Father Knows Best

Having a financial advisor for a dad certainly has its perks.

I have a professional managing my investments, someone I can call at any time of day or night for free financial advice and know he has a keen understanding of my current situation and future goals.

Although I must admit, I didn’t always appreciate my dad’s passion for his profession.

For most kids, the concept of earning allowance was simple: do your chores and earn an allowance.

At my house, it went a little differently. Not only did my brother and I have to complete our chores each week, we were also required to contribute to the “Family(k).”

When we completed our work for the week, we earned a $10 allowance—$3 of which was extracted for taxes, leaving us $7 for the week.

Although I saw paying taxes as a cruel joke and demanded my full allowance, my dad never caved.

Whenever we accumulated enough in our joint account, essentially “reaching retirement,” my dad (the government) rewarded our good habits by redistributing the wealth with a pizza dinner, a movie at the theater, or a trip to an amusement park.

That part I didn’t mind so much.

Though a silly exercise, it was one of the many ways he educated my family on the fundamental importance of financial management.

Now in my twenties, I feel I have a better understanding of financial management than most of my peers.

Since not everyone has had the privilege (or the curse) of having a financial advisor parent, here are a few things I’ve learned from my dad over the years.

Invest young.

Even though we’d prefer to believe we’ll be in our twenties forever, someday we will (gasp) get older. And when we do, many of us expect to own a house, start a family, and eventually retire—preferably somewhere tropical.

To achieve our aspirations down the road, now is the time to start planning and contributing to our futures, although so few of us take advantage of the opportunity while we have the chance.

The average deferral rate in a 401(k) plan is about 6% in the United States.

That number, though not particularly alarming, fails to illustrate the disparity between older investors, who generally save much more than 6%, and younger investors, who are usually saving much less.

Though many older investors contribute much more to their retirement accounts, even those who contribute the maximum amount don’t have nearly the same potential to accumulate as much as young investors.

Compound interest is a beautiful thing— but its full benefits depend on an essential ingredient: time. One additional year of saving can have a massive impact.

For a 25-year-old starting out with a $35,000 annual salary, the difference between saving for 39 years and 40 years amounts to over $76,000 by age 65. So getting started sooner can allow for a much higher future value at retirement.

Establish a budget and track your spending.

Investing, while managing bills and other financial responsibilities, sounds like an overwhelming task, especially if we hope to stash away some additional funds for leisure.

Establishing a budget can bring to light where spending habits need regulating in order to reach that perfect equilibrium of financial stability and sanity.

The first step to budgeting is identifying where your money is going and determining which expenses are reasonable and which require adjustments.

Financial advisors who use software such as eMoney, can keep an eye on your budget with tools that electronically track your spending in all your accounts. So when looking for an advisor in the future, one who uses the eMoney software can provide the most up-do-date technology to enhance your experience.

Accept your limitations.

In spite of what some young investors believe, taking a finance class or two in college does not qualify you as an investment professional. Even the experts never predict the market’s behavior with 100% accuracy, so its complexity should not be underestimated.

In order to make the most informed choices, every investor needs the combination of: time, talent, and inclination. That means if you plan on managing your investments alone, you will need adequate time to devote to managing your portfolio, the talent to handle the investments properly, and the inclination or desire to do so.

This happens to be a rare combination amongst non-financial professionals, so consider getting professional advice from an advisor you can trust.

My dad’s favorite line from Dirty Harry is, “A man’s got to know his limitations.”

Investing without professional assistance can be risky. While luck often plays a hand in portfolio performance, an advisor can help you navigate the uncertainties and diversify your portfolio for enhanced performance.

Of course as the daughter of a financial advisor, it’s easy to suggest seeking financial advice when I can access unlimited professional advice from my dad at any time. But for others who don’t have a parent in the industry, finding the right advisor, at the right price, can actually be easier than you think.

If my dad wasn’t an advisor, I would seek advice from advisors who are young and with reputable firms.

Seasoned advisors are great for those who can afford them. But for investors just starting out, younger advisors can afford to spend time with those whose incomes and financial responsibilities are more modest. They often receive the training and supervision necessary for customizing a plan that’s right for you.

Keep in mind, of course, that it is always important to ask the right questions when evaluating potential advisors and finally choosing one.

Another option is to consider connecting with an advisor through your place of employment, like the advisor who handles your company’s IRA or 401(k) plan. It is typically encouraged by the plan sponsor to educate its participants in making informed decisions, though the degree of customized advice will vary from company to company.

So as far as advice goes, as much as I’d like to deny it, dad really does know best—at least on matters of personal finance!