Ryan Myers, a certified financial planner (CFP) and a professor in the CFP program at the University of Virginia, says the best way to focus on your investment picture is envisioning it as a three-tiered financial pyramid. The base of the triangle is your protection, the middle is your wealth accumulation and the top tier is your wealth distribution. Top earners — one percent of the population — with salaries of $250,000 plus and with sizable assets, venture into the top tier of the pyramid.
The base, also known as the area of “protection” consists of checking, savings, money market accounts, certificates of deposit, life insurance and employee benefits. Additionally, an emergency fund of at least three to six months of your income should be included. “If your car breaks down or you lose your job you can use this fund,” says Professor Myers who has been teaching financial professionals for 20 years. “It also prevents you from using your credit card to handle problems.”
Building the fund is usually the challenge for most people. Professor Myers suggests initially saving $1,000 (from your paycheck or other sources of income) so that you can increase the deductible on your car or health insurance, which will significantly lower the cost of your insurance. What you save should be used to build your emergency fund. Another savings option is the Roth IRA. You can withdraw the principle from a Roth and not acquire any penalties while the earnings are growing tax deferred.
The middle tier, or the “wealth accumulation” level is next. This includes your retirement plan (401K), mutual fund and real estate. “Always contribute at least to the level of your company’s retirement match,” advises Professor Myers, who has been a financial advisor in the Los Angeles and Washington, D.C. areas. “Increase it by one percent every time you get a raise, until you reach at least ten percent. If you begin to save later in life, perhaps after a divorce, try to be more aggressive with contributions.”
For more liquidity, a mutual fund savings plan comes into view after your Roth begins to accumulate. If you haven’t bought property by this point, these steps will prepare you to do so. Another option, at this juncture, is to buy stock to add some risk and earnings to your mutual funds. Collectively, all of these steps, as well as hiring a financial advisor, will guide you through the process of investing in a solid future.
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