Don't Let Your Education in Personal Finance Cause You To Make A Mistake
One of the downsides of personal finance education is the fact that many people who should engage with a professional financial adviser, don't. No matter how much you educate yourself, a professional financial adviser can provide you with in-depth advice which will help you grow your money faster.
Do-It-Yourself Personal Finance Isn't A Good Idea
Don't get me wrong, as a college professor who teaches Personal Finance, I am a big believer in people becoming educated about their finances and money management. The Do-It-Yourself revolution in personal finance is a wonderful thing, as many are taking greater control of their finances, avoiding unnecessary debt, saving for their retirement and other goals, and generally building more wealth than they otherwise would.
But just because Home Depot and Lowe's sell all the things you need to "Do-It-Yourself," that doesn't mean you should grab a sledge hammer and start knocking down the back wall of your house so you can build an expansion.
Hiring a professional financial adviser can help you understand your finances in greater detail, can provide a sounding board for your ideas and concerns, and can help you identify new and creative strategies for achieving you financial goals.
You Should Get a Financial Adviser If...
Many of my students ask me how much money you should have in order to make getting a financial adviser worthwhile. Hiring a financial adviser shouldn't be based on your net worth nor your income, though. You don't need a financial adviser only when you have money. The advantage of a good financial adviser is he/she will help you get the money; through helping you increase your income, increase your assets, or protect those assets from losses. Below are questions you should ask yourself to determine if you would benefit from hiring a financial adviser.
Do I Know Enough to Manage My Finances Without A Guide?
Probably the biggest question to ask is if you truly know enough about personal finances to be able to make the correct decisions. Personal finance education is important, but to truly understand all of the consequences of a financial decision, it takes years of intense study.
As an example, I am currently taking the coursework to allow me to sit for the CFP exam, which is the highest level of professional designation for financial planners. (Although you don't need the designation for an adviser to be a good financial planner, having it helps.) The book for the introductory course is over a thousand pages long. Similarly, the text for the Estate Planning course is 600 pages long, and is taught by an Estate Planning attorney who has been practicing for decades.
A good financial adviser doesn't bring a basic level of information to their clients. The professional adviser has studied years to understand how a simple decision you might make becomes very complex when you consider other factors such as taxes, investment implications, risk, liability, and other factors.
As an example: when you buy a house, on the paperwork you fill out you have a half dozen options for how to 'title' the ownership. That one little checkbox will determine if the house will go to the person you want when you die (the law will pay attention to that checkbox and not your will), how much capital gains taxes you will pay on the house when you sell the house(the wrong box has cost people hundreds of thousands of dollars in taxes), who will get sued if someone slips and falls on the property (being a joint owner with a parent on a house they helped you purchase opens your parents up to a lawsuit), and may create many other potential problems.
A professional financial adviser should understand all of the potential consequences of seemingly simple decisions, and help you make the one which best meets your goals.
Do I Understand How To Apply What I Know?
Many people, including myself, argue that everything a professional financial adviser knows is easily and freely available to you through an Internet search. Although this is true, don't underestimate the importance of being able to apply the information.
Every law written is available online, but you would be foolish to think looking up the law is a substitute for having an experienced lawyer on your side in court. The value a professional brings isn't the factual knowledge they have, it's the experience and ability to apply the knowledge. Because they have dealt with the decision many times, a professional financial adviser can help you anticipate potential problems that even the most in-depth texts can't teach you.
As an example, the definition of term life insurance verses whole life insurance is easily described online, as is the general benefits and drawbacks of each. A professional financial adviser, however, can guide you on which one makes sense in your situation, how much insurance you should actually have, and how you should write the insurance contract. And how the contract is written can have major consequences.
Knowing how to write the contract can save your family enormous costs for life insurance. If the wrong person is the owner of the policy, it could subject the death benefit to estate taxes, while written correctly the entire benefit could be received tax-free. If the benefit is subject to estate taxes, the Federal Government could take $400,000 of a one million dollar policy.
A correctly written policy could also keep creditors from claiming the entire policy proceeds to pay for debts. It can ensure your children don't spend all the money quickly once they turn 18 should you and your spouse both pass. It can even pass wealth to your children and avoid the estate tax all together.
No matter how much study you do of personal finance, a professional adviser can bring a level of understanding one can only get by studying and practicing the subject daily.
Do I Have The Time To Manage it All Myself?
Even if you are capable of studying and researching every detail about every financial decision you make, you may not have the time to do it all. With the complexities and consequences even seemingly simple financial decisions bring, you could spend hours researching a decision a professional financial adviser could identify and explain to you in thirty seconds.
Hiring a professional adviser to save you time could be the best decision you could make. My wife and I are currently upgrading our house. Some of the projects I do myself, and others I hire professionals to do. The difference isn't whether I know how to do the project, however. I do the projects I like to do myself, and the ones that take too much time, or are unenjoyable, I avoid. I can mow the lawn and trim the hedges myself, but there are other ways I want to spend my weekends.
Hiring a financial adviser offloads the heavy lifting and frees your time up to do more important, or more enjoyable, activities in your life.
Do I Want To Manage My Finances Alone?
And the last question is really the main question you need to ask. Your finances will impact every aspect of your life. The financial decisions you make will impact your taxes, will have legal consequences, will determine the type of retirement you have, will affect where you kids go to school, and will influence every goal you have.
You may have all the knowledge, skills, and time necessary to manage your personal finances, but you may not want to do it alone. Having a sounding board and an expert in your corner can help you make better decisions, stick with you plan, and understand the more obscure consequences of your actions.
Each year, I do our tax return a year in advance so we can plan our tax strategy and adjust our withholding at work. And come April 15th, I'm often off by no more than a few hundred dollars. I am well versed in taxes, deductions, and adjustments and probably could do our taxes myself.
But I don't. I hire a Certified Pubic Accountant to do the end-of-year taxes and file the returns. Hiring a professional helps me to see any possible missed deductions (and I've missed a few along the way) that could have cost me thousands of dollars. A professional also helps ensure our tax returns conform with the tax code, which changes every year. And our CPA also gives me peace of mind knowing an expert has reviewed our taxes and filed the best possible tax return for our benefit.
In just a few minutes a week, you can achieve your financial goals. Each week you will receive a simple action item to take to improve your financial situation. Visit our challenge page and commit to getting in the best financial shape of your life.