Build Your Financial Plan with "Buffer Zone" Accounts

Planning for the long term is not just about creating a savings and investing strategy, but also building financial buffers to help protect you and your family.
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We often have very specific financial goals. Maybe we want to pay off credit card debt in the next two years or save for a down payment on a house. Goals may vary quite a bit from person to person. But there's another, more general goal that a lot of us all share: overall financial well-being which can ultimately help lead to financial freedom in the future. We all want to ensure that our loved ones are protected and that they're financially prepared for the next stage (and the next and the next). So how can we get there?

Building assets can be one way to plan for the future, however, where many people fall short is in building "buffer zones" to protect those efforts to save or invest during times of hardship. And unless we are one of the few lucky ones, most of us will experience a time in our lives when our nest egg is too tempting NOT to use in a current financial shortfall. So the key is to modulate our ups and downs. When we are in a period of plenty, we not only need to save, invest, and plan, but also create a buffer to help protect that plan during hardship. This is easier said than done, but still essential.

Opening and maintaining a variety of accounts or even general savings accounts can help us establish those buffer zones, while 401(k)s, IRAs and other future focused accounts can help set us up for pursuing financial goals. You might be surprised to hear that 43 percent of Americans keep their savings in cash, and 53 percent of that group actually "plan to hide cash at a secret location at home." They're quite literally stashing it under the mattress! However, knowing where to start can be confusing. Here's a roadmap of the various investments and savings methods individuals should consider as they work to guard, and grow, their assets for the future.

Checking and Savings Accounts

Starting with the basics, most people need a checking account from which to pay bills. Some accounts generate modest interest payments, and they also serve as home base for budget management. If you use your debit card or checkbook regularly, this can be an easy way to track and evaluate spending habits.

Equally as important is setting up a savings account. Separating out savings from a checking account is an important psychological barrier. This is where you build an emergency savings fund, not where you pay bills. Move money over as you're able, even if it's a small amount, and work toward a rainy day fund of liquid assets that can be used for an emergency. The usual rule of thumb is to build up three to six months of living expenses, but individual needs and goals may vary.

401(k)s and IRAs
Retirement funds are key to a long-term financial plan. Having more than one retirement bucket is a wise move, and many people opt to invest in an IRA in addition to an employer-matched 401(k), given the caps on IRAs and 401(k) matching, for instance. Compare alternatives side by side to decide if a Traditional IRA or a Roth IRA makes the most sense for you. Roth IRAs are popular, but they come with income and contribution restrictions. The key takeaway here is that your retirement assets should be made up of more than one vessel.

Credit Card + Credit Monitoring
Yes! This list isn't all about saving and investing. Building a positive credit history can help in getting a mortgage or a loan for a new car, and personal debt capability is a big part of the financial puzzle.

While building credit history, don't forget to monitor your score. Knowing your credit scores (individual and joint if you're married) is an important part of your financial plan. Individuals are granted one free credit report each year from each of the three major credit bureaus, and they can get them at It's smart for even those who aren't planning to apply for a loan in the near future to take a look at their report regularly. It can help them spot issues or inaccuracies that need to be cleared up, including signs of identity theft, like accounts fraudulently opened in their name. (Tip: Take another step to protect your identity by learning how to create strong passwords. With multiple accounts and policies in place, chances are there are quite a few digital inroads to your personal information for a motivated hacker.)

Life and Homeowners Insurance
Emergency funds can help keep you financially afloat, but insurance policies can be another smart way to plan for the unexpected.

Life insurance can be a touchy subject that people want to avoid, but it's important to think about. If you have a family, they depend on you--emotionally and financially. Life insurance can help to create a buffer zone for their future in case something happens to you.

If you own a house, homeowners insurance is a must, as well. You're required to have this type of insurance while you have a mortgage, but don't let it lapse if you do pay off the home. A house is an important asset now and in retirement. Guard yourself against potential hazards. Most policies will cover a range of losses, such as hail (make sure you know if your roof is covered or if it has a separate deductible) or something even more devastating like a fire.

Legacy Planning
While legacy planning can be uncomfortable to think about, it is critical to your family's overall financial plan. Having a will or trust that designates beneficiaries and specifies how assets will be allocated is essential. And don't forget to designate beneficiaries on retirement and insurance accounts because these will pass outside of any will that may be established. It's also important to review those beneficiaries in the event of significant life changes (i.e., marriage, kids, divorce).

A Financial Plan is More than Saving and Investing: it's Risk Management
Planning for the long term is not just about creating a savings and investing strategy, but also building financial buffers to help protect you and your family. Diligence, forethought and educational online resources can help you create a plan that pursues your financial goals and builds a foundation that includes an array of back-up plans and contingencies for anything that life may throw your way.

TD Ameritrade, Inc., member FINRA/SIPC. Stock investing is subject to risks, including risk of loss. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success.

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