How Not to Hire Me (part 1)

I want to share three things I believe you should do before you even consider hiring a professional advisor, if that is something you are giving thought to. In my next post, I will build on this with even more ideas for the Do-It-Yourselfer. The first three focus on:

  1. understanding your cash flow
  2. how much should be in an emergency account; and
  3. getting started in a retirement plan, whether that be on your own, or through your employer

As you may know, I am a principal owner at a fee-only registered investment advisory firm, PDS Planning, Inc. in Columbus, OH. We love it when people hire a financial planner, it’s good for business. However, as I have promised, my goal is to help those who want to do it themselves. It can be done, I assure you. Today, I am going to outline 3 things you need to do before hiring an advisor, and a few more that may help you avoid it altogether.

First, and most important as it sets up all future financial decisions, get a grasp on your cash flow. How much is coming in each month and how much is going out? Hopefully there is something left over each month. If not, take a close look at your expenses and find out what can be eliminated. Are you running up credit card debt and carrying it over month to month? This is not sustainable. If this is you, you need to focus all your financial energy on reversing this trend. Find a way to live within your means.

Businesses regularly measure their balance sheet and cash flow. Why? Because it makes sense and leads to better outcomes. Set up a budget, track income and expenses. I also think forecasting is really important. That’s the practice of trying to project your cash flow over a future period of time. I always have a 12 month forward forecast for what I expect to happen, from both an income and an expense perspective. There are a lot of great tools out there to help you. First, you could manually track this information in Microsoft Excel as I do for my 12 month forward forecast. For as little as $70, I was able to buy Office 365 for my personal use that would include the popular spreadsheet software. Some great online tools that offer all the conveniences of today’s modern technology include Mint and YNAB, short for You Need a Budget! Not only are these tools either free or low-cost, they also come with convenient apps for your smartphone. Simply link your bank accounts and credit cards to these tools and your spending data is automatically aggregated in one place.

Once you have a grasp on (hopefully positive) cash flow, the next step is to build some emergency reserves. Store it in a savings account and be disciplined enough not to touch it. How much? This varies person to person but some of the general rules of thumb would indicate anywhere from two to six months of your expenses. If you have a stable job, with sound benefits and possibly a spouse or partner who is also working, then you can be on the lower end. If you are in a sales job with a fluctuating income, or a volatile industry, and are the sole breadwinner, then erring on the side of cautious probably makes sense and you should tuck away a bit more. A critical insurance in this decision is individual or group long-term disability insurance. If you have disability insurance, that may give you some additional peace of mind in the event you are unable to work due to an injury or illness.

I have never had a client get to retirement and tell me “Jamie, I think I have saved too much money.” It has not happened in my 17 years in the business and I don’t anticipate it happening anytime in the future. The next step is to start saving in your company sponsored retirement plan, early and often. If your company has an Employer Match feature, take advantage of that – it’s free money! Let’s say you opt to save 5% of your pay in the retirement plan. On January 1st, or at review time when you get a raise, or your birthday, make a pledge to increase that by 1% and do this every year. Before you know it, you’ll be saving 15% of your pay and by phasing it in slowly, it won’t hamper your ability to maintain positive cash flow, and build emergency reserves. If you do not have a company sponsored retirement plan, open a Traditional or Roth IRA. The key here is to start saving for retirement. People are living longer, thus the cost of paying for retirement is growing.

Generally, we like to see clients participating in these 3 steps before we feel appropriate engaging with them to do planning and investment work. These are some basic building blocks but should not be considered all-inclusive. In my next post, I will spend some time reviewing the next steps that you can work on in your personal financial plan. Again, these are basic overviews, and over time, I will continue to provide additional details to help you if you want to manage your own finances. It’s really just WealthAdviceMadeSimple.