Five Accounts You Need For Financial Freedom
Five Accounts You Need For Financial Freedom
When it comes to the FIRE movement, having financial reserves and investing in your future is important. In a society that encourages you to go into debt from buying more and then penalizing you for being in debt is pretty backwards. Some people have become so tolerable of debt as if it’s normal. Below I’ve comprised a list of five accounts you should have in order to maximize and/or protect your assets in preparation for financial freedom and retirement.
Online High Yield Savings Account (HYSA)
A high yield savings account is exactly that, a savings account that yields a higher interest rate or APY than the national average which is a benefit that is offers over a traditional savings account. Because most high yield savings accounts are online instead of brick and mortar banks, this reduces costs that are often paid in fees (from the consumer). There are different companies that offer competitive interest rates such as Ally Bank, Discover Bank, and American Express. There are no monthly maintenance fees, no minimum balance requirements, and funds are FDIC insured. This makes is a great place to keep short-term savings or an emergency fund because it offers you the most liquidity.
Employer Matched 401(k)
A 401(k) is an employer sponsored retirement account that allows you to contribute a percentage of your paycheck and invest it. These funds are not taxed until they are withdrawn after 59 1/2. The financial institution used will vary from employer to employer and not all companies will match but if they do it is an added bonus.
Roth IRA
An IRA an individual retirement account that allows you to save for retirement. A Roth IRA is already taxed whereas a traditional IRA is taxed when it is withdrawn. Ultimately, what you choose will be dependent on whether you think your annual income and tax bracket will be lower or higher during retirement. However, with a Roth IRA you can withdraw the principle whenever you want without penalty whereas a traditional IRA is more restrictive because is will be included in your taxed income and subject to an additional 10% if you take a withdrawal before 59 1/2. More information about IRA withdrawals can be found here.
Health Savings Account (HSA)
A health savings account is a tax advantaged account used for qualified medical, dental, and vision expenses. Money funded into an HSA is not taxed and is available to those enrolled in a high-deductible health plan. Although an HSA is used primarily for health expenses prior to retirement, after retirement this money can be used on things outside of medical expenses which makes it a great retirement account and a perk that many do not know about. Some employers also contribute to health savings accounts. HSA funds can also be invested. Interest gained from HSA investments are not taxed. More information can be found here.
Brokerage Account
A brokerage account is an investment account funded with taxed money used to invest in stocks, mutual funds, etc. You as the investor utilize a financial institution of your choice to buy and sell securities. This can be viewed an extension of your retirement accounts. You can use these funds whenever and however you want.
If guidance is needed about how to allocate money a financial advisor may be a good option for you. Investing in your future is important for both your own comfortable retirement and any generational wealth passed down to your descendants. As with most retirement accounts, it is important to remember the maximum annual contribution for each tax year so that you do not face a penalty. Make sure you have a diversified portfolio which can balance any risk since nothing in the market is guaranteed. Overall, if you’re contributing to saving for your financial freedom you’re already ahead of the game!