Without writing out all four letters of the most satisfying and versatile curse word, Urban Dictionary defines “eff you money” as:
“An amount of wealth that enables an individual to reject traditional social behavior and niceties of conduct without fear of consequences.”
I often hear the misconception that only people with this level of wealth have or need financial advisors. Maybe you have this much money, but chances are you are like me and have what I call “Hi, how are you? money”. Everyone can benefit from sound financial advice no matter where they are on this wealth scale. Let’s explore the measure of the value of a financial advisor and when the best time to employ one would be.
When measured in dollars of value created, a financial advisor’s advice is worth more to a person with more money. However, this is the wrong measure of value. When measured in percentage terms, a far more exact standard, a financial advisor’s guidance is worth the same to everyone.
For example: If an advisor employs a tax optimization or investment strategy that adds 1% of value to an investment portfolio annually, regardless if your portfolio is worth $10,000 or $10,000,000, you should be happy to earn an extra 1%. An additional 1% per year brings you “that much closer” to achieving your financial goals. It can be as simple as having a few extra dollars for a vacation or, over a long enough time horizon, something far more meaningful like years shaved off your retirement age.
The importance of time horizon cannot be understated. Therefore, the best time to have a professional review your finances is now. I don’t say this so you’ll pick up the phone and call me (but feel free!), I say it because of the hidden cost of waiting: compound interest. Albert Einstein described compound interest as:
“[Compound Interest] is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
Seemingly trivial mistakes or inefficiencies can negatively impact wealth over the long run. Let’s assume markets return 8% per year on average. If you were to misallocate $1,000 now, you would miss out on $80 of potential returns next year, the equivalent of a fancy lunch out, no big deal. However, over the next ten years, you would miss out on over $1,000 of returns, you would miss almost $10,000 over 30 years, and, if you are at the beginning stages of your career, you’ll miss out on over $100,000 over the next sixty years!
Tremendous strides in the sophistication of financial planning software have streamlined the process of identifying these inefficiencies and illustrating their effects over the long run. Getting your finances organized ahead of the new year makes sense from a tax perspective and also feels great. I use and love RightCapital, and you can try it for free by scanning this QR code:
Stay tuned for next month as we investigate the effects of compound interest on the other side of the ledger—Debt!