We want to build generational wealth. Every financial move should be made with that goal in mind, as a minority this is going to take time. Knowing how to grow, protect, and leverage our money is imperative in accumulating wealth. Today we are going to review The 5 Essential Accounts you need to create Wealth.
1. Emergency Savings
WE don’t want to beat a dead horse, but, YOU NEED AN EMERGENCY FUND.
If COVID-19 has taught us anything, it’s the fact that not all of us are essential, and most of us don’t have enough money tucked away for a rainy day.
An adequately funded, emergency savings account is essential to maintaining a strong secure financial future. This is not debatable in our opinion.
An emergency savings may come in many forms, however our favorite is cash deposited in a high-yield savings account, but the key is: YOU NEED ONE. If you need a refresher on how to build an emergency fund check out our earlier work.
Look, you can’t work forever and even when you retire there is no guarantee that you’ll be able to secure that highly sought after gig as a Walmart greeter.
If you are banking on Social Security, I hate to break it to you, Even worse there is no guarantee that will be available either.
You’re better off planning for your retirement, while you’re young and able with the potential to earn a high income and can save money in a retirement account.
Retirement accounts come in many flavors however the two basic categories are: Employer-sponsored or Self-Directed.
2. Employer Sponsored Retirement
WE LOVE free money and that’s exactly what employer-sponsored accounts provide. These retirement accounts are commonly in the form of 401K, 403B, or a 457, to name a few. As an enticement to retain talent, employers will often provide matching contributions based upon an prior negotiated amount.
DO NOT TAKE THIS FOR GRANTED, THIS IS FREE MONEY.
For instance the military instituted a matching contribution via Thrift Savings Program and offers to match up to 5% of a member’s base pay. Why is this important? Well, its simple math:
5% From YOU + 5% From THEM = 10% Total Contribution
Employer sponsored retirement plans with matching contributions are the equivalent of the half-off sale at your favorite department store. Who in their right mind would pass up a 50% discount?!!
However, the best part about employer sponsored programs is your contributions are PRE-TAX. These accounts allow you to lower your taxable income while saving and investing for your life in retirement. Again 50% off sale!!
Now before deciding to allocate the 20% in your budget which is dedicated to savings and investing towards this account, please know majority of employer-sponsored retirement plans, are not designed to generate large returns on your money. This is huge drawback and a turn-off for some, however its important to know why your employer does this.
Unless you work for a financial firm, your company will outsource the management of its retirement plan to third-party brokerages/manager such as BlackRock, Fidelity, Goldman Sachs, etc. These servicers or account custodian are not interested in making your individual account grow exponentially because exponential growth requires exponential risk, that not everyone has the stomach for. These companies are not interested in exposing retirement accounts of school teachers, plumbers, police offers, to undue risk. As a result, your employer sponsored retirement account will contain options for investing which are largely comprised of diversified index funds and very few (if at all) individual stock options. This is fine however, because if your company matches contributions, you are effectively getting a 50% off sale on your retirement funds.
Your retirement account will grow, however it will take time, and you’ll be less likely to outpace the market, which is fine. WE KNOW generational wealth is not built in day, so WE will be okay.
An additional hidden benefit in these accounts are the ability to loan yourself funds (which you must pay yourself back) which can be used in an emergency, to fund investment opportunities, or buy a house. If you deposit enough money into your account, you could essentially be your own bank.
Please note, the rules of obtaining these loans vary, so if you’re interested, remember to check with the account custodian to review the rules and processes associated with these loans.
3. Self-Directed Individual Retirement Account (IRA)
A self-Directed IRA functions in the same manner as an employer-sponsored retirement account, except, there is a larger range of investments options, you provide the only contributions, and YOU are responsible for managing/monitoring the profitability of your account.
If your account loses 40% in a day or only gains 5% over the course of a year there is no one to blame. YOU’RE RESPONSIBLE.
Take your time, invest wisely or hire someone to help you, because NO ONE WILL CARE ABOUT YOUR MONEY AS MUCH AS YOU DO.
There are two type of self-directed IRA: Roth and Traditional
Both accounts have their perks and your income level, age, and tax considerations determines your ability to participate in one account or both as well as the benefit it may provide to your financial situation.
Opening an account is very simple as there are a number of online and in person brokerages who offer services. Brokerages such as fidelity, Wealthfront, Betterment, and Vanguard (there are many out there), are all great examples and are good places to start researching these types of accounts.
If you have children…
Then you’ll be interested in a UTMA and/or a 529 savings account to start building wealth for your future generations.
A UTMA also known as a uniformed transfer to minors account, is a taxable brokerage account which is managed by YOU for the benefit of a minor. This account allows you to purchase investments on behalf of the minor and will transfer to the minor at the age of 18. It is a taxable account and as such will pay income taxes each year based upon performance. This account structure is not for everyone however is a great option for those looking to provide a career/adult starter loan for their children.
529 savings plan is named at Section 529 of the Internal Revenue Code. It is a tax-advantaged (possibly tax-free) typically state sponsored savings account for educational-related expenses of the beneficiary. Anyone with a Social Security number can open an account on behalf of a child and there are no income limits for eligibility. You can contribute up to $75,000 per year ($150,000 per married couple) into the account. Withdrawals can be made at any time however if it is not a qualified educational expense, you may be responsible for 10% federal penalty as well as state/local taxes.
If you’re dead set on your children going to college, then this is a great way to save and grow money for the future. Most 529 plans are state sponsored and thus very in benefits and options, so do your research before applying for an account.
4. Taxable Brokerage Account
Everyone knows someone who invests in the stock market. Whether its buying individual shares of companies like Tesla (TSLA) or Google (GOOG), purchasing index funds like SPY, QQQ, VTI, or buying bonds or bond funds. WE all know someone.
What is not always known is how or better yet through whom those investments are purchased.
A taxable brokerage account (Fidelity, Vanguard, or E-trade to name a few) is your every access to the market to purchase common stocks, bonds, index funds (mutual funds or ETFs). These are income generating accounts which means you pay taxes every year on them. They have no income limits and no age restriction. You can choose to manage these accounts yourself, pay someone else, or use a roboadvisor.
Today there are many options for opening an account and invest in the market including via mobile applications like Robinhood or M1 Finance. Previously you needed to invest via a Stock Broker to have access to the market. These accounts are your workhorse. The goal is to grow steady wealth in your retirement accounts while using these accounts to be aggressive and generate large returns.
5. Real Estate Portfolio
90% of millionaires in the U.S. are invested in real estate. Minorities in the past have lacked the opportunity to build wealth due to lack of opportunity to purchase, invest, or even inherit real estate. While there are areas of discrete discrimination occurring in this country today, minorities do have improved access to the real estate investment game.
Real estate is an important component of your investing portfolio. Investing in real estate provides: cash flow, growth of your wealth through appreciation, federal tax benefits and protections, the ability to use leverage to create other investment opportunities, and it makes you an instant business owner. There are definite risks to investing in real estate and the wrong real estate transaction can set you back a life-time, however the greater the risk, the greater the reward. WE are on a mission to create generation wealth and we can not afraid to take on risk in an effort to achieve our goal and gain our financial independence.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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