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New Year Financial Goals
"I'm going to save this year!" Sound familiar? It's a new year with a new opportunity to become more fiscally responsible. But, how can you do that without falling off the wagon? I've got several ways, some of which are more strict than others.
I will start with the least strict and slowly work forward. Use the method you trust yourself to stick with.
At any point in time, I'm saving for several items I want in the near future. How do I save for these? Simple, I allocate my savings into "jars" or, for me, envelops. The money will sit in those envelops until it is great enough to put in a bank or there's enough to buy what I wanted. I follow the simple rule of not being allowed to touch the money in these envelops except for the original usage. It's the same process I use with my monthly earnings to pay for utilities, food, rent, etc. I allocate the money ahead of time, so I know it is there, and I know what my limitations are. This is crucial for things, like food, that if I didn't cap my spending to what is in the envelop, I would go out to eat everyday and spend more than I needed on that budgeted item.
The savings account is the tried and true method of saving, as long as the money ends up in the savings account. You must also make sure the money stays in the savings account; otherwise, you're in need of a stronger solution.
I had a friend a while back who took 25% of every paycheck and put it in his savings account. I can tell you that friend has a ton of money now because he was able to hold himself to his savings plan.
Certificate of Deposit
Say you have a bit of money right now that you've saved up but you are afraid you'll spend it. Try a Certificate of Deposit or CD. I employed this strategy for my summer earnings while in college. I took a little over half of what I earned in the summer and placed it in a CD for 3-6 months in order to prevent myself from spending it all at once. The good part about CDs is that it is hard to remove the money from them. If you do, you'll have to pay a fee. They also pay a slightly higher interest rate than a savings account. There are, however, minimum opening deposits and the higher value of the account, the higher the interest rate.
One way to save is to invest in tangible investments, like a house. Especially now that the housing crisis has taken shape, we're better able to value what houses are really worth and we hope they continue to hold their investment value. Because of the upfront cost and sale cost, you're looking at something that has to be a long term investment, which will ensure you must continue to save over a longer period of time.
If you already have a house, paying down your mortgage could be the same as saving, but the asset protection attorney side of me warns against doing this because it could present your house as a viable option to pay off mortgages. The tax attorney side of me is telling you to pay down other debts first because mortgage interest is tax deductible and generally a lower interest rate.
IRAs, Roth IRAs, 401(k)s, etc are fantastic devices to avoid paying some taxes on your income and saving for the future. The catch is that these accounts cannot be used until you've reached retirement age, or you'll likely end up paying a fee. This fee is your incentive to continue to save and not fall off the bandwagon.
In this category, I'd like to include whole life insurance. Whole life insurance can be used as an investment tool with similar limitations as the retirement accounts. The largest difference, which depends on state and provider, is that whole life insurance can be cashed out at anytime, not just at retirement age.
Businesses and Trusts
Investing in a business startup as an angle or VC investor is a fantastic way to tie up your money for 3 to 5 years. If you've never done this type of investing before, you should partner up with a firm that handles these types. Basically, your money would go to a new venture that has no proven success and you'd get a high rate of return on that investment. The catch? Most new firms don't pay out for 3 to 5 years. Some end up taking even longer than that though, just to warn you.
Irrevocable trusts are the top-of-the-line mechanism to ensure you can't touch your savings. Why? Because once you put it in the irrevocable trust, you can't touch the money. The problem? You're not going to see the full benefits of the trust unless you leave the money to someone else, like your children. If you leave the trust assets to your children, there's great tax benefits if you structure it right. I, however, don't see any reason you cannot give money to a trust company to hold for you until you reach a certain age. They will be confused, and you'll have to pay fees just to hold the money, but you can rest assured, they will not give the money back until they're allowed to.
Other Financial Goals
If your financial goals included working on your estate plan, we've got articles and resources for that too. If you wanted to judgment proof your life, we help with that as well. If you wanted to get more organized, I can help, but it's not really my area of expertise. I know many CPAs who would love to help you with that though.
Happy New Year, and I hope you accomplish your financial goals. Meeting any goal as a resolution is much like reaching that weight goal. It doesn't happen overnight, and takes a lifestyle change in order to accomplish. One week off of the wagon can cripple your attempts.
This article was created for educational and promotional purposes only. It was not created as legal advice, nor was it intended to create an attorney client relationship (though we'd love to discuss this with you). If you need legal advice, please consult an attorney.
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