The 3 Accounts Every High Earner Needs to Build Real Wealth
The 3 Accounts Every High Earner Needs to Build Real Wealth
When we sit across the table with most high earners, they have a retirement account they enrolled in during onboarding, a checking account where their paycheck lands, and some version of a savings account they opened years ago. This is it: just three accounts and two of them are mostly for holding money, not building real wealth.
The thing is, building wealth at a high income does not require a complicated strategy. It does require some planning and making sure you are getting the most out of each account.
This week, I want to introduce the three accounts that form the foundation of a real wealth-building system. I will go deeper on each one over the coming weeks!
Account #1: A Survival Fund (High-Yield Savings Account)
You need a cash foundation (aka an emergency fund, we call this a Survival Fund) that actually works for you. Most people have a standard savings account earning close to nothing. Right now, high-yield savings accounts are paying around 3%. This is not life-changing, but when you are holding 3 to 6 months (or even 12 months) of living expenses as a reserve (which you should be), it adds up. More importantly, it means your emergency fund is not quietly losing value to inflation.
The purpose of this account is simple: it is your safety net. It keeps you from having to sell investments at the wrong time when life throws you a curveball. Think of it as the foundation everything else sits on.
Account 2: Retirement Account(s) (401k, 403b, IRA, and/or Roth IRA)
Retirement accounts can be employer sponsored retirement account like a 401k or 403b; or personal accounts like a Traditonal/Rollover IRA or Roth IRA. These accounts carry many tax benefits but also limit your access to the funds before age 59.5. For example, your 401(k) is the primary tax-advantaged account for building retirement wealth as a W-2 employee. Contributions come out of your paycheck before taxes, which reduces your taxable income today. The money grows tax-deferred until you withdraw it in retirement and if your employer offers a match, that is free money, the highest guaranteed return available to you.
It is important to start saving in this type of account as young as possible but not where you want to invest all of your money.
Account 3: A Freedom Fund (Taxable Brokerage Account)
This is the account most high earners do not open until it feels like an afterthought. A brokerage account (we call it the Freedom Fund) is a taxable investment account with no contribution limits and no rules about when you can take your money out.
Why the name Freedom Fund? Well, this account provides you with the flexibility/freedom for things like the ability to retire early, take a sabbatical, fund a business, or just walk away from a job that stopped working for you, without waiting until 59.5. You can invest in index funds, ETFs, individual stocks, whatever makes sense for your situation and when you are ready to use the money, whether that is at 45, 55, or 70, it is there.
Here is the simple picture to wrap this all up:
- Your high-yield savings account is for your cash/emergency fund
- Your retirement account(s) help you build wealth while reducing taxes now or in the future (Roth IRA)
- Your brokerage account provides you with flexibility
Most high earners have some version of the first two. The brokerage account is the account that is usually missing or not being utilized to its full potential based on people's goals. Over the next few weeks, we are going to go deeper into these accounts.
About Legacy Financial Designs
Legacy Financial Designs is a fee-only wealth management firm located in The Woodlands, TX, serving clients in Greater Houston, TX, College Station, TX and virtually across the United States. We provide comprehensive financial guidance and wealth management to families across the country. If you are interested in working with us, click here to schedule an introductory phone call or feel free to call us anytime at 832-510-0175.
This content is for educational purposes only and does not constitute personalized financial or tax advice. Please consult a qualified professional regarding your specific situation.
David Wanja, Jr., CFP®
