Last month we took an in-depth look at how educating yourself financially can pay off in the long run. More specifically, the case was made that without each of us acquiring the proper financial education our families, communities, and businesses may never realize their fullest potential. This month we’ll go a step further and dig into some additional areas of finance that are not so easy to understand but extremely important in building generational wealth nonetheless. Listed below are several financial concepts that piggyback off of last month’s article and must be better understood in order to secure a strong financial future.
Learning How To Invest
One of the most effective ways to learn the basics of investing is through an employer-sponsored 401k plan, or the non-profit equivalent 403b plan. These types of investment vehicles traditionally offer numerous advantages including a sizable tax-shelter and a potential company match on the percentage of funds you’ve chosen to invest. However, it’s important not to ignore the fact that such employer plans can also come with many disadvantages as well. For example, you’ll most likely be limited to a few investment choices with high maintenance fees, and potential penalties on any funds that are withdrawn early (or borrowed). The good news is that there are always other effective methods to generate a return on investment aside from just using an employer-sponsored plan. Among the many other investment strategies at your disposal are investing in real estate, life insurance contracts, and buying individual shares of the stock market.
Using The Right Tax Strategies
Tax planning is yet another financial concept that’s extremely complicated for most people to understand yet critical to generational wealth. There are an estimated 73,000 pages that make up the U.S. federal tax code, which means that no one person or source is likely to have 100% knowledge on taxes. Yet and still, it’s in your best interest to seek professional guidance from a trusted CPA (or Enrolled Agent) if your plan is to build some level of taxable wealth. Just last year the IRS initiated what was considered to be the largest series of tax changes in decades. And while it’s debatable who exactly is benefiting from this overhaul, one thing is already for certain. Our tax laws are generally set up to favor business owners, entrepreneurs, and investors over those who do not meet this criteria. This means that if you’re simply going to work everyday for a steady paycheck from an employer, you’re likely going to end up in a more disadvantaged tax position. Said differently, you will have far less tax breaks available to you if you haven’t taken the risk of building your own business or investing in appreciating assets.
Carefully Planning Out Your Estate
One final area that’s important for all of us to become financially educated on is estate planning. Many people hear the term “estate” and minimize it down to having an existing life insurance policy in place. However, while the importance of life insurance certainly can’t be overlooked, there must be a more comprehensive approach to planning out the transfer of your assets in the event of death. The key is to first make sure you establish a written will for yourself as well as create any necessary trusts to go along with it. According to statistics published by Legalzoom.com roughly 55% of all Americans, (and 68% of black americans), have no will or estate plan in place. This means that in far too many cases it’s been left up to the courts to decide what takes place with an individual’s net worth in these circumstances. The best way to get started on your own individual estate plan is to consult with an attorney who can give you sound advice in this area.
The conventional mindset to wealth-building has long been to pay someone else who’s more qualified than yourself to handle money. However, learning the proper investment tools, tax strategies, and estate planning techniques should never become 100% someone else’s responsibility. Because the truth is that no one is going to care as much about your financial well-being as you do, despite how much they’re being paid. And it’s for this reason we should all become as financially empowered as possible for the sake of ourselves, our families and our communities.