From a basic savings account to retirement planning and investing, building wealth for your future can take all forms. It starts with keeping a long-term mindset and a strategic plan for your finances. Here are the four steps to start building long-term wealth.
Step 1: Start a Savings Account for an Emergency Fund
Financial emergencies are a part of life. Whether your car needs expensive repairs, or you find yourself in the hospital, having an emergency fund is a necessary first step when it comes to a long-term wealth plan. Borrowing money to cover an unexpected expense can be a financial hole that’s hard to dig out of.
If you consider your checking account or credit card as your emergency fund, you should open a separate account that’s there when you need it. If your emergency funds are in your checking account, you could accidentally spend them. If your emergency fund is a credit card, then you’ll be going in debt and potentially pay a high interest rate on that debt. Most experts believe your emergency fund should cover three to six months of your living expenses. There are three types of savings accounts to consider for your emergency fund.
Savings Account – While you won’t earn a ton of interest in a basic savings account, your money is always available to you.
High Interest Savings Account – Can offer a higher rate of return compared to regular savings account but they often come with certain conditions to earn the premium interest rate.
Money Market Account – Can offer a higher rate of return compared to a regular savings account and you have the flexibility of liquid funds, but some require a minimum deposit amount to avoid fees or large dollar amounts to earn a premium interest rate.
Step 2: Set Up Your Retirement Plan
After you have an emergency account set up, have a plan to save for retirement. The earlier you start saving for retirement, the better off you’ll be.
An easy way to start is if your employer offers a retirement plan – either a 401(k) or a 403(b). Many employers will match their employee’s contribution to their retirement account up to a certain amount. So if your employer offers a 5% match, make sure you’re contributing 5% of your salary to your retirement account, so you’re doubling your contribution.
Another source of retirement income is an IRA account. An IRA account allows you to save for retirement either on a tax-deferred basis (called a traditional IRA) or tax-free growth (called a Roth IRA). With a traditional IRA, you use pre-tax dollars to fund the account, and will pay federal income tax on your withdrawals in retirement. In a Roth IRA, you make contributions with after-tax dollars, so your money grows tax-free. When you’re ready to retire, you will get the tax benefit of withdrawing your earnings tax free (if you meet age and account requirements). Neither Wealth Management by CommunityAmerica nor its financial advisors provide tax advice. For tax advice, please speak with a qualified tax professional.
It’s important to note that employer-sponsored retirement plans and IRAs are just accounts. They are not the investments themselves. These type of retirement accounts can be comprised of several types of assets, such as stocks, mutual funds, index funds, CDs, bonds and more.
Step 3: Set Up Savings Accounts for Both Long and Short-Term Goals
When you have your retirement plan, it’s time to set up savings accounts for your long and short-term goals. Whether you’re saving for your child’s college fund or planning to take a trip to Italy, this is where your savings can sit when you have an end-game plan.
Certificates of Deposit (CDs) are time deposits that are great for letting your money sit and grow. In a CD, you agree to leave your money in the account for a set period earning a specified interest rate. When the CD matures, you can withdraw your money or roll it into a new CD. Typically, the longer the term, the more you earn in interest. Once you open a CD account, typically, you cannot contribute or cannot withdraw money without penalties.
Another great way of saving for your goals is by designating different savings accounts specific to your goals. You can set your paycheck to automatically deposit into a Special Savings Account.
Step 4: Start Investing for Long-Term Wealth
Once your emergency savings, retirement plan and goal-savings are set up, you’re ready to start investing for long-term wealth. Sensible investing over time is one of the easiest ways to grow wealth.
Long-term investments usually refer to investments you hold for multiple years. Investing for the long term is often beneficial from a tax perspective compared to shorter-term investing, because profits on assets you own for more than a year are considered long-term capital gains, which are taxed at a lower rate than short-term capital gains.
Stocks, bonds, and funds are assets that can be used for both retirement and investing for long-term wealth. Having a diversified portfolio with different types of investments can help reduce the volatility of your portfolio, even during market downturns. Types of investments include stocks, investment companies and bonds.
Stocks are buying a fraction of ownership in a publicly traded company. Stock investments are typically not insured and involve some risk. There are many types of stocks that have varying risks including growth stocks, value stocks, dividend stocks and small-cap stocks.
Investment Companies pool money from multiple investors and uses that capital to invest in a diversified portfolio of assets, such as stocks, bonds, real estate, or other securities. Mutual Funds and Exchange Traded Funds (ETFs) are the most familiar types of investment companies. Similar to individual stocks, these investments are also not insured and involve some risk.
Bonds are issued by governments and corporations. By buying a bond, you’re giving the issuer a loan, and they agree to pay you back the face value of the loan plus periodic interest payments. The rate of annual interest you can earn from a bond is called the coupon rate. The price of bonds can fluctuate, but investing in bonds is often considered less risky than investing in stocks, though they are not insured.