5 Pillars of a Solid Financial FoundationSubmitted by JMB Financial Managers on April 16th, 2021
By the time you turn 35, you probably have chosen a career, own or rent a home (house, apartment, condo, etc.), and have a better financial situation place than when you were in your mid-twenties. With a steady income you can now set your sights upon building a solid financial foundation for the future.
There are five pillars to a solid financial foundation: an emergency fund, savings, an investment fund, a college fund, and a 401(k) plan. Building these pillars doesn’t happen overnight and does not have to mean dumping large amounts of money into them at once. Gradually adding funds when you can afford it over several years will start to add up and build a solid financial foundation. Let’s explore each of these five pillars in more detail.
The purpose of an emergency fund is exactly what it sounds like, money put aside to use in case of an emergency. Living through a global pandemic has given firsthand experience into why having an emergency fund is critical. Some other examples of times you may need to use your emergency fund are:
A death in the family
Unexpected medical expenses
Losing your job
Emergency home or auto repair(s)
Unforeseen living expenses
Other unpredictable events.
To get started, set up a savings account at your bank that is specifically for your emergency fund. When building your emergency fund, your goal should be to have enough money in the fund to cover 3-6 months of your basic living expenses, such as food, rent or mortgage payments, utility bills, internet service, car payments, and any other recurring bills or expenses that are necessary.
The goal of an emergency fund is not to completely replace your normal income, but simply cover your expenses during an emergency. Its okay to start small, as even adding $100 a month will make a difference. Gradually increase your contributions as you can afford it until you have amassed enough money in the fund to cover those unexpected expenses.
Savings accounts are deposit accounts at your bank that pay a modest interest rate and are safe and reliable for putting away money to use for short-term goals, such as buying a car, redecorating your home, taking a vacation, and other, more moderately expensive items.
Savings accounts are great places to put away extra cash that you don’t need in your checking account to earn extra interest. Savings accounts are easy to set up and available at any bank or financial institution. Interest rates vary and are subject to change at any time depending on the bank or financial institution’s changing competitive rates.
Another benefit to savings accounts is the ability to withdraw any amount up to six times per month with no additional fees. Federal laws were passed to suspend the withdrawal frequency cap on savings accounts in 2020, and it is unclear yet whether this is permanent.
Investment funds (often called brokerage accounts) are deposit accounts at a registered broker that turn the deposits into shares of stocks, bonds, mutual funds and other investments. Investment funds are used to build a sum of money for longer term and more expensive items such as buying a home, or a rental property,
Investment funds are flexible tools and can be used to build wealth for any purpose over any length of time. By embracing investments over savings, you have the opportunity for your deposits to grow, rather than earning interest. (Investing involves risk, and results in the fluctuation of your account balance on a daily basis.) In addition to the flexibility, investment funds offer easy access, and withdrawals can be made at any time.
If you have, or are planning to have, children, setting up a college fund should be top of mind. There are several types of college funds, as well as a variety of ways to save money for higher education.
The easiest and most popular college fund to set up is a 529 plan. 529 plans are sponsored by state governments and provide tax benefits to the account owner (not the beneficiary unless the beneficiary is the account owner). You can set up a 529 plan for anyone, even a non-relative (such as a friend or the child of a friend) and deduct your contributions to the 529 from your income tax returns. When withdrawing from the fund for any qualified education-related cost, the amount you withdraw is not taxable. If the 529 is for your child who is claimed as your dependent, the account will have a much lower impact on financial aid than other types of college funds. Many 529 plans also have the option to choose from a variety of portfolios that have a combination of stocks, bonds, or international exposures to give your money a chance to grow further.
A 401(k) Plan
While this may seem obvious, not everyone takes advantage of their employer’s 401(k) plan. We recommend enrolling in your employer’s 401(k) plan if they have one available. To make the most of your 401(k), create a contribution strategy and choose your starting contribution level (i.e. starting at a 3% contribution level and increasing to 4% in a year or when you can afford it), check if your employer offers contribution matching and take advantage of that if they do. Make sure you have an investment plan or develop one that includes a diverse investment portfolio, and avoid withdrawing from the 401(k) or cashing out if you can.
If you change employers, transfer your current account balance to your new employer’s 401(k) plan rather than cashing out the account. Cashing out can lead to fees, taxes, and potential penalties. If you move employers and your new employer does not have a 401(k) plan available, or you are unable to transfer the balance from your old 401(k) account for any reason, rollover that balance into an Individual Retirement Account (IRA).
Build Your Financial Foundation Today
Don’t wait; start building any or all of the five pillars of your financial foundation today. If you need assistance mapping out your financial foundation, setting goals, and creating a plan to financial freedom, schedule a complimentary consultation today.
Recommended Additional Resources
College Cost Planning Resources
Retirement Planning Resources
Financial Planning Resources
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.