I have savings and excess income. Is it time for me to find a financial advisor?

Question

My current status looks like this:

• I am a single professional engineer in bay area in my thirties.
• I invest on our company stock every month, as ESPP, and after that I have ~4.5k net income every month.
• My rent is ~1.6k per month.
• I spend 400 to 800 every month.
• I have no loans or debt now.
• I have around 100k in the bank. I have no investment (other than ESPP above).
• In the near future, I want to buy a cheap car for < 20k.
• I am not planning to buy my own house soon, but it may happen in a few more years (5-8).

Many of my friends said I should invest my money in stocks or something else instead of putting it in the bank forever. I do not know anything about finance, so my questions are:

• Is my financial status OK? If not, how can I improve it?
• Is now a right time for me to see a financial advisor? Is it worth the money? How would she/he help me?

Answer 1

Whether your financial status is considered "OK" depends on your aspirations. You aren't spending more than you earn and have no debt. That puts you in the category of OK in my book, but the information in your post indicates that you would benefit from some financial advice--100 grand sounds like a lot of money to have in a bank unless you are on the verge of spending it.

Financial advisors come in various shapes and sizes. Many will charge you a lot for what turns out to be helpful advice in the first meeting, but very little value-added thereafter. Some don't have the best incentives (they may be incentivized to encourage you to put your money into certain funds, for example).

There are many financial advisors (of sorts) that you have access to that won't cost you anything. For example, if you have a 401(k) at work, I bet there is a representative from the plan administrator that will meet with you for free. If you open a brokerage account or IRA at any place (Fidelity, Vanguard, etc.) you can easily talk with one of their reps and get all sorts of advice. My personal take is to meet with anyone who will meet with me for free, but not to pay anyone for this service. It's too easy to get good advice and paying for it doesn't guarantee that you get better advice.

Your financial situation will depend primarily on a few things you have not mentioned here. For example,

• How much are you setting aside for retirement and what are your retirement goals? This is something lots of people can give you advice on, but we don't know what market returns will be going forward so we don't really know. One bit of advice that may benefit you is how to set aside money for retirement in the most tax advantaged way.

• How much do you feel that you need saved up for large expenses? Thinking of starting a family? How many months worth of income are you comfortable having set aside?

• What is your tolerance of risk? If you put your money in risky assets, you may make more, but you may also actually lose money.

Those are the questions a financial advisor will ask about. Once you have his/her advice--and preferrably after talking to a few advisors--you can make your own decision. Basically, your options are:

1. Keep saving in banks or other safe assets (make sure you are using the highest interest-rate paying bank you can find)
2. Put additional money into an IRA or other retirement vehicle in order to save on taxes
3. Open a (normal, taxable) brokerage account and start buying financial assets.
4. Buy real assets, like real estate, gold¹, collectibles, guns¹, etc.

Rules of thumb: Save only what makes sense to save in banks given your expected needs for cash. Put a lot in tax advantaged accounts (don't give Uncle Sam any gifts). Then look at financial and real investments.

There are a number of free resources on the internet. For example FutureAdvisor. Or you can hit up the forums at BogleHeads. Those guys give and receive financial advice as a hobby. They aren't professionals, but you can get a lot of varying ideas and make up your own mind, which to me is better than (just) asking a professional.

BTW, regarding the ESPP: these plans often give you a discount on stock and can therefore be a good idea. Just be sure you don't hold the stock longer than you need to. It's generally a bad idea to concentrate your wealth in any single investment, especially one highly correlated with your background risk (i.e., if the company does poorly you will already be worse off because you may lose your job or see fewer advancement opportunities. No need to add losses in your savings to that).

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¹ Please note: I am neither advocating nor discouraging buying guns, gold, or other controversial real assets. I'm just giving examples of items some people buy as part of their wealth-preservation strategy.

Answer 2

Is my financial status OK? If not, how can I improve it?

Based on the fact that you have $100K in the bank and no debts your situation is OK. You don't have credit card debt or an underwater car loan, though the fact you are thinking about a car and a home shows you have started to put some thought into planning.

Is now a right time for me to see a financial advisor?

The fact that you don't mention retirement savings: 401K, IRA, or pension, means that you have not planned for retirement, and you need to do so.

The ESPP can be a part of a plan, but if that is you only investment you are focusing too much of your current and future income on one source of income.

Is it worthy?

It can be. you want to avoid working with a planner that makes money only if you invest in specific investments they suggest. You want to find a planner that takes a fixed fee for developing the plan, and only provides advice on types of investments.

How would she/he help me?

They will look at where you are. Where you can quickly make adjustments. And where you want to go over the next year, decade, and lifetime. Then they will provide guidance on those steps you should follow.

If your situation changes in the future because of marriage or kids, you can then revisit with a planner and make changes

Answer 3

Many of my friends said I should invest my money on stocks or something else, instead of put them in the bank forever. I do not know anything about finance, so my questions are:

First let me say that your friends may have the best intentions, but don't trust them. It has been my experience that friends tell you what they would do if they had your money, and not what they would actually do with their money. Now, I don't mean that they would be malicious, or that they are out to get you. What I do mean, is why would you take advise from someone about what they would do with 100k when they don't have 100k. I am in your financial situation (more or less), and I have friends that make more then I do, and have no savings. Or that will tell you to get an IRA -so-and-so but don't have the means (discipline) to do so. Do not listen to your friends on matters of money. That's just good all around advise.

Is my financial status OK? If not, how can I improve it?

Any financial situation with no or really low debt is OK. I would say 5% of annual income in unsecured debt, or 2-3 years in annual income in secured debt is a good place to be. That is a really hard mark to hit (it seems). You have hit it. So your good, right now. You may want to "plan for the future". Immediate goals that I always tell people, are 6 months of income stuck in a liquid savings account, then start building a solid investment situation, and a decent retirement plan. This protects you from short term situations like loss of job, while doing something for the future.

Is now a right time for me to see a financial advisor? Is it worthy? How would she/he help me?

Rather it's worth it or not to use a financial adviser is going to be totally opinion based. Personally I think they are worth it. Others do not. I see it like this. Unless you want to spend all your time looking up money stuff, the adviser is going to have a better grasp of "money stuff" then you, because they do spend all their time doing it. That being said there is one really important thing to consider. That is going to be how you pay the adviser. The following are my observations. You will need to make up your own mind.

Free

Avoid like the plague. These advisers are usually provided by the bank and make their money off commission or kickbacks. That means they will advise you of the product that makes them the most money. Not you.

Flat Rate

These are not a bad option, but they don't have any real incentive to make you money. Usually, they do a decent job of making you money, but again, it's usually better for them to advise you on products that make them money.

Per Hour

These are my favorite. They charge per hour. Usually they are a small shop, and will walk you through all the advise. They advise what's best for you, because they have to sit there and explain their choices. They can be hard to find, but are generally the best option in my opinion.

% of Money

These are like the flat rate advisers to me. They get a percentage of the money you give them to "manage". Because they already have your money they are more likely to recommend products that are in their interest. That said, there not all bad.

% or Profit

These are the best (see notes later). They get a percentage of the money they make for you. They have the most interest in making you money. They only get part of what you get, so there going to make sure you get the biggest pie, so they can get a bigger slice.

Notes

In the real world, all advisers are likely to get kickbacks on products they recommend. Make sure to keep an eye for that. Also most advisers will use 2-3 of the methods listed above for billing. Something like z% of profit +$x per hour is what I like to see. You will have to look around and see what is available. Just remember that you are paying someone to make you money (or to advise you on how to make money) so long as what they take leaves you with some profit your in a better situation then your are now. And that's the real goal.

Answer 4

I think you might be asking the wrong question. You have plenty of capital on the side that can be invested. Instead of asking whether you should get an adviser, you might want to examine what your end goal is.

1. Are you looking to build long term growth of you capital?

2. Are you asking about and adviser because you don't want to handle your money, or is it simply because "that's what people do?"

I would imagine that the answer to 1. is yes and that the answer to 2. is that you want to handle your money, and you always considered this something best left to the advisers. I shall proceed on these hypothetical assumptions.

In my humble opinion, I would do the following:

1. Skip the adviser and the fees that go with it. For a young professional like yourself, especially with an engineering background, you can certainly handle the education required to learn the mechanics of investing. Invest some time to learn the fundamentals of the market such as asset classes, basic terminology ect. You will benefit in several ways. For one, you will learn an invaluable skill and save tens of thousands in fees during your lifetime. Moreover, you will have complete control of your risk profile, allocation, and every penny that belongs to you. I really am not bashing advisers, but no one will care as much about your money as you will. And don't be fooled. The market is efficient. An adviser does not have any more edge in a market than anyone else. And from first hand experience, they rarely outperform benchmarks net of fees.

2. I assume you have made it to this step because you want to manage your own money and financial future. Sounds scary, how should one proceed? Let's assume that $100,000 is "in play". And since you are learning the ropes, let's leave $50,000 in cash for now. This leaves $50,000 to start a portfolio. I'd start by building a core position of all the major asset classes in ETF form. This means buying things like SPY or TLT. If you're comfortable, you can start selling monthly calls against these positions to reduce basis and earn some income. The point is, your only limitation at this point is taking time to learn the ropes. The technology is there, the free education is there, and liquidity and product mix is there. Next thing you know you're learning how gamma scalping works, or maybe you're more of a Buffett type.

This is how I view finance in general, and truly hope you break through the initial barrier to controling your own finances.

Answer 5

Is my financial status OK? If not, how can I improve it?

I'm going to concentrate on this question, particularly the first half.

Net income $4500 per month (I'm taking this to be after taxes; correct me if wrong). Rent is $1600 and other expenses are up to $800. So let's call that $2500. That leaves you $2000 a month, which is $24,000 a year.

You can contribute up to $18,000 a year to a 401k and if you want to maintain your income in retirement, you probably should. The average social security payment now is under $1200. You have an above average income but not a maximum income. So let's set that at $1500. You need an additional income stream of $900 a month in retirement plus enough to cover taxes. Another $5500 for an IRA (probably a Roth). That's $23,500. That leaves you $500 a year of reliable savings for other purposes. Another $5500 for an IRA (probably a Roth). That's $23,500. That leaves you $500 a year of reliable savings for other purposes.

You are basically even. Your income is just about what you need to cover expenses and retirement. You could cover a monthly mortgage payment of $1600 and have a $100,000 down payment. That probably gets you around a $350,000 house, although check property taxes. They have to come out of the $1600 a month. That doesn't seem like a lot for a Bay area house even if it would buy a mansion in rural Mississippi. Perhaps think condo instead.

Try to keep at least $15,000 to $27,000 as emergency savings. If you lose your job or get stuck with a required expense (e.g. a major house repair), you'll need that money.

You don't have enough income to support a car unless it saves you money somewhere. $500 a year is probably not going to cover insurance, parking, gas, and maintenance.

It's possible that you could tighten up your expenses, but in my experience, people are more likely to underestimate their expenses than overestimate. That's why I'm saying $2500 (a little above the high end) rather than $2000 (your low end estimate). If things are stable, wait a year and evaluate. Track your actual spending. Ask yourself if you made any large purchases. Your budget should include an appliance (TV, refrigerator, washer/dryer, etc.) a year. If you're not paying for that now (included in rent?), then you need to allow for it in your ownership budget.

I do not consider an ESPP to be a reliable investment vehicle. Consider the Enron possibility. You wake up one day and find out that there is no actual money. Your stock is now worthless. A diversified portfolio can survive this. If you lose your job and your investment, you'll be stuck with just your savings. Hopefully you didn't just tie them up in a house that you might have to sell to take your next job in a different location. An ESPP might work as savings for the house. If something goes wrong, don't buy the house. But it's not retirement or emergency savings.

I would say that you are OK but could be better. Get your retirement savings started. That does two things. One, it gives you money for retirement. Two, it keeps you from having extra money now when it is easy to develop expensive habits. An abrupt drop from $4500 in spending to $1200 will hurt. A smooth transition from $2500 to $2500 is what you would like to see. You are behind now, but you have the opportunity to catch up for a few years.

Work out how much you'll get from Social Security and how much you need to cover your typical expenses with the occasional emergency. Expect high health care costs in retirement. Medicare covers a lot but not everything, and health care is only getting more expensive. Don't forget to assume higher taxes in the future to help cover that expense and the existing debt. After a few years of catch up contributions, work out your long term plan assuming a reasonable real (after inflation) rate of return. If you can reduce the $23,500 in retirement contributions then, that's OK. But be pessimistic. Most people overestimate good things and underestimate bad things. It's much better to have extra than not enough.

A 401k comes with an administrator and your choice of mutual funds. Try for diversification. Some money in bonds (25% to 30%). The remainder in stocks. Look for index funds. Try for a mix of value and growth, as they'll do better at different times. As you approach retirement, you can convert some of that into shorter term, lower yield investments. The rough rule of thumb is to have two to five years of withdrawals in short term investments like money market funds. But that's more than twenty years off.

You have more choices with an IRA. In particular, you can choose your own administrator. But I'd keep the same stock/bond mix and stick to index funds if you're not interested in researching the more complex options. You may want to invest your IRA in a growth fund and your 401k in value funds and bonds. Then balance the stock/bond mix across both.

When you invest each year, look at the underrepresented funds and add the most to them. So if bonds had a bad year and didn't keep pace, invest in bonds. They're probably cheap. You don't want to rebalance frequently, but once a year might be a good pace. That's about how often you should invest in an IRA, so that can be a good time.

I'll let the others answer on the financial advisor part.

Answer 6

Others have mentioned the term fiduciary but haven't really gone in to what that is.

Despite the name "financial advisor" there is no legal (In the US) mandate as to what that means. Often times a financial advisor is little more than a sales rep whose job it is to sell particular financial instruments. These people will give you good generic advice such as "make sure you have a nest egg" and "don't spend more than you make". However when the rubber hits the road in terms of how to save they will often recommend/insist/pressure a particular asset/security which doesn't necessarily meet your risk/reward preference/tolerance. Often times the assets they pitch have high fees. These people won't charge you for their time because their time is a loss leader for the commissions they make on selling their products.

In contrast a fiduciary's job responsibility is to look out for your interests. They shouldn't receive any kind of payment based on what assets you buy. This means that you have to pay them for their time.

The NAPFA website seems to have good ideas on choosing an advisor.

http://www.napfa.org/HowtoFindAnAdvisor.asp

Answer 7

Is my financial status OK?

You have money for emergencies in the bank, you spend less than you earn. Yes, your status is okay. You will have a good standard of living if nothing changes from your status quo.

How can I improve it?

You are probably paying more in taxes than you would if you made a few changes. If you max out tax advantaged retirement accounts that would reduce the up-front taxes you are paying on your savings.

Is now a right time for me to see a financial advisor?

The best time to see a financial advisor is any time that your situation changes. New job? Getting married? Having a child? Got a big promotion or raise? Suddenly thinking about buying a house?

Is it worth the money? How would she/he help me?

If you pick an advisor who has incentive to help you rather than just pad his/her own pockets with commissions, then the advice is usually worth the money. If there is someone whose time is already paid for, that may be better.

For example, if you get an accountant to help you with your taxes and ask him/her how to best reduce your taxes the next year, the advice is already paid-for in the fee you for the tax help.

An advisor should help you minimize the high taxes you are almost certainly paying as a single earner, and minimize the stealth taxes you are paying in inflation (on that $100k sitting in the bank).