There are many misconceptions about financial planning. One of the questions I routinely hear from young people is, “I’m young, do I really need a financial advisor?”
It’s a great question but I think you could ask fifty people that question and you’d get fifty responses. My job as a financial advisor is to craft a service offering that is both valuable and cost-effective for young investors. I believe that the industry has failed to do both of those things. You don’t need just any advisor. You need to find the right advisor.
I absolutely believe that anyone looking to make sound financial decisions can benefit from the help of the right financial advisor. Millennials have discernible financial challenges, much different than the needs that their parents have today, or even had at their age.
So what are some of these unique challenges?
Repaying Student Loans
A four-year degree has become a requirement for many employers to even consider a candidate. Thus, millennials are doing whatever it takes to get a college degree, often borrowing in the form of student loans to afford this education. Herein lies the problem – college is insanely expensive! The average inflation rate since 1914 is 3.29%. Since 2011, public four-year institutions’ tuitions have risen at an annual average of 9%. At private institutions, the figure is 13% annually. These figures are both after inflation.
With the cost of a four-year degree rising at a much higher rate than that of inflation, college graduates are graduating with exorbitant amounts of student loan debt. In fact, in 2016, the average graduate has over $37,000 in student loan debt to repay. This figure continues to rise and millennials often feel that they must place their financial goals on hold as they struggle with paying down student loans. Working with the right advisor could help you make sense of your loans, help you get set up on a repayment plan, and help you do all of this as part of a sound overall financial plan.
No financial plan can be successful without positive cash flow. Unfortunately, Americans have not done a very good job of budgeting. It’s important for millennials to start bucking the trend and to start establishing and sticking to monthly budgets.
Some startling statistics about how Americans are living paycheck to paycheck:
- About 46% of Americans couldn’t cover an unexpected expense of $400 without borrowing or selling something.
- About 31% of non-retired Americans have no retirement savings or pension at all.
You can see by these statistics that a concerted effort needs to be made to help people practice better budgeting. A financial advisor can work with millennials to help them reach the point where they not only have positive cash flow, but are then wisely using excess funds to build for their future.
Avoiding Costly Mistakes
It is important to avoid making costly mistakes with your wealth. Oftentimes, when I’m meeting with a new potential client, a lot of our time is spent trying to undo some poor decisions that were made in the past. Many times, clients are “sold” a solution that doesn’t align with their goals and wishes. These mistakes can be difficult to repair. Make sure you work with a financial advisor that understands your short and long-term goals and is paid for their advice and not commissions.
When it comes to investing, investors are often their own worst enemy. Poor investor behavior is robbing individuals of investment performance. The short story is that investors allow their emotions to drive decisions. For instance, many are too quick to pull money out of the market during downturns and subsequently miss out on market recovery. Other times, investors allow headlines to affect their investing decisions. Remember, sensationalism in the media “sells”. I encourage clients to avoid the “noise” and focus on the big picture.
Understanding Your Benefits Package
For many millennials, making decisions on benefits can be overwhelming. They may be making decisions on health and life insurance, as well as investments, for the very first time. It’s easy to get frustrated and settle for choices that may not be in your best interest.
Working with the right advisor can help you to make sound decisions when it comes to your benefits. An advisor can help identify items that you may not have realized on your own. For instance, did you know that your beneficiary designations on your retirement plan can trump a will? If you have young children, it’s important to get estate planning in place. If you don’t get estate planning done, the state will make decisions for you. An advisor that does comprehensive planning can help you to understand your benefits and the nuances of them.
Building Wealth for the Future
It’s absolutely imperative for millennials to start investing early and often. I cannot stress this enough. Far too often I hear people say, “I wish I would have started investing earlier.” Time is on your side and is the greatest ally of a young investor.
Take this example from Business Insider:
“We have three investors who take different approaches to retirement saving:
- Our first investor starts saving $300 per month at the age of 25
- The second waits ten years, and starts saving $300 per month at 35
- The third investor waits even longer and starts saving at 40, but in order to try to catch up, puts $600 into her account each month
If we assume a respectable but reasonably conservative annual rate of return of 5%, here’s what happens to our three investors’ accounts:
Our first investor, who began saving at 25, ends up putting a total of $144,000 into her account and, after all the compound interest takes effect, will have a balance of about $460,000 when she’s ready to retire at 65.
Meanwhile, our second investor who put off saving until she was 35, invests a total of $108,000, but has only about $251,000 in her account at retirement age. Missing out on those ten years of interest means that our second investor will retire with about 55% as much money as our first investor.
The last investor, who started saving $600 per month at 40, actually winds up putting more money — $180,000 — into her account than the investor who started saving $300 per month at 25. However, even though she’s put $36,000 more into her account than the first investor, she ends up with just $359,000 at 65, about $101,000 less than the early investor.”
As you can see, time and compound interest are the best friends of a young investor. Even if it’s just $50 a month, start somewhere and build on it.
Do young people need a financial advisor? I believe they do. You have unique challenges and goals that are different than the generations before you. Work with an advisor that recognizes that and can relate to you. The most important thing is to get started early. Don’t be that person that will someday say, “I wish I had done this earlier.”
Interested in learning more? Check out some of the ways that I work with millennials.