5 Ways I Handle My Finances

I give financial advice for a living as a financial advisor (and through this blog and my book), so people ask me how I handle my finances. Here are five timely financial tips:

1. My mortgage: We refinanced to a 2.75% 10-year adjustable rate mortgage. Ten years from now my kids will be 29, 25, and 21 and we better not have all three of them still at home. My wife and I will downsize and this minimizes our payments until then. I don’t make extra mortgage payments. I’ll do better investing in stocks and bonds with that cash.

2. Life insurance: I’m serious about having enough life insurance for my family. We’ve maintained extensive coverage since our first kid was born. We mostly use term because it’s much cheaper than permanent insurance, and our need for life insurance should diminish as we age. However, we do each have $100,000 in permanent insurance coverage to pay for a burial and nice party I guess. The IRR on the policies is decent, although lower than we would get investing in stocks. The premiums are small, so it’s a tiny conservative piece of our portfolio. We plan on paying the premiums so the death benefit keeps pace with inflation.

3. Traditional or Roth 401(k): The next two of these five timely financial tips deal with retirement accounts. I contribute to a Traditional 401(k), not a Roth. The Traditional gives you a tax break now, grows tax-deferred, and when you make withdrawals in retirement those withdrawals are taxed as income. The Roth does not give you a current tax break. It grows tax-free and future withdrawals are also tax-free. The Roth is very attractive. I just think we’re in a higher tax bracket now than we will be in retirement. I can’t say for sure, but I am opting for the tax break now.

4. Back-door Roth IRA: We contribute annually to a Roth IRA through the two-step process known as a back-door Roth IRA. If you make too much to contribute to a Roth IRA directly, you can make a non-deductible IRA contribution and convert it to a Roth IRA so long as you do not have any other IRA dollars. We do this to build up that attractive tax-free bucket.

5. Investment timing: I don’t market time. It’s a futile endeavor. And unnecessary anyway (check out Protecting Your Portfolio from a Bear Market). Cash should be put to work according to its intended purpose, meaning that money you don’t need for a long time should be invested aggressively, money you need in the next couple of years should be in cash, and anything in the middle should be a mix of the two.

Suggested Further Reading

Looking to go beyond these five timely financial tips? This Wealth Management Checklist can help.