Financial and investment advisors can be very valuable resources in certain situations. Even so, there are great financial tips that you’ll rarely hear them suggest. Here is the great money advice your financial advisor probably hasn’t recommended.
Financial Advisors & Investment Advisors
These two terms frequently overlap because often both financial advisors and investment advisors focus most of their time on investments. Not only do they focus on investments, but their compensation models are often tied into how much money you have invested with them.
If you are thinking about working with an advisor you should consider the pros and cons listed out in the post Are Financial Advisors Worth The Cost?. If you already have an advisor please make sure you know the answers to these three important questions in an advisor relationship:
- How do you charge, and how much?
- How much did you make off my account last year?
- Are you acting as a fiduciary for me?
There aren’t solid right and wrong answers, but as a paying client, you should definitely understand these important parts of the relationship.
Since advisor compensation is often tied to the size of your investment account, there are a few things you’ll rarely hear your advisor suggest:
1. Have a fully-funded emergency fund
An emergency fund should be held in a very safe, very liquid account. This usually means a savings or money market account.
A fully-funded emergency fund is typically between three and six months’ worth of living expenses. If you aren’t sure how large yours specifically should be, check out this post that helps explain it: How big should YOUR fully-funded emergency fund be?
Money held in a savings or bank money market account is less money that is in your investing account. Suggesting you liquidate some investments, or defer investing for a while, to build your emergency fund means less pay for your advisor.
But an emergency fund is key to lowering your personal financial risk. More than half of Americans couldn’t handle an unexpected $500 expense without going into debt. That’s just $500. Think of a job change, medical situation, major car repair, etc. Having a fully-funded emergency fund can really be a (financial) life-saver!
The Starter Emergency Fund
2. Get out of debt, and stay out of debt
Debt management is rarely an area in which financial advisors are trained. Because of that, we can’t blame them for avoiding the topic.
Even if they were skilled in this area, money spent to pay down debt is money that isn’t invested.
Sometimes the math argument for taking on low-interest debt to invest instead can feel compelling. Why spend $30,000 on a car when the dealership is offering a 4% interest rate loan. Isn’t it better to invest that money?
No. That 4% is a guaranteed expense to you. And it’s an expense added to a product that is rapidly losing value. Your investments might or might not do well over any particular five year period. It is much less risky to skip the loan and pay cash. Plus the additional monthly cash flow that would have been put toward a payment can go to higher priority financial goals.
This is How You Achieve Financial Freedom
3. Invest in yourself
Investing in yourself can pay off HUGE. I already shared the story of how investing in a career change made me millions. Spending money on training, or certification, or total career shift can pay off year after year.
Another way to invest in yourself would be to start a business. It could be a small part-time side-hustle – which is a great way to bring in extra income. Or it could be a full-fledged startup with massive potential. Most commonly it would start as a side-hustle and grow into the larger venture. That’s what happened when I started a business.
Most financial advisors aren’t career coaches. They also aren’t business advisors. They know what they know, and it usually doesn’t include these topics. If you own a business already or are serious about starting one, you should seek an advisor who specializes in financial planning for entrepreneurs and business owners.
7 actionable tips to improve your career situation
4. Pay off your mortgage
But it’s “good debt”, right? And it helps lower taxes – right?
Debt is debt – it isn’t good or bad. Debt of any kind creates risk, and studies show most people would prefer to lower the risk levels in their personal finances.
About the tax break… first off, you only save about a quarter of the amount you pay in interest. Let’s say, for example, you are in the 25% income tax bracket. Paying $10,000 in interest payments would provide you with a $2,500 lower tax bill. You’re still out-of-pocket $7,500. It doesn’t sound like that great of a deal.
Also, the mortgage interest deduction has shown up on the chopping block congressional tax plans multiple times – even recently. If a plan gets passed that lowers or removes that tax deduction, there’s nothing you can do about it.
We downsized in 2014 to accelerate our early retirement. As part of that process, we sold our big beautiful waterfront home. The equity we had in the house allowed us to pay cash for a much smaller townhouse. Now we have no mortgage payment – or debt of any kind. We haven’t had a single regret. Living in a house that is owned 100% without a bank involved is very liberating. I highly recommend it!
Should you pay off your mortgage early?
5. Retire Early
When someone goes into retirement mode, they generally stop contributing to their investment account. That means your investment advisor’s future earnings growth drastically slows – or stops.
Not only that, but most people in retirement start to draw down their funds. Retirees need this money to live from so generally make regular planned withdraws. When this happens your balance will likely reduce over time – meaning less income for your advisor.
Love your job? Great for you! Continue doing it for sure if there isn’t anything you’d rather be doing. Even in that case though you might consider early retirement so you could work part-time and have a lot more flexible of a schedule. Or perhaps you could start your own business doing what you already do, but working for yourself. Another thought would be to do consulting in the same field you’re in.
Early retirement means options. It doesn’t mean sitting around being bored or doing nothing. You work hard for 20+ years, wouldn’t you like at least the option to scale back when you’re still young enough to enjoy it?
What Do You Think?
Do you have a financial or investment advisor already? If so, I’m curious if they’ve ever mentioned any of these ideas to you. Let us know in the comments below.