According to a survey highlighted in Time Magazine half of adult children think that their parents never made money mistakes. Guess what kids? Everyone makes money mistakes.
When we are very young, we think our parents are perfect. As we get a little older we think that our parents are only perfect at being imperfect. The first sign of adulthood is when we realize that the truth lies somewhere in between. Any parent being honest will admit to having made some huge mistakes when it comes to personal finance. Any good parent will want to teach their kids how to avoid making the same mistakes.
Today’s younger generation has lots of resources at their disposal that their parents didn’t. If I had kids, this is what I’d tell young people are the “big” mistakes you can avoid so that you can do a better job managing your money than I did:
Mistake #1 – I can do this myself
If I have a headache I take some aspirin. When I tore a ligament in my knee, I went to a doctor. Similarly, there are simple things in personal finance that you can do yourself and things that are more difficult where you should seek out help. Wisdom is knowing the difference between what you can and can’t do by yourself. This isn’t due to a lack of intelligence. It’s due to a lack of financial education in our system. Once your life starts getting more complicated than a checkbook and an IRA, get professional help. If you think you’re too smart for that, you need PROFESSIONAL help, if you get my drift.
Mistake #2 - All financial advisors are NOT created equal.
There are three kinds of advisors. Surprising to most is that only about 10% of advisors are fiduciaries (always) and are legally required to do what is in your best interest. There are also brokers who only have to make “suitable” investment recommendations that may not be in your best interest. The vast majority of advisors can act in both capacities, often carrying the title of “financial consultant”. If their answer to whether they must always act in your best interest is “never” or “sometimes” or “it depends”, find another advisor. Especially for those with lower levels of assets (below $250k) and simpler lives, don’t be afraid to try one of the new online “robo-advisor” services. The robots are actually fiduciaries. They aren’t ready to replace people for more complex planning and investment needs, but if all you need is asset management, there’s a good chance they will get the job done in many cases better than a human will.
Mistake #3 – All financial advisors are NOT created equal - redux
You want an advisor that has the best credentials in the business. Make sure they are a CERTIFED FINANCIAL PLANNER™ (also known as a CFP®). If they say they aren’t, find another advisor that is. If they say yes, double check that they are registered here: www.cfp.net . (and if they said yes and they aren’t registered there – report them on that website).
Mistake #4 – Every penny matters, but you can drive yourself crazy counting pennies (then you’ll definitely need professional help).
Let your advisor do the counting. Tell your advisor to show you how much your investments cost in total. That means the total of what your advisor charges and the underlying fees on your investments. Do not pay more than 0.5% of your investments ($5 for every $1000). If your fees exceed that, tell your advisor to get a sharper pencil and/or find lower cost investments. If your advisor refuses, go elsewhere.
Mistake #5 – Write your advisor a check for their fees
There are some commissions, fees and transaction costs that must be deducted from your account. But your advisor fee does not. Tell your financial advisors that you will only pay them with a check. One of the largest expenses you will incur in life will be financial fees, but you never notice it because they are deducted silently while you sleep. You need to “feel the burn” of writing this check quarter after quarter, year after year to appreciate how much it’s costing you and to judge if they are offering good value. If they say they won’t work that way, your parents definitely taught you how a door works. Use it.
Our parents aren’t perfect. But you can be more perfect than they were.
And in the theme of the season - Congratulations Graduates! Make the world a better place.