Imagine opening the door to your fridge. You might see some produce, some condiments, some leftovers. That fridge is going to look different during each stage of life. As a young single person, it might only contain a few things. It might be bursting when you have kids running around with robust appetites. It might reflect certain dietary preferences when you get older.
The fridge says something about where you’re at in life and how you’re providing for the people in your care. In the same way, your financial picture is going to constantly change. Your needs will change; your goals will change. As it does, you’re going to want to check your financial plan. See what needs to go in and what should come out.
There are four financial areas you must handle well if you want to keep the fridge well stocked for future generations: investments, insurance, debt, and taxes. Here are some tips for ensuring you’ve achieved basic financial literacy in each of these areas so you can “pass it on” to the people you love.
“You give a little; you get a little.” That’s one way to sum up the goal of investment strategies: you put money into an opportunity that, you expect, will give you a good return on your investment and help your money grow. Some areas of investment are viewed as more secure but also promise smaller growth. Others have the potential for greater growth but also pose greater risk.
In order of riskiness, from least to most, the basic categories of investments include cash, fixed income, and equities:
● Money invested in cash equivalents is typically held in savings accounts and insured up to the FDIC limits.
● Fixed income instruments include certificates of deposit (CDs), treasury bills, corporate bonds, mortgage-backed securities, and municipal bonds, etc.
● Equities refers to stock investments. Traditional equity asset classes include: large-cap stocks, mid-cap stocks, small-cap stocks, and international stocks.
Based on your needs, you should determine an asset allocation that consistently results in maximized results for the level of risk you assume. From there, you should diversify your portfolio so you’re not putting all your financial eggs in one basket. If you don’t invest wisely, you essentially give your money to inflation or take on unnecessary risk.
If you don’t protect your assets with insurance, you’re vulnerable to unexpected circumstances or risks. Insurance is about protecting your capital—both your financial assets, and even more importantly, your human capital.
Human capital is the present value of your future earnings capacity. Typically when you’re young, you have more human capital, and less financial capital. When you’re older, that ratio flips. Your insurance should cover your human capital: you usually need more when you’re young, and less when you’re old.
There are two main types of life insurance: term and permanent. Term is more common, and it covers you for a certain amount of time or up to a specified age. These policies are usually cheaper than permanent insurance. Term policies should be need-based. Their main function is to protect your family and cover debt. A general rule of thumb in your early adult years is to secure a policy that provides seven to ten times your salary.
Permanent insurance is a broad term which describes life insurance policies that are guaranteed to provide a death benefit for your lifetime. Permanent insurance is an excellent tool for those who like the idea of leaving each child and/or grandchild an inheritance.
Capitalism gave us a blessing and a curse when it gave us debt. In the capitalist system, a business owner has the mobility and flexibility to invest in a business before having the financial capital to do so. In that way, debt can be an integral tool for investment and growth.
Student loans, mortgage loans, and credit card debt (provided you pay your card off fully each month) can help you invest in your human capital, home equity, or credit score. Wise use of debt allows you to use money you don’t have to build wealth and accelerate returns.
But if you don’t handle your debt well, you lose your money to creditors, and two consequences kick in, both of which can seriously cripple your financial future: 1) You get on the wrong side of compound interest, and 2) You destroy your credit.
Here’s advice to pass on to your children and grandchildren: if you want to do much of anything as an adult—buy a new car at a good rate, get a mortgage loan, start up a business—you need good credit. You build up your good credit through responsible financial behavior. Pay off your credit card every month and pay your bills on time.
Taxes are dynamic; in other words, they’re always changing. The tax code itself often changes, and your life situation changes often too. When tax policy changes, it can make a huge impact on how you would make investment decisions. When the tax code meets your personal life, a lot of moving puzzle pieces are at play. You need to be mindful and tactical about your financial approach, so that you’re in a better place to pass on your wealth.
By working with a CPA on your taxes along with your financial advisor on distribution and investment strategies, you can benefit from a team who will work together to help you feel more in control about your tax obligations. Left to your own devices, you may neglect to consider the impact taxes could have on your financial picture.
Do not underestimate the impact that your tax strategy can have on your quality of life, and the size of your inheritance. If you aren’t smart about how you manage your taxes, you give a disproportionate amount of your money away to the government. The rate of return for making good tax decisions can be as impactful as investment returns.
Build the Best Financial Life Possible
Investment, insurance, debt, and taxes: these four topics may seem dissimilar, but, when handled well, all of them can make sure your financial fridge is well stocked, no matter what stage of life you’re in. Insurance can help build your estate; smart tax maneuvers can help protect and build your investments; taking out loans at the right time, for the right reason can help build your equity; and making smart tax decisions can result in great rates of return.
Alternately, all of them can leave your fridge bare if you’re not mindful about your approach. Many of these topics can be complex, which is one reason why you might find it helpful to work with a team of professionals, not only to evaluate your current scenario for gaps and issues, but also for opportunities and ensuring you are building the best financial life possible—both for yourself and for future generations.
For more advice on investment strategies, you can find Pass It On on Amazon.
Roger and Lori Gervais are proud parents of three wonderful children: Anna, Will, and Jack. Roger and Lori are also the husband-and-wife team behind The Gervais Group, named by Forbes as “Best in State Wealth Advisors” in Wisconsin. Lori, a CERTIFIED FINANCIAL PLANNER™ professional, has been recognized for her commitment to clients and to the profession by Forbes, which named her to its America’s Top Women Advisor List. Roger, a CFA® charterholder, uses his background in engineering to offer clients a unique set of problem-solving skills. Throughout their thirty years of combined experience in the industry, Roger and Lori have made it their mission to simplify the complex world of financial planning.