Automatic Pilot, Part II
by Richard
Our extreme makeover continues.
The ultimate reality show: “The Unconscious Millionaire.” Transitioning from wage slave to millionaire…by diverting your income upstream before you can see it and spend it.
Four Essential Accounts
We introduced in part one the four essential, tax advantaged and asset protected accounts that a family with children should fund. These are…
- Your 401k at work with employer matching funds. (If the boss is stingy, and does not offer a match, you can easily pass on this one and focus on the others. The only feature that make the 401k truly distinctive and valuable is the free money match.)
- You and your spouse’s Roth IRA. If you make too much to qualify, just do the shuffle…open non deductible IRAs, which have no income limitations, and roll them over in 2010, when you have the extra bonus of stretching the tax over the next two years.
- You and your spouse’s Health Savings Account. You may not have the option now, but be patient. This is the future of health care once employers retreat from their costly legacy indemnity plans, while herding their employees into high deductible, consumer driven health plans.
Don’t think it will happen to you?
Remember your old defined benefit pension plan, which is now your defined contribution 401k? If they can pull the rug out from under you once, what’s to stop them from doing it again? - The Coverdell (Education) IRA is available for each of your kids. It’s capped at $2000 per year per child under age 18. Of course it won’t cover all the costs of college. For that, you will need to tap your kid’s part time earning power (they need skin in this game too) and both sets of grandparents. It’s just too much for any one couple to shoulder on their own.
And if you still fall short, let the kids take out loans. Their lifetime earnings boost will make this a positive leveraged investment.
Now Add Home Ownership
Contrary to the accepted wisdom, your home is not the single best investment you will ever make. That hoary myth got started because most families never systematically invested in anything else.
Residential real estate appreciates at or near the rate of inflation. A globally diversified equity portfolio will produce better results.
If someone held a gun to your head and forced you to contribute $1,000 to fund the first four accounts listed, for a period of your most productive thirty years, then you would say equities are the best investment ever.
Your home equity looms large on the horizon because you did not have the option of skipping your monthly payment, and you forgot to tap your equity balance while paying off the loan.
Nothing magical there. It was the systematic debt repayment, combined with steady, non-spectacular appreciation, that did the trick.
I still view home ownership as the big pole in your tent, because it habituates you to the necessary patterns of savings and investment that carry over to the other side pocket funds.
In part III, we’ll kick around some hypothetical results from following this path. I promise this will be an eye-opener.
And in the concluding segment, Part IV, we’ll talk about investing any slack that remains after you have covered the essentials.
