4 Essential Elements for a Successful and Flexible Savings Plan

Get ready to supercharge your long-term wealth planning! While investing is a key player in boosting your assets, don't forget the powerhouse of wealth-building: maximizing your savings and mastering your spending!

When you consider the various elements that can influence your long-term success, spending is the one factor you can truly command. Being savvy about your spending habits, understanding your expenses, and timing them just right are absolutely essential.

The more you save, the more you can invest and harness the magic of compounding growth over time. By cutting down on spending—whether it's on essentials, discretionary buys, or taxes—you can save more and channel those funds toward your future dreams.

As you craft your wealth plan, aim to create a strategy that protects and grows your principal, empowering you to invest more and keep it working for you. All this, without limiting your ability to seize amazing opportunities when they come your way. Here are 4 dynamic steps to build a flexible savings and spending strategy that can help you live the life you've always dreamed of!

1. Distinguish between your short-term and long-term savings goals

Let's get started! Ask yourself: What am I saving for? Clearly define your savings goals and categorize them into two exciting buckets: Short-term goals, which you aim to achieve in the next 2 to 5 years, and thrilling long-term goals, such as retirement, college savings, or intergenerational wealth transfer. These long-term goals may require a bigger asset commitment but offer a longer time horizon.

By engaging in this exercise, you can better evaluate and prioritize your goals and balance them against your current, day-to-day expenses. Once you've identified your top-priority goals, you can start crafting a savings plan that perfectly aligns with your dreams.

The types of accounts you open, the amount of assets you deposit, and the investments you choose will depend on your ultimate goal. For shorter-term goals, focus on accessibility and stability, ensuring the funds are ready when you need them. For ambitious, long-term goals, embrace the thrill of taking on more risk and explore tax-advantaged accounts with specific guidelines for withdrawals.

2. Maximize and optimize your savings

Let's cover the essentials first!

Start by building a robust emergency fund to cover 3 to 6 months of expenses. This fund acts as your safety net, allowing you to handle unexpected expenses or income interruptions without touching your investments.

If you have a workplace savings plan like a 401(k), make sure you contribute enough to receive the full employer match, if available.

Next, aim to max out contributions to your tax-advantaged accounts. Maximize your savings by contributing as much as possible to workplace savings accounts like 401(k)s or 403(b)s, traditional IRAs, and, if eligible, a health savings account. The benefits of these accounts are substantial and can set you up for long-term success in reaching retirement and legacy goals.

Additionally, consider converting your traditional IRA or employer-sponsored plan to a Roth IRA when suitable. The tax-free withdrawals and absence of required minimum distributions from a Roth IRA can supercharge your savings, provided you're comfortable with the taxes at conversion.

If college savings is a top priority for your family, explore funding a 529 plan. This can be a powerful strategy, especially if you can "superfund" the plan by contributing up to 5 years' worth of contributions in one go.

If you've achieved all of the above and still have assets to allocate, don't let them sit idle in cash where inflation can erode their value. Instead, consider investing in a brokerage account aligned with your long-term investment strategy.

3. Look for ways to reduce expenses and mitigate taxes

With your savings maximized and optimized, it's time to focus on spending! You don't need to make drastic cuts to see a difference; even small reductions can have a big impact over time.

One area to trim is taxes, which can significantly affect your savings and asset growth. A study by Morningstar showed that taxes might reduce portfolio returns by 2% annually for investors who don't consider them in their decisions.

Incorporating tax-smart strategies into your financial plan can accelerate wealth-building. Reducing taxable income, maximizing deductions, and considering taxes in investment decisions can help lower your tax bill and give your money more growth potential.

Charitable giving is another powerful way to reduce taxes. Donating assets instead of selling them and donating the after-tax proceeds can maximize your gift and increase your charitable deduction. Donating stock directly to charity can eliminate capital gains tax and be tax-deductible at the current market value. Long-term appreciated stock is often the best to donate for maximum tax benefits.

4. Borrow strategically to protect your principal

Sometimes, opportunities arise that you can't pass up, or you face significant expenses that seem to require dipping into savings. Don't fret! By borrowing strategically, you can handle these situations without compromising your goals. For instance, you could:

• Take out a mortgage. Buying a home without a mortgage ties up cash in an illiquid asset, whereas a mortgage leaves you with more cash for short-term needs and investments.

• Borrow against assets instead of liquidating them. If you need liquidity, borrowing against your home or securities can be an alternative to selling. Options include a home equity line of credit, securities-backed line of credit, or margin loan, each with unique benefits.

• Utilize intrafamily loans. An intrafamily loan can help loved ones buy real estate, invest in a business, or pay off high-interest debt. Private loans can be tailored to the borrower's needs and offer estate planning options. Consult an attorney for setting up a legitimate intrafamily loan.

Building wealth for the long haul

With an effective strategy for saving, spending, and borrowing, you can build wealth that lasts generations. As you pursue your short- and long-term goals, remember to develop a comprehensive wealth-transfer strategy through thoughtful estate planning, benefiting your children and grandchildren for years to come.