When I got serious about the money game, it became apparent that I was playing the checkers version, while the successful people were playing chess.
However, once I learned about all the different types of financial accounts available to me, I was able to up my game! I went from using a checking and savings account, essentially playing checkers – to using Roth conversions and leveraging rental properties, which is some pretty high level chess.
Thinking of money as having game piece like properties, based on what type of account it was in, helped me to understand it. It even made it a little fun! Then I could start building my powerful arsenal and crafting a winning strategy. Doing so helped me escape my cubicle job to pursue a life of travel and explore more meaningful work.
Here’s the pieces you need to get acquainted with to get into the game!
Tax Advantaged Accounts – the Valiant Knights
First off, the tax advantaged accounts! “Tax advantaged” means that the government gives special tax benefits to encourage savings for a particular purpose – mostly for retirement. These are the work horses of the financial game!
The tax advantages vary from taking some off your current tax bill (pre-tax) to avoiding future taxes (post-tax). They can also allow your money to grow tax-deferred, meaning you don’t pay anything on dividends or interest in the year you earn them.
There is a third, super sweet category – the “double” taxed advantaged, as well. There is only one magical unicorn account that has this super power. Its the Health Savings Account (HSA). Rare but flashy, it can be a pretty pony to have, if you can.
Pre-tax was basically the only category of tax advantaged account for a long time, and accounts of this type are often given the adjective “traditional.”
The post-tax versions didn’t come about until 1997.These accounts are often referred to as “Roths”, after the Senator behind the legislation that created them.
Individual Retirement Accounts (IRAs) and 401(k)s are the two main types of tax advantaged accounts for retirement. Each come in the traditional and Roth flavors.
All tax advantaged accounts have different contribution limits, rules for who can use them, and when you can access the money.
Since they’re a little tricky, I think of them as the horse mounted knights. They are a little clunky, with their coat of armor. They don’t move in straight lines. But they are valiant and formidable if you play them right.
My Beloved Queen – the Roth IRA
One notable exception to the often cumbersome tax advantaged accounts is the Roth IRA – she is a queen! Ever nimble, she is hard to beat.
Thanks to a special tax law that allows for Roth conversions, the Roth IRA is very valuable, especially if your game is early retirement. I have a whole article which explains the Roth IRA in depth and sings her praises.
Brokerage accounts – Bishops and Rooks
Brokerage accounts are where you can buy and sell all sorts of financial securities, such as stocks, bonds, ETFs and mutual funds. These accounts have no rules about how much you can put in or when you can take money out, but they don’t get any special tax treatments.
Everything you put in has to be taxed by Uncle Sam. Any interest or dividends you get, you must pay taxes on all along the way. And if you sell something for more than you bought it for – you’re going to pay a special tax on the amount you made called capital gains tax.
Capital gains taxes are generally lower than income tax. Up to a certain amount of gains are actually tax free. You can do some fancy stuff with taking losses, that can bring your gains down, as well. So while not technically tax advantaged, learning all the intricacies of the rules, you can make them pretty tax efficient!
Brokerage accounts are extremely versatile. You can own a vast variety of financial products in them. They’re easy to deploy, can move one square or ten! I think of them like my Bishops and Rooks on the chessboard. Powerful to have at the ready!
Cash – Both Pawn and King!
Cash and cash equivalents are investments like money market funds, Treasury bills, and good old fashioned FDIC insured savings accounts. While not aggressive, they offer stability and quick access to funds. But like a pawn, they are slow and not highly regarded.
But like Wu-Tang says “cash rules everything around me” thus making cash our King! When it comes down to it, you can really only pay your bills with actual cash money. It is what you ultimately exchange for what you need and want.
In the end, it’s all about protecting the King. And while you can’t win with only pawns, the unsophisticated piece is key to many a winning strategy.
Insurance – the Table Underneath the Board
You can’t play the game if all your pieces tumble off the board. Insuring against catastrophic failure is an important factor of game-play that can’t be overlooked. A major health event or death could upend any table. Property loss, lawsuit, natural disaster – while statistically improbable, all could really blow up your strategy. Make sure you’re covering yourself as much as is possible and reasonable.
Leverage – Next Level Gaming
Utilizing borrowed capital, aka credit or debt, to amplify your investment returns can be a game-changer. It can be as simple as using credit cards for points or a little more complex, like mortgaging an investment property. It can also get as sophisticated as buying triple leveraged ETFs on margin in a brokerage account.
Leverage is like a “performance enhancing” drug for your game pieces, giving you juiced up returns. But using leverage always comes with risks, it is essential to use with the upmost caution!
Mastering the Game
If you want to win at the money game, you gotta move from playing checkers to playing chess. To do so requires a comprehensive understanding of the diverse financial game pieces at your disposal. Each piece plays a crucial role in your overall strategy, from tax-advantaged accounts to versatile brokerage options and the all important cash.
By mastering the intricacies of these financial game pieces, you elevate your ability to make strategic moves that can help you achieve your goal – be it financial independence, early retirement, or beyond!
So, are you ready to evolve your money game? What’s your next move?
Master Your Money, Live a Truly Prosperous Life!
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