Like Super Gymnast Flexible | Series 1.2

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Welcome to the Enjoy More 30s: Family Finance

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podcast, the only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out and distract our focus

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from simply enjoying life.

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Hello, and welcome to the Enjoy More 30s: Family

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Finance podcast. Today, the episode is the second in the

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series of "Your Money Mindset", and it's called "Like Super

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Gymnast Flexible". So in this episode, we're going to cover

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what you need to know when it comes to flexibility in regards

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to personal finance as a young family, and then what you can do

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to actually achieve it. So when I met my wife Lauren, we met

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freshman year of school on the first day- we actually lived

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right next door to each other at TCNJ. And what I found out about

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Lauren is that she watched a lot of sports that I did not. She

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was into what I would refer to, which is not the official title

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at all, but what I would call kind of artistic sports. She

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watched gymnastics, cheerleading, ice skating,

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things of that nature. And what I found out about those sports

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was that the way that they judge them, they have a very kind of

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unique way about it. There are some categories that have become

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more determined over time, but a lot of the scoring, or I should

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say some of the scoring, has to eventually wind up in the

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opinion of somebody.

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So if you've ever watched the Olympics before, with these

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kinds of sports, you'll see a lot of countries have slightly

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different averages, and then slightly different numbers for

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the routine. Then they average them together and get rid of the

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low and the high, and this is how they get out to their score.

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I had always kind of grown up watching sports like hockey,

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soccer and football where basically if you put the puck in

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the goal, or the ball in the goal, more times than the other

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team, you have more points at the end of the day, then you win

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the game. If I watched the Olympics, it was hockey, soccer

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or track, you know, you cross the finish line first and you

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win. And so by watching with Lauren, over time, I gained much

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more of an appreciation for these sports that I wasn't

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really interested in when I was younger. And more than anything,

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though, I was really interested in the athletes themselves.

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Gymnastics in particular, I had never really noticed how crazy

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in shape these people are. I mean, they're waking up at 5am

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every day, since they're a teenager, probably younger than

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that, training for these Olympic events. And their bodies are

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proof that they do that. So you look at these guys, and they're

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as big as a football player, but they can also do a split and a

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flip, they can hold themselves up in the air in a ring, they

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can balance- they can do all this really amazing stuff in the

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air and with their body because they don't just have strength,

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they also have all this flexibility that goes around

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with it. So strength is great, but strength and flexibility

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means you can do pretty much anything.

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So what you need to know- personal finance for your family

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is actually much the same way, especially for a young family.

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You have 30 years of changing thoughts, desires, incomes,

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goals and everything else. Being able to adapt is really

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important when it comes to a young family. It's not going to

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be a straight line for any of us. We may think we know what we

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want to do or what our kids are going to do, and then over time

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that changes and we need to adapt to that. So we need to

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have a situation that is flexible enough in certain ways

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to allow us to adjust when things come our way. Being

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flexible when it comes to personal finance with a young

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family, a lot of the time comes down to where you are saving

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your money.

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Now the two primary places people start saving money into

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tend to be their 401(k)s and their 529 plans for their kids.

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A 401(k) is retirement based, 529 plan is education based. Now

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each of these certainly has merit, and likely should have

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some portion of your savings going into them, however both

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have significant restrictions that you should be aware of, and

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know about when you're putting your money into it. So it's not

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that you shouldn't have these types of accounts. Many times

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you should, it's just knowing the restrictions that go along

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with them because if you know what the restrictions are, and

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maybe what the deficiencies are, now you know some other things

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that maybe you need to go into a different direction to help

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still maintain that flexibility in.

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401(k) accounts, overall, can be great for saving towards

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retirement. When we meet with young clients, we almost always

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recommend contributing up to any employer match amount. Free

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money is better than any kind of money out there. The restriction

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though on it, for the account as a whole, is pretty significant.

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There's a 10% penalty, and you also have to pay tax on it

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regardless of when you take it out. So if you take it out

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early, there's this 10% penalty, and then if you add on your tax

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rate, you could be paying 35%-45% on any distribution if

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you're taking it out early. Now, early means younger than 59 and

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a half, based on today's rules. And so that's a big

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discouragement for trying to take money out of an account

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like this. Now, there are certain hardship withdrawals,

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and some plans have 401(k) loans, but it's built to be

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generally inflexible. The point of this account is to have money

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for retirement. So they, of course, are trying to make rules

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that discourage you to take the money out. Whenever you're

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dealing with any kind of an account, if you stop and think

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about why this account was created, the government created

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the 401(k) type of an account to incentivize you to save more

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money towards retirement. They don't want to be responsible for

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your entire retirement, which makes sense, and so they provide

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an incentive for you to have an ability to put money into

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something, and encourage you to have a large chunk of that as

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much as possible that is saved on your own.

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529 plans are in a very similar boat. They have that same 10%

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penalty, and tax will also be due on the gains if it's not

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used for higher education. So if you put money into a 529 plan,

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and it grows, and then you use that money for college, there is

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no tax that you have to pay. But if something changes, and now

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they're not going to college, if you want to take that money out

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and give it to them, now you're dealing with a situation where

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there's a 10% penalty and taxes on those gains. This, overall,

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means that neither is a great flexible source for changing

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life and goals- a new addition, a roof replacement, losing your

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job, a vacation home, a wedding fund, retiring early- kind of

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anything and everything else. Those two types of accounts that

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most people use, and you probably should have some degree

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of, are not doing a great job of handling those variable kinds of

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situations that most people encounter at some point.

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So what can you do? What we often recommend is for young

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families not to put all their savings into inflexible

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retirement and education type accounts solely, but rather also

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utilize and build up an invested taxable account. Now, you may be

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asking what that means exactly. The easiest way to do this is if

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you start off by thinking about your bank account first. It

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doesn't really grow at all, but you can get to the money

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whenever you want. Now think of your retirement accounts. They

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likely grow more because they are invested, or I hope they're

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invested, but you can't really touch the funds if you need them

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because of the penalties involved.

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A taxable account sits in the middle of these two. So if you

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picture the bank account all the way on the left, and the 401(k)

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all the way on the right, the taxable account is sitting in

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the middle of these two buckets that you're picturing in your

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head right now. It has the ability to be accessible, like a

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bank account, but also the ability to use investments like

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a retirement type of account. So at the end of the day, it's a

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flexible, accessible account with potential to grow over

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time. Now this next part is extremely important. From my

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description, right there might have sounded like, "Oh, this is

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great. If I have some extra money that's not in my

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retirement account, not in my education account, it's an

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excess above what I need in the bank, then I'll just throw it

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into one of these accounts." That's not how you should be

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approaching it- you need to take another step first.

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This account still needs to be attached to a goal, and have an

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expected time horizon of at least say five years. If you're

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ever using investments, and this is going to be covered more in

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future episodes, you need to expect to not touch it for at

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least say five years, as there always can be short term ups and

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downs. So for example, as in a scenario, let's say that you

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have money, that you have extra in your bank account right now,

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and in a year or so you're planning on putting in a pool.

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In your mind, you're going, "Oh, I can invest that until then."

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No, you know, wrong answer- you should hear all those warning

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bells going off in your head. Another scenario, "I'm getting

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married in two years. Let me invest the money. Why have it

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sit in the bank account?" Wrong again. Two years, one year,

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these time periods are too short, and depending on how

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you're investing it, there's almost certainly too much risk

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of having a down when you may need the money. We need to

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really pay attention to those time horizons to allow us the

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opportunity to recover from any temporary downs and not be, you

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know, left with less than we may have started with. Your

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mentality really should be more of, "I don't plan on touching it

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anytime soon, however, I know if I need to- college expenses,

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home renovation, future child's wedding, lose my job, want to

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retire early- I have something significant I can go to which is

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flexible for wherever life takes me." As young families, we have

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20 to 30 years of life to go before retirement. You should

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expect plenty of changes between now and then, and as a result,

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our finances need to be flexible to support this.

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In recap, or summary of some of the main points, flexibility is

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important. Hopefully, after this conversation we've had today,

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you realize, "I should have some degree of flexibility in my

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situation, and expect to need to use it at some point in time

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over the next 20 to 30 years." The second part is to recognize

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that the accounts that most people use are your bank

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accounts, your 401(k) and your 529 plans, at least from what we

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see, when people walk in our door. When a young family walks

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in our door, those are the three types of accounts they're most

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likely to have. And each one of those has a different advantage

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and a different drawback. So bank accounts- they're great for

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accessing whenever you want, however, they're not going to

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really grow that much over the long term. The second type of

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account, a 401(k), is great for saving for retirement, but they

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are built by the government to incentivize you to save towards

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retirement. They are not built for having flexibility over the

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next 20 to 30 years before you hit age 59 and a half. The third

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type of account, 529 plan, is built for education. So they

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also have that same 10% penalty just like the 401(k) does,

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because they want you to use that money for college. If the

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kid winds up not going to college, or they wind up getting

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a full ride, there are some rules where you can transfer it

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to another kid. But overall, it's not built to be flexible to

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be used for other purposes other than education.

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Thanks very much for tuning in today. If you enjoyed this

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episode, please make sure to review us on Apple podcasts or

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wherever you listen. There are literally millions of young

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American families out there I'm trying to reach and help just

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like you. Our next title coming up is, "Survivors Don't Complain

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About Too Much Life Insurance". We're going to cover how a lot

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of the families that are young tend to be underinsured from

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what we've seen, why this is and how you can protect yourself

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against it. Thanks again for tuning in today and I'll talk to

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you soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal tax or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS securities Inc and TFS advisory services an SEC

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registered investment advisor member FINRA/SIPC