In many my post, I refer to your “Financial House”. A financial house isn’t actually a concrete structure. However, having one built on a rock solid foundation is absolutely critical in achieving financial independence. Your financial house is composed of 4 levels and a roof. Below are the details of each level.
Foundation – Income Protection
The strength of all long lasting homes can almost always be attributed to a strong foundation. The foundation of the home will determine the homes ability to not only bare the weight of the home but to also help weather some storming times. The foundation of the financial home is income protection. In the typical home, there are either one or two income sources. The loss of the singular income or either of the dual incomes would be devastating the overall stability of the home. This is why the foundation is income protection other wise known as life insurance. In another post, I cover the additional reason everyone should have life insurance.
1st level – Emergency Fund
The first level above the foundation should be an emergency fund. This fund is in place to cover immediate needs that are unexpected. This could include car repair, home appliance repair, unexpected medical expenses, etc… The emergency funds should be liquid. It usually takes the form of a savings account in the bank. Refer to my post on building an “emergency fund” for more details.
2nd level – Retirement Accounts
The next level in your financial home should be your retirement accounts. Everyone wants to retire at some point. You need to be actively setting aside funds today to be able to reap the benefits later in life. Retirement accounts take the shape of 401k’s, 403b’s, 457’s and IRA’s (Individual Retirement Accounts) as well as State or Corporate sponsored pension plans. These are investment type vehicles that can either grow tax-deferred or tax free. They can be part of your employer benefits package or your own personal account. Types of IRA’s as well as why employer based retirement accounts should be maximized I will cover specifically in future posts.
3rd level – College Savings Accounts
The 3rd and final level of your financial home is planning for future educational expenses of your children. In this space, we recommend either a Coverdale IRA or 529’s. Both of these vehicles are investment vehicles. The growth will be tax free if used on qualified education based expenses. This can include tuition, books and room and board. Which one you choose depends on the amount you plan to contribute on a annual basis as well as some of the product features.
The Roof
All homes need a roof to protect all of the homes contents and your financial home is no exception. The roof of your financial home should be a will, living will and power of attorney. In the event of the unthinkable, you want to have, in writing, how your assets should be distributed. This should include all monetary accounts (checking, savings, emergency and retirement) as well as any property. Having a will in place with relieve your beneficiary with having to scramble around at the most inopportune time.
This is the fundamental concept of a financial house. In order to truly reach the point of financial freedom. a strong financial home is pivotal. For help in building your own personalized financial house, email me at Louis@louisromero.com