In their day, castles provided shelter, safety, and security for those living inside. Families had the opportunity to grow and prosper because of the protections that castles afforded. Today, you can have your own castle without time-traveling to earlier centuries or being a member of royalty. Rather, you can build a financial castle to safeguard and cultivate your financial investments. Here’s how to do it.
Understanding the Types of Money
Think of concentric circles originating in the middle of the castle and branching outward. Within the first circle sits the types of money that comprise of your financial castle: needs-based money, wants-based money, and legacy money. Let’s take a closer look at each kind.Needs-based money is typically for families who are just getting started with financial planning and are addressing cost-of-living expenses like bills, debts, and mortgage, as well as saving money for a first home.
Wants-based money is for families with expendable income to pay for things such as a larger house, a second home, a new car, or luxury vacation.Legacy money is invested for the next generation. It’s meant to outlive you rather than you outliving it. The goal is for families to reach a point there they have more than enough money to live comfortably for the rest of their lives and to pass it on.
Inner Moat of Protection
Imagine a moat surrounding your castle. In order to financially plan, you need to protect yourself by mitigating risk. The most strategic way to do this--you guessed it--is through insurance, and specifically:
Long-Term Care Insurance
The whole purpose of this moat is to bullet-proof (or arrow-proof) your castle of wealth.
Outer Moat of Protection
As the concentric circles expand, we arrive at the outer moat of protection, which includes the will and trust. Often these are thought of interchangeably because they are the pillars of estate planning, but there are important distinctions:
A will is a legal document that details your wishes as it relates to the distribution of your property and the care of any minor children.
A trust is a legal arrangement where one person or entity, known as a trustee, holds legal title to property for another person, known as a beneficiary.
A will is active only after you die.
A trust is operative as soon as you create it.
A will indicates who will receive your property when you die, and it designates a legal representative to execute your wishes.
A trust, on the other hand, can be used to begin distributing property before death, at death, or afterward.
A Large BubbleWe’ve arrived at the outermost circle, which we’ll call the large bubble that encompasses your financial castle. The bubble represents tax planning and preparation, an essential part of a financial plan. Tax planning is an analysis of finances to achieve maximum tax-efficiency and covers the timing of income, size, timing of purchases, and planning for future expenses. There are numerous tax-planning strategies, including saving for retirement, taking advantage of tax credits, and avoiding additional taxes, among others. Be the King of Your Financial Castle
There are many components to building your financial castle, and as we’ve detailed, the whole is greater than the sum of its parts. When you bring all of that together, that’s what comprehensive financial planning is all about.