The toolbox in your garage wouldn’t be complete if it didn’t have a few basics: hammer, screwdrivers, pliers, wrenches, etc. The same is true with your financial toolbox. Most of these ‘essential tools’ are basic items that you absolutely need to have. A few of these might be good goals to work towards if you haven’t already incorporated them into your financial picture already.
Don’t worry, I won’t give a tool reference for each of these financial essentials, but I have to say that a budget is like the toolbox of your finances. Without a budget, you’ll have a difficult time organizing and prioritizing your dollars. Sure, you can do the job without a toolbox, but it’s much more difficult.
Check out these budgeting resources if you’re looking to start or revamp your own budget.
We have to do all we can to prepare for retirement, and using a Roth IRA can make getting there much easier. The withdrawals from a Roth IRA are tax-free at your retirement (including interest if the account is over 5 years old), so this can mean huge tax savings when you retire.
If you feel a little lost when it comes to Roth IRAs, check out this great article on Roth IRAs.
If you’ve been diligent in your savings, you want to make sure you put those after-tax dollars to use. You can invest after-tax dollars in mutual funds or even take a little more risk and fund a social lending account like Prosper or Lending Club. Both options can help your money earn a great return. For a simple approach to investing, look into Betterment.com. (You can read ChristianPF’s review of Betterment here)
If you have an emergency fund and want to keep it liquid, there’s no reason why you shouldn’t still get a great return on your money. Online accounts like ING and Sallie Mae are paying 1% to 1.1% Much better than putting it under a mattress or in a no interest checking account!
Yes, you know that having a will is important and if you’ve already created one, that’s great! If you haven’t drawn up a will yet, that’s something you should put on your To Do list right away. Legalzoom.com can guide you through a basic will and it costs about $70 to do. Also, be sure to establish a durable power of attorney POA, which allows someone to act on your behalf regarding financial, legal, and health care decisions if you become incapacitated. Sample POA documents can be found on the internet, but you can use legalzoom.com to create one for about $35. You’ll also want to make sure you have a notary present when signing these documents.
These are a few specialty tools that can really do a lot of good for the right people. You’ll probably want to meet with a financial planner or planned giving attorney to discuss the best approach for these tools.
This is a special type of trust that allows someone to create an income off of appreciated assets while paying as little as possible in taxes and give to a charitable organization at the same time. By using a charitable trust, you can sell appreciated assets and receive a substantial charitable income tax deduction. These annuity trusts will also provide fixed income over your life or the live of someone else (like your spouse or a child).
For someone who is older, a charitable annuity trust can be a great tool to help with your overall financial goals. A person at age 70 might receive an annuity payment of $25,000 per year from an annuity trust when they fund it with an asset valued around $500,000. They receive this income for the rest of their life and the ministry of their choice can receive the remainder of the trust (oftentimes this amount is larger than the initial gift!) In most cases, the average payout to the annuitant is oftentimes very close to the original amount invested.
A planned giving attorney and financial planner can help you to establish a charitable trust if your financial situation warrants one.
A gift annuity can provide a fixed payment for your life while also providing you with an income tax deduction when you fund the annuity. Let’s say you’re 60 years old and you have a property worth $500,000 that you paid $300,000 for. If you sell the property, you could be faced with a potential capital gain tax of $30,000.
If you gift your property to a charitable organization by using a gift annuity, you could receive upwards of $26,000 each year as a payment (based on a 5.2% payout), while the ministry receives the full $500,000. It’s a great tool if you are someone who is charitable, but still needs an income to live on during retirement years.
Most financial planners can help you to in knowing if a gift annuity is right for you.
Do you use any other financial tools that should be included in someone’s toolbox?
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