We must revisit our financial foundations, goals, and pitfalls throughout our lives. Significant events including marriage, the birth of a child, caring for a loved one, the death of a loved one, educating children, or retirement all mean that you must revisit your foundation, and ensure you reestablish the financial basics.
A solid foundation is necessary before you begin investing. Your #1 priority in the Foundation step is mastery over spending, debt, and savings. Most people spend their lives trying in vain to out-earn or out-invest their failure to master the basics. Spending problems follow you until you address them.
Wealth
- Spend less than you earn
- Establish an Emergency fund – held in cash, savings accounts or CDs (not invested!)
- Eliminating high interest debt often offers a higher “return” than investing, so its the best form of investing if you have debt. Eliminating consumer debt (credit cards and personal loans) before investing is an important step in establishing your financial foundation.
- Additional Reserves for goals: buying a home, car down payment or other goals
- Avoid high interest debt on any purchase: In general interest rates above 5%, should be avoided for anything beyond necessities (education, home, a basic car). If you need a higher interest loan to buy it that’s a good sign you can’t afford it.
- Run any new monthly payments through a budget before committing.
- Basic estate planning – A will, power of attorney, health directives, beneficiaries named and up-to-date on retirement and investment accounts
- Term Life insurance that covers the basic needs of your family in the event of your death. Term policies are only active for a fixed period (often until your estimated retirement when you’re less likely to die). This makes the policies more cost-effective than other insurance. Insurance generally should not be looked at as an investment vehicle. In some cases, once you’re well beyond the basics, life insurance as an investment can make sense but not at the foundational stage.
Wisdom
- Pay yourself first – assign money from each paycheck to savings before paying any bills! This means both retirement and saving for now (an emergency fund or reserves for important goals). What’s left over is what you have needs and wants.
- Personal financial care is self-care – Taking care of yourself financially can feel as good, if not better, than pampering yourself with luxury goods, fine dining, and expensive travel. It does require reconditioning our minds from the constant messages we get from society, influencers, commercials, the media, however.
- Understanding how compound growth of investments works over time and recognizing that this principle works “in reverse” for debt as well. Debt balances compound even faster because blacks often pay higher interest rates than other groups.
- Share your financial knowledge with your family, friends, and greater community.
Once you have accumulated a surplus (or learned to always spend less than you earn), it’s important to make wise decisions about where you put that money. Focus on investing to secure your and your family’s current and near-term goals (the next 5-10 years) first before you start thinking longer-term or about future generations. Once you’ve built wealth for yourself, you then will have the foundational wealth and wisdom to build wealth for future generations. We all know the airplane instructions of securing your oxygen mask before your child’s in the case of an in-air emergency. The same goes for building wealth.
Wealth
- When is it appropriate to invest? Once you have your short-term needs in good shape, and there are excess funds, you can save for the future: We use the Now vs. Soon vs. Later approach for determining your investment horizon:
- Now (5 years or less): Cash, saving accounts, CDs
- Soon (5+ years): Moderate-risk investments like bonds and balanced funds
- Later (10+ years): Growth investments like Stocks, stock mutual funds, or ETFs
- Now (5 years or less): Cash, saving accounts, CDs
- Understanding the When, Where, and How of Investing: Investment prioritization
- Start simple with retirement – Save enough into your workplace retirement account to get your employer’s match
- Invest simply: Retirement account investment choices – Most plans offer a Target fund to make it easy for you to manage risk and return – we suggest choosing the Target fund for when you turn 65-70 years old.
- Retirement savings rate – start with at least 5% of your salary going to retirement accounts and increase this percentage every year until you are putting in the maximum. Most people need 20-40 years of saving at this high rate to meet their retirement goals.
- Types of retirement accounts – Your employer may offer Traditional (pre-tax) vs Roth (after-tax) 401k, IRA, TSP, 403b- Create tax diversity in your retirement savings: Learn more about the pros and cons of different tax strategies for your retirement account when you’re ready – but its most important is to be consistent for many decades about saving for retirement.
- “Invested Reserves” – non-retirement “brokerage” accounts – Offer different tax advantages than retirement accounts. Because they are not “retirement” accounts offer more flexibility for meeting goals other than retirement.
- Pensions and annuities – provide income streams at a later date (usually retirement).
- Save early and often towards large future expenses: cars, homes, education, travel etc. Planning for big expenses in advance gives you options: you’re able to choose the most favorable of using debt, using savings or investments, or using current spending.
- Estate planning: A will, power of attorney, health directives, beneficiaries named, and up-to-date on retirement and investment account
- Save early and often towards large future expenses: cars, homes, education, travel, etc. Planning for big expenses in advance gives you options: you’re able to choose the most favorable of using debt, using savings or investments, or using current spending.
- Term Life insurance that covers the basic needs + wants of your family in the event of your death. Term policies are only active for a fixed period (often until your estimated retirement when you’re less likely to die). This makes the policies more cost-effective than other life insurance.
Wisdom
Recognize money narratives at play in your life. We all have a money past that consciously or subconsciously guides us. What were your parents’ and grandparents’ views on money? How do you think similarly? How do you think differently? Reconciling these differences is important to charting an empowered financial future for yourself and your family.
- Establish confidence over your finances: believe that you are in control of income, savings, and expenses.
- Recognize the freedom to experiment with your ideal life as your financial stability and asset balances increase: entrepreneurship, sabbaticals from work, and career changes are all possible as your financial stability increases.
- Define success in your life in terms of your values, causes, interests, and skills, not just positions and titles.
- Know the true cost of career advancement: We all know we want a bigger salary and recognition but also consider time, lifestyle, and ancillary costs, along with the potential salary increase.
- You can afford anything but not everything. Determine what you value and spend on those areas. Cut back in areas that aren’t important.
You have reached the point where you have assets that can support your expenses each year for the rest of your life, or you have a combination of assets and ideal work with income, flexibility, and enough security that allow you to live your desired lifestyle. From this place you have the abundance to start creating a springboard for future generations.
Wealth
- Estate planning:
- Revocable Trusts can be beneficial, to avoid the complexities of probate, for those with investments and assets outside of their retirement accounts.
- Testamentary Trusts that go into place to protect minor children from inheriting significant assets until after 25-30 years old.
- Engage in long-term tax planning: We all want to pay as little tax as possible now, but taking a long-term view is also important as your wealth grows. Some pitfalls of avoiding taxes in the short term that can bite you in the long run are:
- Not adequately planning for Required Minimum distributions (RMDs) from retirement accounts in your 70s can create a taxable income spike in retirement.
- Reducing taxable business income now at the expense of later social security benefits
- Planning for tax effects on your estate including how retirement accounts will be taxed to beneficiaries of your estate.
- Define your ideal asset allocation (the percentage invested in specific stock, bond, or investment categories) by goal and rebalance at least annually.
- Charitable giving planning: Determine the charitable causes that are important to you and allocate a percentage of your net worth annually to give. With a coordinated plan you can take advantage of tax-efficient giving strategies like donating appreciated securities, Qualified Charitable Distributions from retirement accounts (once eligible), etc.
Wisdom
- Define your “enough” and model this for your family and community. Recognize the hedonic treadmill at play in your life. Try to notice if you are rarely satisfied. The drive that pushes you to excel professionally and build wealth should be balanced with satisfaction, and an appreciation for your life as is. Gratitude and contentment are important parts of preserving and enjoying wealth.
- Teaching the next generation: actions speak louder than words!
- You can be generous with your time, knowledge, and resources
- Remember that the tendency towards scarcity does not go away because you have a certain level of wealth. It’s always there. Abundant mindset is a choice you make over and over no matter your wealth.