If you are serious about creating wealth or securing your long-term finances, you need to engage a financial advisor. An independent financial advisor or an IFA, as they are called, help you with financial planning. That involves managing your monthly expenses, maintaining an emergency fund and investing in fixed income and equity assets regularly.
Your financial advisor may visit your home or the office. If you want to extract maximum out of your interaction, you must prepare a bit. Make a list of things you want to ask and read up a bit about them.
The big picture
You can start your conversation with your financial advisor with the big picture scenario. Discuss the state of the economy, your business or profession and the state of financial markets.
Then dive into a bit of macroeconomy. Yes, the word may be overwhelming. However, it is just the economic term for the word ‘big picture’. You have to be aware of it to take a calculated call on various options that a financial advisor puts in front of you. Your conversation with your advisor will help you connect the dots between the macroeconomic picture and your finances.
If interest rates are rising in the economy, then it means inflation is on the way up. You need to ensure you invest right to minimise the impact. Similarly, if interest rates are down and inflation is trending down, equity markets tend to get a boost. You must choose an appropriate equity asset based on your ability to take the risk and your future income. Your financial advisor must help you with this exercise.
Power of compounding
While many things fall under personal finance, the most critical concept for you to know is that of compounding. It is the way money grows. It is essential to discuss this concept thoroughly with your financial advisor. You benefit due to the power of compounding if you invest regularly.
On the other hand, if you are into a habit of using short-term borrowing and repaying debt slowly, you may end up paying more than you think. You pay the price for poor financial literacy. The S&P Global FinLit Survey found a few years back that one in three adults are financially literate. They were asked about the knowledge of interest rates, interest compounding, inflation and risk diversification.
You must get help from your financial advisor on balancing your investments and loans. Your investments in the long run are worth something if you pay off your debts. They make no sense if you run a high credit card or personal account simultaneously.
Risk-taking ability
Risk should be the most important topic that you need to discuss with your advisor. Opinions may vary, but you must take a call on your ability to take risks. There are standard thumb rules for investing. A typical one financial advisors throw around is that ‘100-your age’ to determine the allocation to equity assets. The idea is that you must allocate more when young and less when old to equity assets that carry a higher risk than fixed income.
However, your risk-taking ability is not just a function of age. It is also about your future income. If you have a steady income or you are confident that your future income is expected to be robust, you can invest in equity even later. Hence, this is a call you must take based on your assessment. A talk with a financial advisor should help.
Make the most out of it
Your relationship with your financial advisor is not a short-term one. Your relationship with your money too is a life-long partnership. It will take the two of you to tango. It cannot be a monologue where a financial advisor rattles off things, and you merely listen. It needs to be a meaningful conversation.
For that purpose, you need to take the initiative and ask the right questions. That involves reading up a bit. Make it a point to give your money a few minutes during the day. If you do that consistently over the years, your investments will go a long way to secure your financial future.
Risk theory
A typical theory financial advisors throw around is ‘100 minus your age’ to determine the allocation to equity assets
It states that individuals should hold a percentage of stocks equal to 100 minus their age
So, for a typical 60-year-old, 40 per cent of the portfolio should be equities
The idea is that you must allocate more when young and less when old to equity assets that carry higher risk than fixed income
But, if you have a steady income, you can invest in high-risk equities even later
Wrong way
If you are into the habit of using short-term borrowing and repaying debt slowly, you may end up paying back more. You pay the price for poor financial literacy