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Having a financial advisor help you make decisions that affect your current and future financial situation is a smart thing to do. A good financial advisor can do many things: help you set goals and work toward achieving them, see what the affects of your current decisions may be on your future, and give you a feeling of preparedness and security.
There are, however, some things a financial advisor cannot do. Knowing what these things are can help you get the most out of your relationship with your advisor, since you will know what to expect. Here are three things your financial advisor can't do.
Show you your future in a crystal ball. A financial advisor can show you how different scenarios may play out. For example, they can show you what may happen if you retire at 62 versus 70. They can show you what your financial future may look like if you or your spouse requires long term medical care, or dies prematurely. They cannot, however, show you with certainty what is going to happen in the future.
Financial advisors often use a mathematical formula called Monte Carlo analysis to determine whether or not a person is likely to have enough money to retire. This analysis takes multiple factors into account, and computes 10,000 different scenarios to determine the percentage of instances in which the money will last for the rest of the person's life. Unless you are a multi-billionaire who plans to spend very little, there will always be a few scenarios in which you will run out of money. No one can predict the future.
Pay $10,000 worth of bills with $5,000. Financial advisors are very smart people, but they are not wizards. If you are spending more than you earn, you will not be able to save money, and eventually you will end up bankrupt.
Your advisor can help you determine where you can cut back on your expenses so that you will be able to save and invest the money that you don't have to spend on bills. If you have excessive debt, they can help you create a plan to pay it down to reduce your outflows every month.
Pick winning investments every time. If you want to make money on your investments, you will have to take some risk. Putting your money in a savings account or CD will guarantee you a rate of interest that is unlikely to keep up with inflation. If you want your investment returns to exceed inflation, you will need to invest in stocks, bonds or mutual funds that have at least some risk. This means that, at some point, some of your investments may lose money.
Financial advisors work hard to stay informed about investments and market conditions in order to help you make the best decisions you can. Finding a financial advisor you trust and understanding what they can do to help you goes a long way to securing your financial future.
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