Like Super Gymnast Flexible | Series 1.2 - Enjoy More 30s: Family Finance

Episode 2

Like Super Gymnast Flexible | Series 1.2

Published on: 1st February, 2021

Create a Flexible Financial Situation for Your Changing Life

Quote for the episode: "Being flexible when it comes to personal finance with a young family, a lot of the time, comes down to where you are saving your money."

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC. TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcript
Voiceover Audio:

Welcome to the Enjoy More 30s: Family Finance

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podcast, the only podcast dedicated to making life more

Voiceover Audio:

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

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

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.

Voiceover Audio:

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

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About the Podcast

Enjoy More 30s: Family Finance
Family Finance for Young Professionals.
Young families receive little to no personal finance help. We all grow up to have jobs and money, yet our education system focuses on Shakespeare and Algebra. Even professional advice can be hard to come by, with the majority of the industry chasing retirees and existing wealth.

Joe Okaly's podcast is aiming to change this, providing personal financial advice geared specifically to professionals with young families. This podcast is dedicated to making life more enjoyable for young families, by hitting on the financial topics that tend to weigh on us, stress us out, and distract our focus from simply enjoying life.

Joseph P Okaly is a CFP Certified Financial Advisor who fits directly in with who this podcast is focused on - a young professional with a family. With over a decade of experience as an advisor, there is passion and knowledge to make a difference.

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC. TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.