Financial Organization – Part 4

The Importance of Saving

In our last blog, we talked about the logical process of dividing each of the three model areas, Protection, Savings and Growth, into nine sub-areas, or “drawers”. We also listed all the common errors in the 9 Protection Drawers.

In this blog, we are going to take a look at the common mistakes in the Savings drawers.
Inadequate Savings

The first thing people need to do is save adequately and in such a way that the money will be “liquid”. We recommend between 15-20% of the adjusted gross income until the savings amount equals 50% of your adjusted gross income. For example, if a family has an adjusted gross income of $100,000, we want them to have saved in “liquid” accounts such as bank accounts and money markets, $50,000. Once that is done, they can start saving in other places like retirement plans, college savings programs, etc.

Diversification

Unfortunately, we find that most of the time as soon as people can save money they immediately put it into their retirement account which may cause problems if they suddenly need that money. Let’s say they lost their job or have need of money for the purchase of a piece of property. Taking the money out of a retirement fund can be costly in both penalties and taxes. So diversification and liquidity in savings is very important.

Wrong titling

The third issue that we find is that many times there is very little thought put into titling accounts. Having an asset titled jointly versus individually, joint tenant with rights of survivorship versus tenants in common, individual ownership or having it owned by a trust or some other entity can protect you against lawsuits and things like that.

Reinvesting all the interest

Another common mistake is that people will many times put money into an account and leave their dividends, interest or earnings in that account rather than taking that interest/dividend and applying it to some other part of their financial model.

Compounding the tax

Leaving interest/dividends in the account has another negative side effect. As you compound the growth of an account you also compound the growth of the taxes that you pay which is just another eroding factor to wealth.

Too high a percentage of savings placed into retirement plans, which are not liquid , and have some tax disadvantages

As mentioned above, we have a population where a large percentage of people are putting a tremendous amount of money into retirement plans and then they may not have the liquidity they want to access the money. Recently we had a client that needed access to the money in his pension plan. He is under 59 ½ and he doesn’t have a provision to borrow on it so he is in a position where he would have to pay the penalty of 10% and also all the ordinary income taxes in order to withdraw that money.

College saving

We also find that people save money for college in a way that basically will eventually move the account off their balance sheet and move it on to the college’s balance sheet. We want to guide our clients toward using other people’s money to potentially pay for college. How we position our assets could either allow us to avail ourselves of more programs whether it be scholarships, needs based or non-needs based or certain loans. By having money already set aside in our children’s names or gift accounts or 529’s we might disqualify ourselves from some of those other options.