The personal finance business attracts more than its share of scoundrels. Unscrupulous salespeople pitch high-commission, high-fee, underperforming investments and overpriced insurance plans that masquerade as investments, turning your hard-earned cash into their wealth.
Two key ways they do that are by burying the costs in opaque language in the fine print of their investment contracts, or by only showing you high-cost options. In essence, they either disguise their costs or make it seem like every investment available to you will cost you significant management fees.
While bad money advice is easy to come by -- and is often offered for "free" by those pitching those high hidden-cost investments -- good advice is a bit tougher to find. Generally speaking, the best type of money professional to turn to for solid money guidance that's truly in your best interest is a fee-only certified financial planner. And as luck would have it, the CFP Board is offering free consultations in various cities, starting Oct. 4 and running through Nov. 8. This might be a great opportunity for you.
Certified financial planners go through an extensive training and testing program and have to adhere to strict ethical guidelines. They also must be experienced, with at least three years of professional background in the field, before they can adopt the designation. The ones who are fee-only are valuable because they get paid for their time and advice, not the products they sell. Their advice forms the basis of their reputation -- and if they give bad advice, their reputation and business suffer.
Still, while fee-only certified financial planners may be able to provide you the most unbiased money advice you can get, their time and guidance does not typically come for free. Typical fees run from $125 to $350 per hour for guidance or $2,000 to $5,000 for a comprehensive, individualized plan.
Your Chance to Get That Guidance for Free
While those prices may seem steep, they can easily be worth it, especially when compared to the hidden fees you may already be getting charged for the "free" help offered by your current adviser. Still, if you've never worked with a certified financial planner before, you may want a way to try one's services before you buy them.
The CFP Board's free Financial Planning Days offer you the chance to talk to certified financial planners about your current financial situation and plans, with no strings attached. Planners will not sell you products or services or pass out business cards, though you will have the chance to follow up with them later, if you find value in your talks.
The typical meeting will only last about 15 minutes, which won't be enough for more than a few basic questions. Still, if you bring your records and plan a few key questions, you can get a heck of a good start, and perhaps find a planner to help you get your own finances in order.
Questions to Ask
If you have debt: What's a good plan to get that debt paid off? If you have a mortgage, should you refinance it, accelerate the payments or just pay it as planned and put your money elsewhere?
If you have investments: Are your investments appropriate for your age, career stage and risk tolerance? Are they cost-effective ways to get the potential rewards you're seeking? Are you saving enough and in the right places to meet your life goals?
If you have dependents: Do you have enough insurance and in the right type of insurance to assure your dependents are cared for should you pass away prematurely or become disabled? Are you saving enough and in the most efficient types of accounts for their educations?
If you're close to retirement: When should you take Social Security? Are you able to retire on your nest egg? How should you adjust your investments to provide you income in your retirement?
Can 15 Minutes Change Your Life?
The Financial Planning Days won't be enough to get your financial house in order. Still, it can be an excellent start down a path toward a smarter, more cost-effective financial plan. For an investment of 15 minutes of your time and absolutely no cash out of your pocket, it's worth looking into.
10 Financial Land Mines That Can Decimate Your Net Worth
How You Can Get Good Financial Advice for Free
Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.
Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they're not actively doing anything with it.
The average American household that carries credit card debt holds a balance of around $15,000. If you're among those who have a credit card balance, you've probably seen the little chart on your monthly statement telling you how much you'll pay in interest over the next several years if you make only the minimum payment. (If you haven't, look at it.) The same chart will also compare that to a "suggested" payment that's slightly higher.
Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can't pay for a consumer good out of pocket, don't finance it.
We don't demonize student loan debt the way we do credit card debt because we see an education as an investment -- and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.
That said, debt is still debt, and the longer you take to pay it off, the more interest you'll pay. Once you've freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.
Whether it's to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you're tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.
Putting aside a little each month could prevent you from getting socked with a hefty bill you can't afford and then need to finance.
No matter your age, you should be adding to your retirement funds -- such as your 401(k) or individual retirement account -- each month. Just setting aside money sporadically won't cut it; you need to identify how much you'll need to live on once you stop working and monitor whether you're on track to reach that amount.
Here's a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you'll need in your retirement portfolio, if you assume that you'll withdraw 4 percent per year to live on during your retirement. In other words, you'd need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you're able to retire the way you envision.
A home is a big investment, and sometimes that investment doesn't wind up netting you the return you thought it would.
The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.
You also want to be careful when purchasing a new home. Buying in a neighborhood that's on the downward spiral or buying the most expensive home on the block, likely won't net you a good return when it's time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value.
Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies' fees and shop around to make sure they're not taking more of your money than they need to be.
If you don't have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.
If you're having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don't, check out a site like PayScale to get a ballpark figure.
If you're not making what you're worth, you're doing more than leaving money on the table; you're also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.
If you don't have proper insurance coverage, you're taking a very big risk that could come back to bite you. Too many people think the worst can't happen to them, but the hard truth is you can't predict the future, and scrimping on sufficient insurance is never a good idea.
Of all the things we're hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:
Homeowner's or renter's insurance.
Flood insurance (if you live in a flood-prone area).
Umbrella liability insurance (especially if you own a small business).
If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.