In preparation for the new year, let’s think about getting our financial house in order. A great place to start is to organize your accounts. Here are the six financial accounts you need:
- Master checkbook. This is where your payroll gets deposited and any other regular income you receive. You can pay your big monthly bills from here like:
- Mortgage
- Car payment
- Car insurance
- Life insurance
- Utilities
- School tuition/childcare
- Monthly transfer to daily pay account for a budgeted amount
2. Daily pay account. This is could be an online bank as long as it has a check card for on-going spending. You will get a fixed amount deposited into this account each month and you will spend it down to zero at the end. You will want to track it closely, so consider an app alike Everydollar that makes it easy. The stuff you pay for from this account includes:
- Groceries
- Fuel
- Take-out food
- Restaurants
- Incidentals
3. Emergency fund. You want to have three to six months of “necessary expenses” saved in case of unexpected interruption of your income. Look at the bills paid out of the Master Account. And this fund is where you go if you have medical bills or big car repairs. It should be safe, secure, not too easy to access and maybe pays some interest. This is not really an investment, it’s more like insurance against the inevitable big bill. If you want some creative ideas on how where to stash your emergency fund check out this list.
4. Employer-sponsored retirement account. Your work should offer some kind of retirement plan. It’s usually a 401(k). Often the boss matches your savings for some of the money. A few important things to know:
Find out the matching formula. Typically, it’s dollar-for-dollar on the first three percent of your earnings that you save and then 50 cents on the dollar for the next two percent of your earnings saved. So, if you save five percent of your gross pay, the boss will add four percent of your gross pay.
Get all the matching money. You should save at least enough to get all the matching money. If you can, save up to 20 percent of your gross pay into a Roth tax-free retirement account.
You pay tax on the money you save into the Roth account. But it comes out of your payroll you won’t miss it.
You can spend this money in retirement without tax and you will love that in retirement.
Retirement account employer match. This is the account that holds the employer matching contributions and any profit sharing the boss chooses to share. This money will be taxable as income in the year you spend it.
5. Mid-term goal saving. Since we know you are super responsible and you are doing a great job saving, you will need a taxable investment account for a long-term goal. This will be a taxable brokerage account that you will use over the next five years to build up for a big goal like:
- Vacation home
- Super vacation
6. Quarterly tax account. If you are self-employed, you will want this account. As a self-employed person, you need to pay taxes directly. You are expected to pay four times each year based on your earnings for the year so far.
It’s really common for self-employed people to receive a big tax bill at the end of the year and not have money to pay it. And, the IRS can add penalties.
You need to pay federal tax, state tax and self-employment tax (Social Security and Medicare tax).
You may find that these ideas raise questions about your financial goals and how to move foreword for your best results. You might want the advice of an experienced, well-trained, professional advisor. A great place to look would be here.
This link will direct you to some CERTIFIED FINANCIAL PLANNER™ professionals in your area. You should meet with a couple of them to find a person who is a good fit with your situation and personality.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.
Do I have enough savings to retire?
