Wealth building is a marathon and not a sprint. Here’s the thing about building wealth, it doesn’t happen on accident. You have to be intentional about opening and funding the right types of accounts to build wealth.
I want to equip you with ALL the tools and knowledge that you need to go about the business of creating a life of financial freedom so that you can, without hesitation or reservation, make the decision to do what is best for you and your family in the future!
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Money Mindset Blocks
When we start to unpack wealth there can be a lot of mindset blocks, limiting beliefs and negativity that crops up in your mind. You know, that nagging mean girl in the back of your head telling you that all those who are wealthy in this world were born with money, had some sort of crazy fluke of luck that would never happen to you or maybe that they are crooked, dishonest thieves who live in a place of greed wanting more, more, and more.
If you have those limiting beliefs and mindset blocks around money and creating wealth in your life, these accounts honestly won’t help you that much. I’m sharing the different types of accounts that you need to have open, to understand, and to be consistently funding so that you can invest wisely for the future and take advantage of the magic of compound interest to get your money to grow for you.
First things first, addressing those mindset blocks and limiting beliefs, unpacking the reasons that you think those things and addressing them are a key part of this equation. These 5 accounts that you need to build wealth will not help if you don’t unpack those mindset blocks!
5 Types of Accounts to Build Wealth
01. 401k or 403b at Work
401k and 403b accounts serve to protect your wealth from taxes! Think of them as a suit of armor that keeps it safe from the financial dragon (taxes). Money invested into your at work 401k isn’t taxed, which reduces your taxable income and can decrease your tax bracket. boogie man (taxes).
Extra, extra read all about it… let’s talk about making absolutely sure you are putting enough into your 401k to get the employer match. Think about it – for every dollar you put in, your employer is matching that dollar up to a certain percentage of your income. That means that, immediately you are getting double your investment. That’s 100% returns RIGHT out of the gate. That’s FREE money and a huge benefit so be sure that you take advantage of it.
If nothing else, make sure you are contributing up to the match at work, even if you are working on other money goals like debt reduction and short term savings.
02. IRA (Individual Retirement Account)
IRA stands for Individual Retirement Account – which essentially means that it isn’t provided by work or your employer. You don’t need an employer fostered plan to be contributing to an IRA.
The difference between a Traditional or Regular IRA and a Roth IRA comes down to taxes.
Traditional IRAs your contributions and earnings on the account are tax-deferred… which sounds tempting but what it really means is that you aren’t paying taxes on that money… YET. You will pay taxes on that money when you withdraw it from the account, something called distributions.
Roth IRAs are taxed on contribution, which means you pay taxes on the money that you put in now and then the money grows “tax free”.
Contributing to a Roth IRA has a set income limit and if you are above that income limit you can’t directly contribute to a Roth IRA. What you can do, however, is open a traditional IRA and roll that money into a Roth to the tune of 6,000 a year – this is commonly called a backdoor Roth and is a great way to get a little extra boost to your retirement outside of your employer provided plan.
I want to take a minute to unpack the tax implications of putting money into a Roth vs. Traditional IRA. It might sound like a pain to do the steps to take advantage of the backdoor Roth, but here’s why it matters. Once you’ve paid the taxes on the dollars you’ve contributed to the Roth IRA, you don’t have to pay taxes on the growth OR when you pull the money out in the form of distribution.
03. HSA (Health Savings Account)
A HSA is an account that is designated for health-related expenses. The perk? Contributions, earnings and distributions in your HSA are not taxed. Yep, you heard that right, all things HSA are tax free.
You can set up an automatic contribution to your HSA by having it auto-drafted from each paycheck.
If you don’t use your HSA funds you can roll them over one year to the next and the best part is that they aren’t only for emergencies – you can use these accounts for medical, mental and dental care that is routine as well.
At the time of this recording the limits for HSA contribution are 3,650 per individual and 7,300 for families.
HSAs work in tandem with higher deductible health plans and can be through your employer or you can open an HSA on your own.
You can actually use an HSA as an investment vehicle. So if you have enough money in your budget to cover those medical, health, mental health and dental needs that arise – you can continue to fund your HSA year after year, invest the money and it’s going to roll over and grow and grow.
04. High Yield Savings Account
What’s the difference between a High Yield Savings account and a regular old savings account?
Currently the interest rate on a standard savings account is 0.17% APY – apy stands for annual percentage yield – that’s the amount of interest you are earning. Ally is the online bank where Dan and I keep our emergency fund and money we are saving for short-term goals. At the time of this recording the interest rate we are earning is 2.0%.
High Yield vs. Standard Savings Account
Let’s do a little math to see the difference in keeping your Emergency Fund in a high yield savings account vs. a regular savings account.
Let’s say you have a $20,000 Emergency Fund invested at 0.17% in your local bank. You’re earning a grand total of $34 a year in interest.
If you had that same $20,000 Emergency Fund invested in a high yield savings account you’d be earning $400 a year in interest. That’s $366 per year. We personally leave this in our Emergency Fund to earn a bit more the following year, knowing that over time with inflation our monthly expenses may go up.
If you leave that 20k in the HYSA, after 20 years it becomes almost 30,000 whereas the money in the savings account yielding only 0.17% would grow to just under 20,700. Make no mistake – the high yield savings account is NOT a great place for large sums of money you want to leave invested for long periods of time, but it is a wise way to have your savings grow a little bit and still be accessible for when you want to use it.
Outside of the Emergency Fund a High Yield Savings Account is a great place to keep short-term savings. Think of things that you are going to save up and buy, like your next vehicle or couch purchase, that you are going to be ready to access and spend that money in less than 5 years – HYSA is a great place to keep that money.
My favorite High Yield Savings Account is at Ally Bank – you can enroll from your couch and start earning interest on your Emergency Fund.
05. Emergency Fund
Here’s the thing about the Emergency Fund, or as I like to call it an OMG fund – it’s not designed to make you a ton of money – it’s designed to keep your other investments safe. The reason to have an emergency fund is so that when something unexpected happens you don’t have to do things like borrow on credit cards or withdraw your 401k and take a big penalty there to cover said emergency.
So YES you should have an emergency fund of 3-6 months of your household expenses. How do you decide if it’s 3 or 6 months? How stable is your income? Do you have two income earners or 2? How high are your expenses? How does the sound of having 3 months of expenses vs. having 6 months of expenses saved make you feel?
Only you can decide which is best for your level of comfort and given the situation with your family. OMG funds are designed to help you sleep at night and offer a layer of protection between you, your investments and anything that might crop up along the way to threaten those investments.
In that way, Emergency Funds are more like insulation and insurance than an investment. We talked earlier about putting that fund in a HYSA but just remember – it’s not there to make you money, it’s there to protect your wealth building investments from you stopping your contributions or pulling that money our prematurely in the event of an emergency.
Wondering how exactly you fund this emergency fund? Here are 8 ways to have more money now and in the future!
Wealthy vs. Rich
Now that we’ve talked all about building wealth and the investment accounts and vehicles that you can use to build wealth, it’s time to take a look at being rich vs. being wealthy. Focusing on the money alone will leave you feeling empty and unfulfilled. What can you do to open and fund these wealth-building accounts AND build a life that is rich in joy, happiness and fulfillment?
My friend Chelsea Brennan of Smart Money Mamas shares about figuring out what you value and living a rich life in accordance with those values in this interview here.
When you look up the definition of rich in the dictionary the first one that pops us is that standard “having a great deal of assets or money: wealth”. The second definition, on the other hand, is plentiful and abundant. I’m here to remind you that you can lead a rich life full of love and joy and time with those who you enjoy most… regardless of how much money you have in the bank. Seeking out the beauty, being conscious about opportunities for gratitude and living in the moment while learning to embrace the journey are keys to that most rich life.
There you have it – 5 accounts to open to build wealth! If you want to dive more into how to budget so that you can fund those accounts, head here.