Earlier in this series, we outlined the basic layers of a sound financial plan, and we detailed the elements of the first layer – protection. Now that we’ve established a firm foundation to our financial pyramid by putting in place adequate protection strategies, we can move on to accumulating wealth. In this article, I’ll discuss strategies for building assets. Next time, I’ll cover strategies for investing and managing those assets.
The first step in the asset accumulation process is to assess what you have available to devote to building wealth. Start by reviewing your cash flow. Make a detailed list of your recurring and non-recurring expenses and compare this to your household income.
This is a critical step in order to ensure that you don’t create a savings plan that is beyond your means. Additionally, it is always a good idea to know your expense level as it is important when assessing your needs for life or disability insurance. Keeping track of expenses can also help you when working out what you will need to maintain your standard of living in retirement.
Next, make a list of your larger financial goals such as retirement, education funding, saving for a first-time or new home purchase or an extravagant vacation. This list will be helpful for a number of reasons. First, it will allow you to get a sense of how much you need to save in order to meet your goals.
Second, it will assist you in figuring out how long you have to save for a particular goal before you need the funds. Knowing your time frame is also essential in determining how aggressively you can afford to invest the assets devoted to any specific purpose.
Finally, this list also will help you prioritize your savings strategies based on the importance of and time frame for particular goals. It is easy to find online financial calculators that give a quick and dirty result but if you use these online tools, make sure to account for inflation and use reasonable assumptions regarding the rate of return you believe you can earn on your investment.
Armed with all of this information, you now can develop a strategy for accumulating the wealth you require. Regardless of the goal or its time frame, consider implementing a system by which you pay yourself first. In other words, instead of waiting until the end of the month to see what you have left after paying your expenses, put systems in place through which you put your money aside during the month.
This can be through retirement plan contributions that your employer automatically deducts from your paycheck or by using systematic savings strategies that regularly pull money from your bank account. As long as you’ve accurately assessed your cash flow – income minus expenses – you should have a good sense of how much you can afford to save each month.
Next, consider what investment vehicles are available for specific goals. For example, employer-sponsored retirement plans, IRAs, and/or Roth IRAs can be used as a vehicle for retirement savings. These options are useful for long-term savings because of their potential tax efficiencies but may not be useful for non-retirement related goals.
Similarly, 529 Plans, Coverdell accounts, and/or Uniform Gift or Transfer to Minors Act accounts all potentially can provide efficiencies in saving for education funding goals, but, like the retirement plan options, these typically have limitations making them inappropriate for other goals. Once again, a financial adviser can assist you in assessing your saving and investing options and determining which is the best fit for what you are hoping to accomplish.
This material is for informational purposes only and is not intended to act as specific advice. Please talk to a financial professional prior to investing and a tax adviser for tax advice.