A common term in finance is “getting your financial house in order” but what does that actually mean?
When your financial “house” is in order, it means that you’ve established a solid financial foundation for your wealth. To achieve this, you should consider establishing these five fundamental financial accounts that are crucial for sustaining your financial well-being:
Long-Term Savings Account
A savings account is your foundation for long-term savings. Deposit money into this account and forget it’s there. This is the place where you store and grow your money for big purchases. Banks and credit unions will often limit the number of withdrawals you can make per month to encourage you to keep that money stored away.
This is your go-to account. A checking account is designed to keep your money secure while providing easy access to your money for everyday spending. Although most checking accounts have minimum balance requirements, you can make regular deposits or withdrawals and link your account for scheduled bill payments.
This bank account helps you deal with the unexpected. You know that label you see on fire extinguisher boxes – “break glass in case of emergency”? Only in a financial emergency should you “break into” this account. What is a financial emergency? Everyone’s definition varies, but examples include hospital bills, major car repairs, and unemployment.
Workplace Retirement Plan Account
Some want to start saving for retirement as soon as possible. Workplace retirement plans offer you a convenient way to get started. Money saved and invested in these accounts will compound, this allows you to build up equity faster over time. Consistent monthly investment is the “fuel” for this account.
While this account allows you to grow money by investing in the stock market, you also have the potential to lose money. Regular monthly investing does not protect against or guarantee a profit.
Individual Retirement Account (IRA)
This is tax-advantaged retirement savings account that you own. You can choose from a traditional IRA and a Roth IRA. Traditional IRAs won’t tax you for your up-front contributions but will tax you for retirement withdrawals. Roth IRAs are the opposite. Your up-front contributions are taxed but retirement withdrawals are not.
Starting at the age of 72, you will be required to make annual withdrawals from your traditional IRA. This money will be taxed as ordinary income. If money is withdrawn before the age of 72 you can be faced with heavy tax penalties.
There is no mandatory annual withdrawal requirement from Roth IRAs. To qualify for the tax and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement after age 59½.
The Best Time to Start Your Long-Term Savings Is Today
Creating long-term wealth is a slow and steady process. To mediate risk, it’s important to diversify your financial portfolio through these various accounts. If one is affected due to changes in the financial market or because you’re in need of a large amount of money, your other accounts won’t take a hit.