Assets

Assets_Money

Checking Account

The checking account is the primary means for your daily or monthly cash needs. The checking account receives your income via direct deposit, gives you access to cash via ATM, and can be used for automatic bill pay. Cash held in a checking account is the most common of all the assets.

In the current interest rate environment, checking accounts pay very little interest. Online banks typically have the best rates. Even the best rates for online banks are below 1.0% ($100 per year on $10,000).

NerdWallet has a great tool for searching and filtering for a variety of checking accounts.

You will find that the more you deposit, the better the rate.

Savings Account

The savings account should hold money for an emergency fund. Emergency funds are designed to prevent you from going into credit card debt when you need money quickly to cover a big expense.

What happens when your furnace or transmission goes out and you only have $1,000 in your checking account and no money in your savings? You will likely max out a credit card trying to cover this large, unexpected expense. This will only add to your liabilities (increase in credit card debt) and will lower your net worth. This example outlines the importance of having an emergency fund to cover these expenses.

In the current interest rate environment, saving accounts pay little interest but more than checking accounts. Online banks typically have the best rates. Even the best rates for online banks are below 1.0% ($100 per year on $10,000).

You will find that the more you deposit, the better the rate.

NerdWallet has a great tool for searching and filtering for a variety of savings accounts.

Investments

There are a variety of investment accounts in which you can save money for retirement and other long-term purposes. Each of the investment savings options has different advantages and disadvantages.  The following italicized categories are subsets of the Investments category.

Traditional vs. Roth

There are two options for investment accounts, Traditional or Roth. The difference in the options relates to the tax treatment on the account.

The Traditional option allows you to defer paying taxes until you withdraw money in the future. The account is funded with pre-tax money and reduces the amount of tax you pay on money that you earn. All of the money in this account will grow tax-free until you withdraw the money. At this point, all the money that is withdrawn is taxed.

The Roth option allows you to pay taxes now with no taxes upon withdrawal. The account is funded with after-tax money and does not reduce the amount of tax you pay on your income. Both contributions (the money you put in) and all growth from the contributions are tax-free when distributed.

With the Traditional vs. Roth options outlined, let’s discuss the different investment accounts and if Traditional or Roth options are available.

Consider diversifying (not putting all of your eggs in one basket) your tax-advantage accounts (Traditional vs. Roth). No one knows if taxes will rise or fall in the future. If we knew which direction tax rates would go, then our Traditional or Roth decision would be easy. Since we don’t, consider having a Traditional account and a Roth account. For example, let’s say that you have a Traditional 401k and a Roth IRA.

Traditional 401k is funded with pre-tax income and is the better option if tax rates are lower in the future since you will pay the lower tax rate.

Roth IRA is funded with after-tax income and is the better option if tax rates are higher in the future since you pay taxes now and not in the future.

 Individual Retirement Account (IRA)

The IRA is the most commonly available retirement account. The maximum yearly contribution is $5,500 with the option to contribute an additional $1,000 if you are over the age of 50.

With an IRA, there is the option to choose either Traditional or Roth.

Workplace Savings Plans – 401k/403b

Many medium-to-large sized companies offer some form of workplace savings plan. Typically these are either 401k or 403b plans. They are named after the section of IRS tax code that authorizes them.

Employers offering these plans sometimes offer matching contributions as part of your benefits package. For example, if you contribute 8% of your income into your 401k, and the employer matches 50% up to 8%, you would get a total of 12% in your plan (8% employee; 4% employer).

The employer match is free money and not contributing to your plan and missing out on is a terrible idea.

With 401ks or 403bs, there will be a Traditional option, but most employers have not adopted Roth options. The trend indicates that more employers are adding a Roth option.

Real Estate

Property counts toward your overall net worth. The market value of a primary residence, second home, investment property, or land should be counted as an asset.

Vehicles

While vehicles are considered an asset, they are the only asset listed here that depreciates in value. All of the other assets listed appreciate in value. What’s the difference? Depreciation means the value of the asset decreases over time. Appreciation means that the value of the asset increases over time.