Have you ever questioned what you should be doing with your money? If you are like many other people who are part of our community, you are inundated with suggestions for how you should be investing and managing your money. It can be a bit overwhelming, and to make it worse, you are likely running on information overload, which can ultimately lead to paralysis without understanding your financial life stage.

The reality is that when people feel confused or unsure of what to do, they often do nothing, believing that this is the safest route. You cannot make a wrong decision if you make no decision, right? Unfortunately, it is necessary to sort through all of this information and make decisions that are best suited for what you are trying to accomplish, regardless of how you feel about it. Otherwise ten or twenty years from now, you will be in the same boat that you are in today, wishing you had done something to better your situation.

So what do you do when you have all of this information coming at you? How do you know what to do, and when to do it? The process involves creating mental filters that will help you to process information as it is coming at you. The filters will help you identify the information you need to consider for your situation and provide clarity about what needs to be ignored.

To begin, it is important to understand what phase of life you are in. In other words, what are the things in your life that have influence in how you define your financial priorities?

Contrary to what most people may believe, your phase of life has less to do with your age and more to do with what you have going on in your life. There is common sense needed to help you navigate your chronological needs and should be the compass for identifying what phase of life you are in.

Phase One: Developing a Financial Footing

We all have to start somewhere, and this is where we begin. Developing a financial footing is important for shaping your future. You can think of this as your financial foundation, and how well you structure this determines how secure the rest of your financial planning is.

The focus of this phase is to cover your risk, build savings, and position yourself for the next level.

  • Build short-term savings for emergencies.
  • Save for large purchases.
  • Have adequate insurance coverage.
  • Formulate a spending plan for your income.

So if you are in this initial phase of life, then a good filter to use may be that if it does not have anything to do with covering your risks and building short-term savings, then you should probably avoid it for now.

Keep in mind as I mentioned before, there is common sense involved with all of this.  If you are a high-income earner living below your means then you should be moving along to the next level.  This is all about determining what phase you are in.

Phase Two: Investing in Shelter and Children’s Education

As you enter into a life of responsibilities, you soon experience the pressures of making ends meet as your expenses increase with the rising cost of raising a family and maintaining a home. This is a phase of life that if you are not careful can lead to credit card debt as expenses can exceed income.

The good news is that if you have successfully established the previous phase, you are well-equipped to work through these added pressures and to continue working toward this next level, which is the entry into investing and debt avoidance. In this phase of life, you will want to consider the following:

  1. If you are renting a home consider buying one.
  2. Determine how you want to approach higher education if you have children. If you have children, their college education is a large financial obligation that you know is imminent. The biggest challenge many parents face is whether they should save for their child’s education, or save for their retirement. Often, depending on your financial situation, saving for both can leave you short of both goals. If you find yourself wondering which one to save for, the answer is simple: save for retirement! It is not advisable to put your retirement at risk to cover tuition bills.

As you can see, this phase brings to life the need to think long-term. Your filter for this phase is owning a home, setting a five to ten-year goal for investing, and if desired, saving for a child’s education. Anything outside of this needs to be postponed until you get this phase ironed out.

This may look different if you do not have children or are not married.  Renting can be the best option for some situations which would lead you to the next phase.

Phase Three: Investing in Your Retirement

Now that you have graduated from the basics, you are now ready to move into long-term investments. Keep in mind that this phase has to do with the money you will not use until you are retired from work. And something to keep in mind is that, depending on what type of account you choose for your retirement savings, you will not have easy access to the money you save, which is why the previous phases are critically important.

There is no limit to the possibilities for saving for retirement.  However, the most common are the following:

  1. Your employer’s 401k is an option, assuming that there is a match. If there is not a match, then I would not contribute to this plan.
  2. A Roth IRA may be an option since the money grows tax-free and can be withdrawn tax-free if your income is below the maximum thresholds for eligibility.
  3. If you are not eligible for a Roth IRA or a traditional IRA, and your employer is not offering a Roth 401k, municipal bonds or a properly designed life insurance policy are alternatives for tax-free access to your money.

A note here to help guide you along the way is to always consider how you plan to use the money you are saving.  Some programs are attractive because you receive a current tax deduction.  However, the tax deduction is not as important as the tax liability you will have when withdrawing the money.

Phase Four: Distributing Assets for Retirement Income

If you are approaching retirement or have already retired, how you position your money will determine the longevity of your retirement resources, as well as your quality of life. Saving money is the easy part. Protecting the money and distributing it for income purposes is a bit more complicated.

If you are a risk-taker and feel the markets will continue to climb in perpetuity, then keeping your money in traditional investments is probably OK for you. Just keep in mind that your sense of confidence does not remove the risk associated with investing. There is still the chance of losing money, which could necessarily cause your income to decrease in retirement.

I tend to believe that guarantees when planning for retirement income are a good policy, since the markets are unpredictable, and your income depends on consistency. My focus would be to protect the purpose of the money, and that purpose is clearly income.

The balance of the money, which you may not need for income today, may be needed later to supplement your income due to inflation or added expenses. This money needs to be focused on growth, with an emphasis on preservation.

Your filter here is determined by the use of the money. If the purpose is income now, look to possible investments that offer you the protection you need to guarantee the income you desire. If the money is for use down the road, then look to the option that preserves your principal, while attempting to grow income for later.

You can check out my free book on retirement planning and also take our quiz for preparing for retirement.

Phase Five: Transferring to the Next Generation

Now that you have fulfilled your life goals and are planning to pass what you have onto the next generation, you will want to make the most of what you have worked a lifetime to accumulate. I will jump right into a few of the most important aspects of passing your estate onto your family.

  • The use of a will or a trust is important to communicate to your family members what your wishes are and can help to preserve family unity. It is a good idea to consider a generational strategy, which you can learn more about, in my free book on generational planning.  You can take our quiz on preparing the next generation.
  • If you have money that you are not using, and your health is good, the use of life insurance is a guaranteed way to double or even triple the amount of money you pass along to your heirs, and the death proceeds from a life insurance policy are tax-free.
  • A beneficiary review is a good idea to verify that the account or assets are correctly designated. If you have a trust, make sure the appropriate assets are titled to the trust. This includes titles to homes and bank accounts. An attorney can assist in making sure this is done correctly.

The filter for this phase of life should be focused on how the money will be used, not how the money is being stored. In other words, the question to ask is, “What is the maximum benefit to be received by your heirs?” This may be very different from how you position the money you need or are using to live on.

The biggest challenge for many people is that they are bombarded with advice from talking heads and good intention people.  However, none knows better about your needs and wants than you. The key to maximizing your money is understanding what you are trying to accomplish and identifying how the money will be used.  Tune out the noise and only take advise from sources that have a complete understanding of your situation.

If you have a question let me know.  I receive a lot of money related questions and do my best to answer questions within 24 hours or so.

Good Luck!

A policy change may incur fees and costs, and may also require a medical examination.

The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. Kalos Capital, Inc. does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.