Insights + Resources

Building a Healthy Financial Foundation

Apr 17, 2023

When you read about money matters, you will sometimes see the phrase, “getting your financial house in order.” What exactly does that mean?  When your financial “house is in order,” it means it is built on a solid foundation. It means that you have six fundamental “pillars” in place that are either crucial for sustaining your financial well-being or creating wealth.

#1: A savings account.

This is your Fort Knox: the place where you store and build the cash you may someday use for your biggest purchases. Savings accounts pay a modest interest rate. You should still consider having a savings account, even in today’s low-interest rate environment.

#2: A checking account.

This is your go-to account for everyday expenses, whether you pay your bills digitally or the old-fashioned way. Checking accounts pay a modest interest rate. Some accounts may have minimum balance requirements, so it’s best to read the new account information. Also, opening a checking account may lead to opening a credit card account at the same financial institution.

#3: An emergency fund. 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 they can be hospital bills, major car repairs, and unemployment.

#4: A workplace retirement plan account.

Some want to start saving for retirement as soon as possible. Workplace retirement plans offer an easy way to get started. In most plans, your contribution is made with pre-tax dollars.¹

Money saved and invested in these accounts can grow. Over time, the compounding may become greater. Adding money each month is the “fuel” for your account.

Regular monthly investing does not protect against a loss in a declining market or guarantee a profit in a rising market. Individuals should judge their financial ability to continue making purchases through periods of declining and rising prices. The return and principal value of stock prices will change as markets change. Shares, when sold, may be worth more or less than their original cost.

#5: An Individual Retirement Arrangement (IRA).

This is a tax-advantaged retirement savings account that you own. Traditional IRAs have retirement withdrawals taxed, but not up-front contributions. Roth IRAs tax up-front contributions are taxed while retirement withdrawals are not.²

Traditional IRAs require mandatory annual withdrawals starting at age 73 and is taxed as ordinary income. Distributions taken before age 59½ are hit with a 10% federal income tax penalty. No mandatory annual withdrawals are required from Roth IRAs while the original owner lives. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal can also be taken under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

Thanks to the SECURE Act, you may add to Roth and traditional IRAs all your life, as long as you meet the earned-income requirement for account contributions.²

#6: A taxable investing account.

This is also popularly called an investment account or brokerage account.  The invested assets are taxed each year. In an IRA or workplace retirement plan they are not. A taxable investing account gives you access to a wide range of investment products, which can help complement the other accounts in your financial foundation.

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Tags: financial advisor charlotte nc, Financial Planning, Personal Finance, retirement, Retirement Planning, Retirement Tax Savings, Tax Planning, Wealth Building