The Hierarchy Of Income Planning
April 1, 2020 by Gregory Fortier, CFA
Quickly google “creating wealth” and you are bombarded by search results of get rich quick schemes, stories about self-made millionaires, and the expected self-help books for sale. The reality for most of us is that creating wealth will be more a story of simply gaining the correct knowledge and taking time to plan rather than founding the next tech company to IPO, skipping the daily latte, or going all in on bitcoin. If you’re going to win, like in any game, you must first know all the rules.
Rule #1: Prioritize
Another realization is that building wealth is not the sole goal unto itself. There are many goals, even competing goals, on your hierarchy. No matter your income level, there is only a finite amount of dollars to allocate. For many, budgets are torn between normal living expenses, contributing to retirement, paying off mortgages and student loans, saving for your children’s education, saving for a first or second home, charitable contributions and building or maintaining an emergency fund. Start by prioritizing your savings and debt buckets. I am shocked to commonly see folks make accelerated mortgage or student loan payments instead of contributing to their 401k account that offers a match. The match is free money! That is a 100% return, doubling your investment. The next layer of priorities is more unique to the individual’s situation and prioritizing tax advantaged accounts.
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