Two of the most important financial steps you can take are building an emergency fund and contributing to a 401(k) plan. A solid emergency fund can help you take care of life’s little unexpected adventures without going into debt. A 401(k) plan helps you build long-term wealth in a tax-efficient manner in addition to garnering “free money” in the form of employer matching contributions.
But if you get the feeling that you need to do more than simply have a savings account and a retirement plan, you’re absolutely right. Once you’ve got these basics in place, it’s time to strengthen your safety net, maximize additional investment opportunities and protect your assets, both for yourself and for your heirs and dependents.
Here are some areas to consider.
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Health Savings Accounts (HSAs)
Health savings accounts aren’t for everyone. But for those who can take advantage, an HSA offers three layers of tax advantages: contributions are tax-deductible, growth in the account is tax-free and qualified distributions used for medical expenses are also tax-free.
One of the caveats is that you can only qualify if you have a high-deductible health insurance plan. Another important consideration is that withdrawals taken for non-medical expenses before age 65 are subject to a 20% penalty, in addition to full taxation. However, starting at age 65, that penalty goes away, although non-qualifying distributions still incur income taxation.
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Roth IRAs
From a strictly tax perspective, a Roth IRA operates in a completely opposite manner than a 401(k). With a 401(k), contributions are made on an after-tax basis and withdrawals are fully taxable. A Roth, on the other hand, doesn’t allow tax-deductible contributions, but all withdrawals, including income and gains generated in the account, come out tax-free. This can be an enormous benefit for retirees, particularly those in a high tax bracket.
Insurance
Once you’ve acquired assets, you need to protect them. Although no one likes paying insurance premiums, they provide peace of mind. When you pay your monthly bill, you’re accepting a small “loss” — the amount of your premium — in exchange for protection against major losses, like your house burning down.
Most people are aware that they should have at least the three basic types of insurance: health, vehicle and homeowners/renters. But depending on your personal financial situation, you might also want to look into disability, umbrella/liability, life and long-term care insurance. Speaking with a financial advisor and/or licensed insurance agent is a way to ensure you have all the coverage you need without overpaying for things you don’t.
Rental Income
Developing passive income streams is an essential part of building and growing long-term wealth. As famed billionaire investor Warren Buffet has often said, “If you don’t find a way to make money while you sleep, you will work until you die.”
Rental income is a classic example of this. While not a completely “hands-off” way to earn income, beyond finding tenants and occasionally making repairs and upgrades, you don’t have to do much work in exchange for that monthly rent check. Real estate can also act as a hedge against inflation. Not only do properties tend to appreciate in value over time, your income from rental payments will also go up.
Personal Investment Accounts
A 401(k) is a great investment account, but it doesn’t offer much by way of flexibility. In addition to your money being tied up until age 59 ½, your investment options are limited to what your employer provides. While a taxable investment account doesn’t have the income tax benefits of a 401(k), it does offer ultimate flexibility, both in terms of investment options and contributions/withdrawals.
Additional High-Yield Savings Accounts
Once you’ve set up your emergency fund, you should establish additional high-yield savings accounts for each of your short- to medium-term goals. For example, if you’re trying to save up for a wedding, a vacation and a down payment for a house, you should set up distinct savings accounts for each goal. This prevents you from co-mingling your funds and lets you see at a glance how much progress you are making toward each specific goal.
Estate Plan
Estate planning is not just for the rich and famous. Even if you don’t think you have enough assets to matter, the truth is that everyone should at least have a will so that they can direct where their money goes after they die. Many other households could use a durable power of attorney, a revocable trust, a healthcare directive and/or other estate planning documents.
The purpose of an estate plan is to ensure that your assets are protected, that important decisions are made in advance in writing and that your money goes where you want it to after you pass away. It can also help avoid any in-fighting among your heirs, as your intentions will be clearly articulated in writing.
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This article originally appeared on GOBankingRates.com: I’ve Got an Emergency Fund and a 401(k) — Do I Need Anything Else?
