Effectively managing your finances is the key to getting ahead and preparing for your future. There are many places where you can gather information to learn how to budget, create a financial plan, and take other steps to pay down debt and grow your savings and investments.
Still, there are some situations in which it makes sense to work with a financial professional.
Since financial advisors charge fees or receive commissions from products or services you buy, you might wonder if you should hire an advisor or try to take charge of your finances yourself.
Whether you hire a financial advisor to help manage your money depends on your circumstances. While a financial advisor can provide critical input for long-term planning and help to ensure you are on track, they may not be necessary for every situation.
Consider the following information about when to consider working with a financial professional vs. taking a DIY approach to managing your money.
What Are Financial Advisors?
Financial advisors are professionals who help their clients create plans for managing their money and investments to achieve their goals.
Many financial advisors focus on investing and work with clients to help them assess and understand their risk tolerance, portfolios, and cash flow, as well as offer advice about strategies they can use to build wealth.
Other financial advisors take a holistic approach and work with clients to help them create budgets and retirement plans, minimize taxes, and strategize how to handle significant life changes.
Many diverse types of finance professionals might be referred to as financial advisors but have varying certifications, levels of expertise, barriers to entry, and fee structures.
They include the following:
- Financial planners
- Financial consultants
- Wealth managers
- Brokers
- Certified Financial Planners (CFP®)
- Certified Public Accountants (CPA)
- Charter Financial Analysts (CFA)
Each financial professional has different degrees of responsibility to their clients, so you need to understand the particular type of advisor you are considering. Before you hire a financial advisor, make sure to check whether they have any professional designations.
For example, a Certified Financial Planner® must complete coursework, pass rigorous exams, and attain at least two years of industry experience. A CFP® must also meet a fiduciary standard, meaning they should work with your best interests in mind.
You'll also want to check whether an advisor works on a commission-only basis or instead offers a flat-fee structure. Those who work on a commission basis might have a conflict of interest if they're paid to sell you financial products you may not need.
Your money professional should also have experience and expertise in the areas where you need help. Make sure to research any advisor you might consider to see whether they have garnered positive reviews or complaints from previous clients.
BrokerCheck is a free tool offered by FINRA (the Financial Industry Regulatory Authority) to research the background and experience of financial brokers, advisers, and firms. You can also check the Better Business Bureau website for complaints or search online for negative reviews of a specific individual or company.
When to Hire a Financial Advisor vs. Taking a DIY Approach
Now that you understand more about the distinct types of financial advisors, it's important to note that not everyone will need to partner with a financial professional to manage their money.
If your finances are relatively simple, it might make more sense for you to manage your finances on your own instead of incurring fees to work with an advisor.
Here are some common areas in which you might consider a DIY approach and when it might make more sense to hire a professional.
Budgeting
Creating a budget and sticking with it helps to create a foundation from which you can understand your finances and start building wealth. You can read many books and blogs to learn how to create a spending and savings plan and live within your means.
Many people can create basic budgets without help. But there are also paid online tools such as You Need a Budget (YNAB) that thousands of people use to develop and maintain their plans. A small monthly fee (or discounted annual price) may be worth it if a tool helps you stick to the budget you create.
If you decide to DIY a budget, start by calculating your net income, which is your gross monthly income minus deductions. You'll want to work with your net income instead of your gross salary to understand what you have coming in and going out.
Next, track your spending for at least one month. You can either save all of your receipts or use a personal finance app such as Mint, EveryDollar, or Tiller. At the end of the month, review your spending and categorize your transactions.
Start by listing your regular, fixed expenses, including your mortgage, utilities, auto loan payments, and others. Then, list the costs that vary from month to month, including your groceries, utilities, entertainment, gas, and others.
You can review your bank statement and your credit card statements for help with itemizing your transactions since they often do so for you.
When you've categorized your expenditures for a month and know your net income, you can review your spending to see areas where you can make cuts. You can also see if you are paying out more than you have coming in and make necessary adjustments.
Once you have an idea of your spending, set spending limits in each category. Be realistic and work to stay within your budget. Your budget should help you pay down debts, cut excess spending, and grow your savings.
Over the first few months, you may realize you've missed categories you need to include in your spending plan or that you've under- or over-budgeted in certain areas. Make adjustments to your budget as needed but work to keep your spending aligned with your values.
If you see that you're spending much more than you have coming in and have trouble understanding where you can cut your expenses, it might be a good idea to enlist the help of a professional.
A financial planner can review your budget and help you find areas where you might reduce your spending and how to attack your debts.
Financial Planning
If your finances are not complex, you can use your budget to build a financial plan that includes strategies for meeting both your short- and long-term financial goals.
For example, if you intend to buy a house in five years, you might plan to save $30,000 for a down payment. While it may seem overwhelming initially, it can be much more manageable when you break it down into a savings goal of $500 per month.
If your current budget doesn't allow that, return to your budget to see areas where you might cut spending so you can devote more to your savings.
Your financial plan should also include action steps for meeting your long-term financial goals, including your retirement, your children's education, charitable donations, and more. Be sure to address the strategy for how you will invest and save for future purposes vital to you so you can reach those goals.
Working with a financial advisor to set up a plan might be wise if you need help defining your goals and determining how to set milestones to reach them. A financial advisor can help develop a plan that fits your situation and works within your budget while also helping you avoid mistakes.
Taxes
For many people, an effective way to plan for minimizing taxes is to take advantage of qualified retirement accounts and other tax advantaged savings plans.
The money you invest in your traditional IRA or 401(k) is made by pre-tax contributions, so your taxable income for the year will be reduced. If you're employed and your job offers a 401(k) with matching contributions, you should plan to invest at least up to the matching percentage your employer provides.
You might also choose to invest in a Roth IRA. While your contributions to a Roth IRA are made post-tax and will not reduce your taxable income in the year you make them, you can take distributions in retirement from a Roth account tax-free.
Since your tax bracket is likely lower at the start of your career than it might be as you near your retirement, this can be a savvy way for young people to reduce how much they might have to pay in taxes over the long term.
Financial professionals can be greatly beneficial for tax planning when your finances are more complicated or when you have substantial income and assets.
For example, a tax professional might help you set up a trust and use gifts to reduce the size of your estate to help you avoid estate and gift taxes.
Getting professional help might also be crucial if you're self-employed and need to figure out how to reduce your overall tax burden and make estimated taxes during the year to avoid a large tax bill at the end of the year.
Investing
Making intelligent investing choices takes a sharp learning curve. Many people can benefit from working with investment advisors instead of trying to manage their portfolios independently.
People tend to make emotional decisions with their investments, which can cause substantial losses, according to theNational Financial Educators Council (NFEC). An investment advisor can help you to understand your risk tolerance and ensure that your portfolio is fully diversified to maximize returns while minimizing losses.
Selecting an advisor can be a challenging task. To help you navigate the process, here are 10 questions to ask when choosing an investment advisor.
If you aren't interested in working with a traditional investment advisor, you may decide that a robo-advisor can bridge the gap between hiring an advisor and DIY investing.
These software platforms powered by algorithms are designed to automate and manage your investments based on your input and risk tolerance. M1 Finance, Betterment, and Wealthfront are examples of these investment platforms.
If you decide DIY investing is for you, understanding risk and reward is essential, as is figuring out your level of risk tolerance, timeline, and overall financial objectives.
You'll need to devote time to learning about several types of investments, how to invest your money and allocate assets, and how to adjust your portfolio over time to meet your financial goals.
Situations When You Should Consider Getting Financial Help
In addition to the primary areas of fiscal management discussed above, certain life events might prompt you to seek help from a financial professional.
Some of the times when it can make sense to work with a financial advisor instead of trying to do it yourself include:
- Getting married and wanting help to create and manage a financial plan as a couple
- Having children and wanting to plan for their education and financial future
- Creating an estate plan to protect yourself, your family, and your assets
- Nearing retirement and wanting to ensure your finances are on the right track
- Receiving a sizable inheritance and managing it properly
- Simply not being a do-it-yourself type of person
While it is possible to manage your finances on your own, many people find they do not have the time it takes to make intelligent financial choices consistently.
The cost of working with a financial advisor might make sense when you are going through a significant life change, have complicated finances, are self-employed, or simply do not want to manage your finances on your own.
Even if you use a DIY approach to your finances, it can still make sense to check in with a financial advisor to review your plan and your progress annually or once every few years to ensure you're still on track. While no one will care more about your money than you do, having someone else's opinion can supply valuable insight into whether your current strategy is working well.
“The heart of man plans his way, but the Lord establishes his steps.” Proverbs 16:9
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