How much do you really know about your money? With all the financial stress we encounter, it is very tempting to over-delegate control of your money to a financial professional. In the short term, it often feels like a huge relief, a weight off your shoulders, a burden for someone else to manage.
It's the same feeling I always get at the mechanics when I drive the car in, looking for a quick fix and a ride home.
The last thing I want is to actually learn how the car runs, though I'd probably be tens of thousands of dollars richer if I did know some fundamentals.
I'm sure I'd also manage to avoid a steady stream of problems by actually maintaining my car.
The problem is that there are no checks and balances when you over-delegate important aspects of your life or your money.
When we surrender control, we are much more likely to be a victim of fraud or negligence, and we stop making decisions based on our life goals. Instead we put ourselves in a position of reacting to plans made on our behalf and letting our financial situation dictate our life goals rather than the other way around.
There are seven concepts you can commit to memory and practice regularly in order to effectively manage your finances. These won't guarantee financial success, but they will dramatically improve your odds of achieving your financial goals and avoiding financial disasters:
Know your advisers. Know how they are compensated so you can identify where they may have conflicts of interests or biases toward certain products, services and/or fund companies. Are they compensated by collecting commissions on products they sell or do they just charge fees? Know their background and track record. You can go to finra.org or cfp.net to run a background check and determine if your adviser has any complaints or disclosures on his/her record.
Know what you are worth and track that on a quarterly basis. Over time, your net worth should increase as you save and invest and pay down debts. If you see a steady decline in your net worth, and if it's hovering dangerously close to zero or worse, if it's negative, then it's time to pay down the debt.
Know what you are making, what you are spending and what you owe. Make sure that your debt payments are less than 36% of your income and do what you can to eliminate all high-interest rate debt.
Know your financial goals, your time frame for reaching each goal, your risk tolerance and the asset allocation that is appropriate based on your time frame and risk tolerance.Stick religiously to this asset allocation and do not let an adviser talk you into changing it due to unusual “once in a lifetime investment opportunities.”
In fact, if your adviser ever utters the words "once in a life time investment opportunities," that's a red flag and you'll want to start looking around for another adviser who has a more measured and realistic approach.
