How Much Money Should I Have Before I Need Advice?

I get this question all of the time. And I understand why. The whole "investment" thing, heck, even the financial planning concept, seems designed for people who aren't worried about whether they'll have to wait until next month to fix the muffler on the aging Honda. Actually, though, this is the wrong question. The right question isn't about how much money you have; it's about how much time you have to grow it. Let me explain...

Imagine a woman who's doing quite well for herself. She's got a good career, saves up a little money every month, and just received a big bonus at work. All of the sudden, she has $120,000 in her bank account. Does she need investment advice? Well, maybe not. Let's say now that what she really wants to do is to buy a house in her favorite neighborhood with her savings. Since she lives in the Boston area, that's going to be about $650,000 (no, really). And she wants to do this within the next 3 years.

This would be a great time for her to pay for a financial plan—she's going to want to think about how the mortgage terms play with her other financial goals, taxes, retirement savings, etc... But if she plans to put all of her money into real estate within the next few years, actual investment advice is pointless. The best she can do is probably an FDIC insured bank account with some sort of interest rate (better yet, at her local credit union to set herself up for more favorable mortgage terms).

Sure, she could put the money in the stock market or into bonds or other investments for the next few years, but no financial advisor worth her salt would recommend it. Why? Because investment in securities (stocks, bonds, funds, private businesses, etc...) works well for the long-term. In the short-term, though, investments are a lot more risky and a lot less likely to be worth the hassle and expense. If the market or business is "down" when the perfect property comes up, she's out of luck.

Now imagine another scenario. Like the first woman, this other woman is on the right track after overcoming some difficulties. She's got nothing in the bank, yet, aside from some emergency funds (and we don't ever want to invest those!). On the other hand, she wants to start putting money away for sometime down the road. She's only going to be able to put aside $50 a month for right now. But she has no intention of touching that money for the next 8 to 10 years, at least. Does she need investment advice? Absolutely.

Thanks to all sorts of affordable investments and investment accounts, she's got a ton of choices in terms of where her money goes. Maybe she needs some sort of tax deferred retirement account. Maybe she'd be better off not deferring the taxes. Maybe she needs one well-managed fund, but which kind of fund works best? How can she avoid unnecessary fees? Sure, she is starting small, but the choices she makes now will have a big impact on how that money grows—or doesn't.

So, don't ask yourself (or your local advisor) how much money do you need before you should get investment advice. Ask yourself what your time frame is for that money. If you've got it for 2-5 years, you should probably be shopping for good deals at your local credit union or bank. If you feel confident that you won't be touching it for at least 5, or better yet, 10 years, it doesn't matter what you've got—it's time to become an investor.