Almost everyone needs a financial planner they can trust. The answer to why largely depends on your stage in life. Your goals will be different later in life than they are when you are young and just starting out. Most people are aware of why they might need a planner as they approach retirement, so this post will focus more on the reasons you should seek advice at a younger age.
Seeking advice early on
Your Most Important Asset
The most important reason to find a financial planner when you are young is that starting early with your savings plan can make a huge difference when you are ready to retire. Many people believe that they don’t need to think about retirement until they’re near that milestone, but the truth is that if you adopt this mindset, you may be left without enough money in the bank to get you through. The reason getting started early works so well is due to the power of compounding.
One of the simplest illustrations of that power is the “magic penny”. Imagine this scenario:
You start with a penny on day one. Every day after that, the amount you have doubles (i.e.. day two, you have $.02; day three, $.04; day four, $.08 and so on). By the end of a month, you will have more than $5 million!
(There’s an interesting video by MSN where the host goes around San Francisco asking people on the street whether they’d rather have $1 million now or the magic penny. Spoiler: Most people choose the $1 million. – Magic Penny Example)
While it isn’t realistic to expect to double your money on a daily basis, this example does show the most important asset in compounding, time. At a younger age, you have more time for investments to compound, and therefore a larger potential for creating wealth.
For a more real world example, let’s compare what would happen if you were to add $5,000 to a Roth IRA each year for 25 years, starting at ages 25 and then at 40. For both scenarios, we will assume the long term market return of 7%. Even though each individual will have put in the same amount of money ($125,000), the one who started at age 25 would have 2-3x as much by age 65 ($872,530.45 vs. only $316,245.19) than the individual who started at age 40!
Let’s take this example one step further and assume you are going to add $5,000 to that Roth IRA each year from the ages of 25 to 30 before halting contributions altogether. At age 65, you will have $381,863.46 in your account, which is still more than the $316,245.19 you would have if you started at age 40 and contributed every year for 25 years!
A planner can help you manage the investments as well as keep you accountable to “pay yourself first”. This means sitting down to determine how much money you can afford to save every month, while still being able to pay your bills and other expenses. Then making sure that the amount you can afford to save gets immediately put away for savings before you get the chance to spend it.
As you add more money to savings or investments every month, a planner can help you determine the best way to allocate it. Some will even do it for you, ensuring your portfolio remains diversified, giving you the highest probability of success year in and year out.
It’s also important to note that hiring a planner doesn’t have to be expensive. The fees can be incentive enough to keep you motivated to reach your financial milestones in exactly the same way as a personal trainer can help you stay on track with your fitness goals.
Begin Cultivating a Strong Relationship Early
Lastly, another great reason to begin looking for a financial planner while young is that you begin the process of building trust. You can begin to trust him/her and they can begin trusting you while you don’t have as much skin in the game. That way, when the time comes that you desperately need their help (and chances are that time will come) you’ll have someone who knows you and your needs and who you trust to give you sound advice.