Create a Flexible Financial Situation for Your Changing Life

• 401(k) (04:40)
• 529 (06:12)
• Invested Taxable Account (07:18)

Quote for the episode: "Being flexible when it comes to personal finance with a young family, a lot of the time, comes down to where you are saving your money."

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC. TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Welcome to the Enjoy More 30s: Family Finance

podcast, the only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

that tend to weigh on us, stress us out and distract our focus

from simply enjoying life.

Hello, and welcome to the Enjoy More 30s: Family

Finance podcast. Today, the episode is the second in the

series of "Your Money Mindset", and it's called "Like Super

Gymnast Flexible". So in this episode, we're going to cover

what you need to know when it comes to flexibility in regards

to personal finance as a young family, and then what you can do

to actually achieve it. So when I met my wife Lauren, we met

freshman year of school on the first day- we actually lived

right next door to each other at TCNJ. And what I found out about

Lauren is that she watched a lot of sports that I did not. She

was into what I would refer to, which is not the official title

at all, but what I would call kind of artistic sports. She

watched gymnastics, cheerleading, ice skating,

things of that nature. And what I found out about those sports

was that the way that they judge them, they have a very kind of

unique way about it. There are some categories that have become

more determined over time, but a lot of the scoring, or I should

say some of the scoring, has to eventually wind up in the

opinion of somebody.

So if you've ever watched the Olympics before, with these

kinds of sports, you'll see a lot of countries have slightly

different averages, and then slightly different numbers for

the routine. Then they average them together and get rid of the

low and the high, and this is how they get out to their score.

I had always kind of grown up watching sports like hockey,

soccer and football where basically if you put the puck in

the goal, or the ball in the goal, more times than the other

team, you have more points at the end of the day, then you win

the game. If I watched the Olympics, it was hockey, soccer

or track, you know, you cross the finish line first and you

win. And so by watching with Lauren, over time, I gained much

more of an appreciation for these sports that I wasn't

really interested in when I was younger. And more than anything,

though, I was really interested in the athletes themselves.

Gymnastics in particular, I had never really noticed how crazy

in shape these people are. I mean, they're waking up at 5am

every day, since they're a teenager, probably younger than

that, training for these Olympic events. And their bodies are

proof that they do that. So you look at these guys, and they're

as big as a football player, but they can also do a split and a

flip, they can hold themselves up in the air in a ring, they

can balance- they can do all this really amazing stuff in the

air and with their body because they don't just have strength,

they also have all this flexibility that goes around

with it. So strength is great, but strength and flexibility

means you can do pretty much anything.

So what you need to know- personal finance for your family

is actually much the same way, especially for a young family.

You have 30 years of changing thoughts, desires, incomes,

goals and everything else. Being able to adapt is really

important when it comes to a young family. It's not going to

be a straight line for any of us. We may think we know what we

want to do or what our kids are going to do, and then over time

that changes and we need to adapt to that. So we need to

have a situation that is flexible enough in certain ways

to allow us to adjust when things come our way. Being

flexible when it comes to personal finance with a young

family, a lot of the time comes down to where you are saving

your money.

Now the two primary places people start saving money into

tend to be their 401(k)s and their 529 plans for their kids.

A 401(k) is retirement based, 529 plan is education based. Now

each of these certainly has merit, and likely should have

some portion of your savings going into them, however both

have significant restrictions that you should be aware of, and

know about when you're putting your money into it. So it's not

that you shouldn't have these types of accounts. Many times

you should, it's just knowing the restrictions that go along

with them because if you know what the restrictions are, and

maybe what the deficiencies are, now you know some other things

that maybe you need to go into a different direction to help

still maintain that flexibility in.

401(k) accounts, overall, can be great for saving towards

retirement. When we meet with young clients, we almost always

recommend contributing up to any employer match amount. Free

money is better than any kind of money out there. The restriction

though on it, for the account as a whole, is pretty significant.

There's a 10% penalty, and you also have to pay tax on it

regardless of when you take it out. So if you take it out

early, there's this 10% penalty, and then if you add on your tax

rate, you could be paying 35%-45% on any distribution if

you're taking it out early. Now, early means younger than 59 and

a half, based on today's rules. And so that's a big

discouragement for trying to take money out of an account

like this. Now, there are certain hardship withdrawals,

and some plans have 401(k) loans, but it's built to be

generally inflexible. The point of this account is to have money

for retirement. So they, of course, are trying to make rules

that discourage you to take the money out. Whenever you're

dealing with any kind of an account, if you stop and think

about why this account was created, the government created

the 401(k) type of an account to incentivize you to save more

money towards retirement. They don't want to be responsible for

your entire retirement, which makes sense, and so they provide

an incentive for you to have an ability to put money into

something, and encourage you to have a large chunk of that as

much as possible that is saved on your own.

529 plans are in a very similar boat. They have that same 10%

penalty, and tax will also be due on the gains if it's not

used for higher education. So if you put money into a 529 plan,

and it grows, and then you use that money for college, there is

no tax that you have to pay. But if something changes, and now

they're not going to college, if you want to take that money out

and give it to them, now you're dealing with a situation where

there's a 10% penalty and taxes on those gains. This, overall,

means that neither is a great flexible source for changing

life and goals- a new addition, a roof replacement, losing your

job, a vacation home, a wedding fund, retiring early- kind of

anything and everything else. Those two types of accounts that

most people use, and you probably should have some degree

of, are not doing a great job of handling those variable kinds of

situations that most people encounter at some point.

So what can you do? What we often recommend is for young

families not to put all their savings into inflexible

retirement and education type accounts solely, but rather also

utilize and build up an invested taxable account. Now, you may be

asking what that means exactly. The easiest way to do this is if

you start off by thinking about your bank account first. It

doesn't really grow at all, but you can get to the money

whenever you want. Now think of your retirement accounts. They

likely grow more because they are invested, or I hope they're

invested, but you can't really touch the funds if you need them

because of the penalties involved.

A taxable account sits in the middle of these two. So if you

picture the bank account all the way on the left, and the 401(k)

all the way on the right, the taxable account is sitting in

the middle of these two buckets that you're picturing in your

head right now. It has the ability to be accessible, like a

bank account, but also the ability to use investments like

a retirement type of account. So at the end of the day, it's a

flexible, accessible account with potential to grow over

time. Now this next part is extremely important. From my

description, right there might have sounded like, "Oh, this is

great. If I have some extra money that's not in my

retirement account, not in my education account, it's an

excess above what I need in the bank, then I'll just throw it

into one of these accounts." That's not how you should be

approaching it- you need to take another step first.

This account still needs to be attached to a goal, and have an

expected time horizon of at least say five years. If you're

ever using investments, and this is going to be covered more in

future episodes, you need to expect to not touch it for at

least say five years, as there always can be short term ups and

downs. So for example, as in a scenario, let's say that you

have money, that you have extra in your bank account right now,

and in a year or so you're planning on putting in a pool.

In your mind, you're going, "Oh, I can invest that until then."

No, you know, wrong answer- you should hear all those warning

bells going off in your head. Another scenario, "I'm getting

married in two years. Let me invest the money. Why have it

sit in the bank account?" Wrong again. Two years, one year,

these time periods are too short, and depending on how

you're investing it, there's almost certainly too much risk

of having a down when you may need the money. We need to

really pay attention to those time horizons to allow us the

opportunity to recover from any temporary downs and not be, you

know, left with less than we may have started with. Your

mentality really should be more of, "I don't plan on touching it

anytime soon, however, I know if I need to- college expenses,

home renovation, future child's wedding, lose my job, want to

retire early- I have something significant I can go to which is

flexible for wherever life takes me." As young families, we have

20 to 30 years of life to go before retirement. You should

expect plenty of changes between now and then, and as a result,

our finances need to be flexible to support this.

In recap, or summary of some of the main points, flexibility is

important. Hopefully, after this conversation we've had today,

you realize, "I should have some degree of flexibility in my

situation, and expect to need to use it at some point in time

over the next 20 to 30 years." The second part is to recognize

that the accounts that most people use are your bank

accounts, your 401(k) and your 529 plans, at least from what we

see, when people walk in our door. When a young family walks

in our door, those are the three types of accounts they're most

likely to have. And each one of those has a different advantage

and a different drawback. So bank accounts- they're great for

accessing whenever you want, however, they're not going to

really grow that much over the long term. The second type of

account, a 401(k), is great for saving for retirement, but they

are built by the government to incentivize you to save towards

retirement. They are not built for having flexibility over the

next 20 to 30 years before you hit age 59 and a half. The third

type of account, 529 plan, is built for education. So they

also have that same 10% penalty just like the 401(k) does,

because they want you to use that money for college. If the

kid winds up not going to college, or they wind up getting

a full ride, there are some rules where you can transfer it

to another kid. But overall, it's not built to be flexible to

be used for other purposes other than education.

Thanks very much for tuning in today. If you enjoyed this

episode, please make sure to review us on Apple podcasts or

wherever you listen. There are literally millions of young

American families out there I'm trying to reach and help just

like you. Our next title coming up is, "Survivors Don't Complain

About Too Much Life Insurance". We're going to cover how a lot

of the families that are young tend to be underinsured from

what we've seen, why this is and how you can protect yourself

against it. Thanks again for tuning in today and I'll talk to

you soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

only. They do not constitute accounting, legal tax or other

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer or other professional before acting upon

any content or information found here first. Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

of TFS securities Inc and TFS advisory services an SEC

registered investment advisor member FINRA/SIPC