There are so many financial tools available to us between IRAs, 401ks, brokerage accounts, loans, mortgages. The list goes on and on. The question remains, are these tools moving us towards our financial goals or keeping us further away from our financial goals? This question needs to be answered frequently. It’s not a one size fits all or one decision fits your entire life type situation.
Think of it this way. The products, the 401k, the IRA, the mortgage, are the tools. The strategy is what the tool is doing for you. How are you using that tool? Very often when we’re meeting with clients and prospects, we ask the question, Is this strategy bringing you closer to or further away from your goals?
And a lot of times the people will look at us and say, “What do you mean?” The choices we’re making with the financial tool, we don’t even think about it. We just do it because it sounds good or everybody else is doing it. That’s not good enough. If you have stated goals and stated objectives that you’re trying to meet.
Let’s take the 401k for an example. Most employers, if they offer a 401k, also offer automatic enrollment. By not making a decision. You’re making the decision to enroll in this 401k plan. How is this moving you towards your financial goals and is it going to help you achieve your short term and long term financial goals?
In most cases, it will help you achieve retirement or help supplement it at least. But what about your other financial goals, like sending your kids to college or buying a new house or going on a vacation? All of these goals need to be addressed and the 401k is not the tool that will help you get there. But when people use this automatic enrollment and are only saving in their 401k, what happens is their money is not accessible when they want to achieve these other financial goals. And if you access that money before age 59 and a half, if you’re able to, you’re going to pay a penalty and that money is going to be fully taxable as income.
The other option may be to take a 401k loan, but that has other rules associated with it, like the five year repayment schedule and the fact that your money can’t grow while you have it withdrawn through that loan feature.
In addition to that, you’re now paying taxes twice on the same money. You might be asking, how could that be? Very simply, when you pay back a 401k loan, you pay it back with after tax dollars. So you already paid tax on that money. Then you put it towards your 401k loan and now when you go to retire and you take the money out of the 401k, you’re going to pay tax again. You’re literally paying tax twice on the same dollar. Is that your goal and objective?
What you want to do when you’re doing financial planning is making sure your plan is flexible enough to achieve each and every single one of your financial goals, even if they change. Instead of putting money in different buckets for retirement, for paying for college, for paying for your vacation, for putting a down payment on your house. You want your money to be flexible so you’re able to achieve all of these goals throughout your life and you’re not stuck with tax consequences for each one.
Several years ago, we met with a family who had the goals of having a great retirement with a brand new mountain home, and they also wanted to send their children to college. After looking at their financial situation, it became apparent that what they were doing wasn’t exactly in line with what they wanted to achieve, and it certainly wasn’t the most efficient method.
But with some simple shifts in their cash flow, we were able to help them save for retirement, fully fund their children’s private college educations and build their mountain home so they didn’t have to wait until retirement. They were able to achieve that goal 12 years sooner than they anticipated.
But here’s the best part. By helping them to obtain the mountain home 12 years sooner or not having to wait till retirement in order to build it, the husband had an opportunity to work with his father every weekend to build that mountain home. He and his dad literally hammered every single nail into that cabin.
Unfortunately, several years later, the father died. He had cancer and died at a very young age. The husband came to me and said, “Hey, I want to thank you for everything you did to help us to build that mountain home.” And I said, “Well, you know, you put the money away.” He goes, “No, you don’t get it. I will never be able to get that time back. And if I waited until I retired in order to build that cabin, I never would have had that opportunity. So thank you for showing us how to get to our goal much, much sooner.”
You see, these are the things that money can’t buy. And this is why it’s so important to have the flexibility within your financial plan to achieve your goals all along the way.
Because life doesn’t wait and it’s not about saving for retirement or saving for college. It’s about those moments in your everyday life that you can never get back.
This couple didn’t change their outflows by one penny, but they were able to build the home 12 years sooner than when they were on track or when they thought they could do it. All because we looked at things through a lens that showed them free up their cash flow and do it in a way where they can achieve all of their goals and objectives.
If you’d like to see exactly how we put this process to work for our clients, check out our website. We have a free webinar, The Four Steps to Financial Freedom, where we do a deep dive on how we put this process to work.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.