

Research finds that have a financial advisor can have a profound impact on your financial health. More than 66 percent of Americans with a financial advisor feel financially secure against 30 percent without a financial advisor at their side. Having a financial advisor gives them a sense of moving in the right direction.

While some may be skeptical of advisor fees, research finds that the right financial advisor can very well compensate an investor for the asset management fees through impressive returns.

Copyright: Portia Antonia Alexis

Here are a few of things that a financial advisor can do for his clients:

Help you define your financial goals. What are your short-term goals? How do you see yourself financially after 25 years? How much money would you need during retirement?

These are some of the most common financial questions you may have. A financial advisor can help you define specific short-term and long-term goals and create a strategy to achieve them.

For instance, if you’re saving for the down payment of your first house, where should you keep that money? Or how much money do you need in the first place? Is your checking account the right place to keep it? Your financial advisor understands your housing requirements and can give a ballpark idea of how much money you may require. Similarly, he can suggest the right saving instruments, such as a high-yield savings account, to deposit your money.

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Similarly, your financial advisor can help you identify your retirement goals. Instead of having no estimate, he can put together a figure, backed by an investment strategy, to offer a sense of financial certainty.

Find investments that work for you. Not every investment suits your retirement portfolio. If you’re well in your 50s, investing in equity might be a risky choice. Similarly, if you’re in your late 20s or early 30s, putting all of your money in bonds or CDs may not be the smartest way to grow your wealth.

A financial advisor understands your goals and picks investments that will help you achieve them. Furthermore, he can advise investments that suit your risk profile, thereby limiting your overall risk exposure.

Let’s take the above example. For someone in his 50s, it is best to apply a conservative investing approach that focuses on consistent long-term returns instead of growth. At the same, a portion of your portfolio should be invested in growth-oriented financial instruments to fund your income for the next several years.

Help you gain more financial control over your life. Research finds that people having a financial advisor finds themselves in control of their life. Nine out of 10 Americans reveal that having financial order in their house makes them both confident and happy.

Financial problems can cause stress, and it’s not just major money issues, such as bankruptcy or an overwhelming amount of debt. Sometimes, it’s more about having financial control in your life, knowing how much money you’re bringing in, where you are spending it, and are you moving toward your financial goals.

A financial advisor helps you understand money better, creating strategies that work in your favor. You can be relieved of your stress with the right financial expert by your side.

Hold experience in addressing, resolving financial challenges. Financial advisors hold years of experience in managing finances, and as much as you would like to consider your circumstances unique, they’re often not. The chances are quite solid that your advisor has already helped someone facing the same challenges.

Let’s take the example of debt. If you have a huge debt, which only seems to grow despite your regular payments, your advisor can create a strategy to repay your debt, negotiate better payment terms, and guide you through the entire process. If you have a mix of debt, with both high interest and low-interest loans, paying down the most expensive debt while making minimum payments on others might help you save money on interest payments.

The key is to be transparent and as open as possible about the issues. By working together with your financial advisor, you may just regain your long-gone financial freedom.

As good as it may sound, not every financial advisor has your good interest in his mind. It’s critical to evaluate the performance of your investments regularly, ensuring that your advisor is keeping the promises he or she made initially.

Let’s have a look at some signs that indicate that you need a new financial advisor.

1. You’re not on track to meet your financial goals.

Most of the financial advisors will start a relationship by understanding your financial requirements, goals, and challenges.

They’ll list your short-term and long-term goals, and advise strategies to achieve them.

All good so far, but you suddenly notice that your investments aren’t helping you achieve your financial goals. In fact, if anything, you’re nowhere close to your financial goals or even on the right track.

It’s understandable if the investments occasionally miss their mark, but if that’s not the case, you need to change your advisor immediately.

As a responsible investor, you must track your financial goals and returns periodically.

2. Your advisor recommends investments that aren’t suitable for your portfolio.

Every time you speak with your financial advisor, he pitches a new investment product and instead insists on purchasing it. Sounds familiar? That’s a red flag, and if it’s happening with you, consider having a new advisor.

Every investment product or financial instrument has a risk profile, and the product must suit your risk tolerance level. It’s your financial advisor’s job to recommend products fitting that criteria.

Instead of blindly investing in a financial instrument, do some individual research, and if you have doubts, ask your financial advisor. One must understand that financial advisors often receive commissions for recommending a product, so you should always do personal research.

3. Your life is due for a significant change.

Are you on the verge of retirement? Is there a major life event that would affect your financial life? You need to make sure that your financial advisor is qualified for your new economic requirements.

Most investors tend to stay loyal to their long-term financial advisors, and for all the right reasons; however, if you’re retiring or there’s another financial change in your life, your financial advisor should be able to realign his financial strategy to suit your needs.

The best way is to ask your financial advisor for recommendations or suggestions and crosscheck it with a third-party expert. You can get professional advice on a per-session basis, so you don’t need a new advisor simply to validate the new strategy.

4. You’re not receiving monthly or quarterly reports.

Most of the financial advisors provide monthly, quarterly, and annual reports to their clients. That’s how you track how your money is doing. These reports should be detailed, helping you identify realized profits or losses, understand how your portfolio is doing, and provide a list of relevant accounts, such as portfolio number, demat account, 401k account or Roth IRA account number.

Additionally, you have complete rights to seek access to your online investment portfolio. Your financial advisor should have no problem whatsoever in sharing it.

However, if you don’t get at least quarterly and annual reports, it’s time to ask questions, and if your advisor isn’t answering, there’s your cue.

5. Your advisor changes your portfolio without informing upfront.

Did your financial advisor add a new product or investment without consulting you? It’s a common practice among financial advisors to rebalance your portfolio for maximum growth or minimizing any impact from market volatility, provided you gave them consent upfront. However, if you didn’t do it and your advisor anyways changed your portfolio, it’s time to find a new advisor.

If you’ve identified one or several of these red flags, its likely time to change financial advisors. Here are a few suggestions for hiring the right advisor this time around.

Find out if your financial advisor is a fiduciary. Fiduciaries are investment advisors who are registered either with a state regulator or the SEC. It’s their duty to act in your best interest, and in case of any possible conflicts of interest, they must notify you in advance.

You must understand that not every investment advisor is a fiduciary, and stockbrokers, broker-dealers, and insurance agents aren’t bound with the same duty to work in your best interest.

You can ask your financial advisor for his registration number and crosscheck it on the NAPFA (National Association of Personal Financial Advisors) website.

In addition to the fiduciary standard, find out if your financial advisor has any specific certifications, such as CFP (Certified Financial Professionals), ChFC (Chartered Financial Consultant), or AIF (Accredited Investment Fiduciary). It’ll help you understand their qualifications and whether they’re suitable for your financial requirements.

Ask how your financial advisor gets paid. How a financial advisor gets paid can have a massive impact on your portfolio composition. Financial advisors operate through with different fee structures, where some are fee-only advisors, whereas others may receive a commission to recommend a particular product. There are other fee models, such as asset management fees or success fees (hedge funds).

While there are no rules defining the ideal compensation models, it’s critical that your financial advisor discloses it.

Verify credentials and customer feedback. Checking the credentials of your financial advisor is only the first step. It’s critical to find out if there’re any possible complaints registered against your advisor. You can do that by merely going to the SEC website, CFP® Board, or checking your advisor’s records with the FINRA (Financial Industry Regulatory Authority). If you find a complaint, ask your advisor about it, although multiple complaints are a red flag.

In addition to checking official records, ask your financial advisor for references. Any good advisor would be happy to share them. Speak with the previous or existing clients of the advisor and get thorough feedback. You can search more about your financial advisor online.

The right financial advisor can make your life better, peaceful, and financially rewarding. It’s crucial to do thorough research before hiring a financial expert. Even when you have someone looking after your finances, make it a habit to track your portfolio. A little bit of caution and routine checkup will go a long way in securing your financial future.

Portia Antonia Alexis

By:

Source: https://www.entrepreneur.com

This video discusses some common types of financial advisors, the key differences between them, and why you may choose to work with one. We post educational videos that bring investing and finance topics back down to earth weekly. Have a question or topic suggestion? Let us know.
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