Section I - Lesson 4B
Financial Plan - Two Separate Accounts
Step two of your financial plan is to recognize that you'll have need for two separate types of investment account. For your more immediate needs you'll want what we'll call a regular money account, and for your retirement needs you'll want a 401k or IRA account. There are compelling reasons for directing money to both of these accounts, rather than concentrating your efforts on just one or the other.
Money that you direct to your tax-advantaged retirement account, be it 401k or IRA, is money that you'll usually not be able to access easily until you're 59 1/2 years old or more.
This retirement account will have terrific built-in tax advantages that your regular money account won't have. Your money goes into your 401k or IRA on a pre-tax basis, which gives you about 28% more bang for your buck, right from the get-go. Then your money grows tax-deferred until you actually take it out, giving you even further mileage. And if it's a company 401k plan, your employer may also "match" all or part of your investment, which also goes in pre-tax and provides you with even more tax-free appreciation.
Clearly, you've got lots of reasons to take advantage of the special benefits of a 401k or IRA, but the fact remains that the money you direct to these accounts won't be available to you, for the most part, until retirement. Meanwhile you'll require an investment account that you can access for emergencies as well as all sorts of other immediate needs.
Your regular money account will serve this purpose. It may not have any tax advantages but it will be available any time you want. This is where you'll be able to go for money to make a down payment on a home, for college expenses for yourselves or your kids, for wedding expenses or whatever else may seem desirable.
Once established, your regular money account is where you'll go to meet large and small emergencies. This is your money for the proverbial rainy day. Once you put your plan in motion it won't take long for you to begin feeling the wonderful peace of mind that comes from knowing you have "money in the bank." It doesn't seem to matter how much is in the bank. What matters more is that you're finally building wealth and that more is on the way.
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