Investing in a 401k, 403b, a Thrift Savings Plan(TSP), or IRA has yearly contribution limits and restrictions on when you may begin withdrawing funds. These plans can help you and your family with future retirement income. College 529 savings plans are typically used for qualified education expenses. Recent legislation has opened the door for investors to also utilize 529 dollars to fund a private, middle or high school education – or even allow them to pay off a student loan. Again, these accounts, by definition, have a role or purpose to serve a financial goal.
What’s less clear is evaluating the purpose and job description behind your checking or savings account. What about an after tax investment account or other bank accounts? Owning a single account that may serve multiple purposes could potentially be distracting and lead you to using your investment funds in a way that does not serve your financial goal.
At Flowerstone Financial, we believe in giving each account a specific “job description” and purpose, to include the timing of first use. You’d never take money out of your retirement account to fund a Trader Joe’s grocery run or Costco purchase,right?. Though, Costco purchases tend to be pretty expensive here in the Metro area, so maybe you should..? (kidding 😊). The real value in segmenting is knowing when and what account to pull from based on the purchase or income need. These purchasing priorities may be factored into your written plan so that the right money comes from the right account at the right time. This also addresses having necessary liquidity and not comingling these monies in your operating account.
An operating account may be utilized to pay bills each month, grab cash at an ATM, or other short-term needs. Other accounts that may be helpful to your financial goals include an emergency reserve account, a future fun & happiness account, or home account for future capital improvements. Problems tend to arise when you mentally account for three job descriptions with one account. It stresses your brain more than necessary and may lead to sub-optimal decisions.
We’ll talk more about these accounts next time.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.