Building Your Financial House - The Blueprint

Building Your Financial House - The Blueprint

Just as the building of any house begins on the drawing board, so does the planning of your Financial House. An Architect draws up blueprints that show the proposed physical house in extreme detail; you are the architect who will draw blueprint of your Financial House in extreme detail. This is the exciting, but often frustrating, stage of building a structure as a lot of what you’ll be able to build depends on your education.

An Architect spends years learning about structure, materials, stress lines, traffic flow, living patterns and so on. As you are building your Foundation, you also need to be learning about the elements that you will use to build with. As this education includes practicing on paper, the time you will take to complete your Foundation will be put to good use.

On a blueprint, each room is labeled clearly with the doors, windows, fireplaces, etc... all identified as well. The architect, builder and owner know at a glance, how many windows will be in the Dining Room and how many Bathrooms there will be. Unfortunately, many people fail to plan this well with their Financial Houses. Money is gathered together in a large lump or two and there is no clear ideas as to what that money is for. There is a lot of talk about Investment Strategy and Investment Vehicles and this creates a lot of confusion.

Recently, there was a question on Yahoo!Answers where the poster asked:

“Should I put my money in Mutual Funds or in an IRA?”

This is almost impossible to answer as there is no clue as to the purpose of the saved money. Is it Retirement money? Is the poster looking for an Income Stream from this money? Is the poster saving for a child’s education? A new home? Is this the Emergency Fund Money? People know that they need to ‘invest’ but they have little to no background or education in regards to how to invest purposefully. Too many times, people jump into a Strategy or Vehicle and lose their Investment Seed money.

Vehicles? Strategies? Investing Purposefully? Yes.

There are Investment Vehicles and Investment Strategies and a lot is written about both, but the differences are not often clear. The simplest way to understand is as follows: An Investment Strategy is the method you will use to increase your Investment Seed money and the Investment Vehicle is the entity that you put that Investment Seed money in. Still sort of confusing as this is abstract, but it gets a little clearer when we use concrete examples. An IRA (Individual Retirement Account) is a Strategy you use to grow your 10% Savings (Investment Seed money) by buying into Mutual Funds (Investment Vehicle) with the Purpose of having more money for your Retirement.

Back to your blueprint. Just like a house has floors, so does your Financial House. The Foundation is your Basement - it will keep you safe and secure. You put in the Basement things you will use seasonally (snow shovels, leaf blowers, tire chains, gardening equipment, etc..). In your Foundation, you are putting Your Emergency Fund money, restoring your Credit by Paying Down Debt and Saving 10% of all Your Income. Investment Strategies for the Foundation included, but are not limited to, Tax Strategies, 529 plans, Archer or Health Savings plans, Estate Issues and Insurance. Investment Vehicles for the Foundation include, but again are not limited to, CDs (Certificate of Deposit), Savings Accounts, Money Market Accounts, Car Insurance, Home Insurance, Health Insurance and Wills. Their Purpose is all to keep you safe.

From the bottom to the top - every house has some kind of Attic, at least a space between the ceiling and the eaves where you can store things that you hardly, if ever , use. Sometimes the things we store in Attics become amazingly valuable, hence the existence of the TV Show ‘Antiques Road Show’. Those old chairs that Great Aunt Nellie had when she died, were stuffed up in the Attic for 80 years and are actually a set Chippendale Dining Chairs worth $12,000.00 each. This is the Purpose for Retirement Savings and we all hope that they become extremely valuable. There is Risk, however, and putting one item in the Attic will not serve you well. This means that just because you have a 401k plan at work does not mean that you are covered for your Retirement needs. The Attic of your Financial House should hold several Strategies - IRAs (Individual Retirement Account), Roth IRAs (a different tax treatment of Individual Retirement Accounts), 401ks (workplace related retirement savings with employer matching contributions), Pensions, Living Trusts, Annuities and Life Insurance are a few examples. Investment Vehicles in the Attic are Stocks, Bonds, Mutual Funds, Precious Metals, Real Estate and Businesses.

In between the Attic and the Basement is where you live every day. The 1st or Ground Floor is the Comfortable living, something most of us will achieve with some effort and attention. A few of us will have a 2nd Floor, which is Enviable or Luxury living. This is where all the extras that are just for fun are. Investment Strategies on the 1st Floor are much the same as for the Basement, but to a slightly more advanced degree of difficulty and with larger amounts. In a like manner, the Strategies for the 2nd Floor are more advanced than the 1st Floor, but also include items like IPOs (Initial Public Offerings), Corporate Ownership, Board of Director memberships, Passive Income and Options. The Investment Vehicles for the 1st Floor are Stocks, Bonds, T-Bills (Treasury Bills), Life Insurance, Mortgages, Loans, Real Estate and so on. The 2nd Floor uses these Vehicles as well but in different manners; for example, a Strategy on the 1st floor buys Stock and makes money (hopefully) at the sale of the Stock or maybe on Dividend Payments. A Strategy on the 2nd Floor buys Stock and makes money repeatedly on the Stock in addition to any Dividends while holding the Stock without selling the Stock through the use of Options. To be able to make any money at all with Stocks, you need a Financial Education.

Unfortunately, a working Financial Education is not really taught in traditional Schools. An MBA does not prepare you for Investing, nor does an Accounting degree. There are skills that you will learn in both of these fields that you will use in your Investment Education, but you can learn these skills without taking college courses towards formal degrees. Most of the materials you will need to begin your Financial Education can be found at the bookstore or the library.

What you will learn is how to plan Investment Strategies that use Investment Vehicles to maximize the Earning Potential of your Investment Seed money to achieve your Financial Goals. This is again a nebulous concept so here is an example:
The Financial Goal (for this example) is to have non-taxed, Retirement income of $1,000.00 a month. (Purpose).

This Income will come from a Roth IRA, as ALL funds withdrawn from a Roth Ira after the required minimum age are tax free (Strategy).

This Income will be from Dividends paid monthly, quarterly or annually by Stocks held within the Roth IRA (Vehicles).

The Investment Seed money will be invested today in Stocks that pay Dividends; all Dividends paid between now and when required minimum age is meet will be reinvested into Dividend paying Stocks. This means that the initial investment amount is smaller than the amount that is needed at retirement, as it will grow during the intervening years.

This may not mean a whole lot right now, but as you study and learn, you’ll begin to understand the potential of your money in hand today as compared to the money you could have in the future.

It all begins with a plan.