The Three Coffee System

Every day we choose different types of coffee cups for our different needs. If we are sipping coffee in our living room we are most likely using a porcelain mug. Great for a cup at home, but not great on the go. It gets colder quicker and easily spills without a lid. If we are busy and on the go, we may run through a drive-thru and use the hometown's favorite disposable to-go mug. It is great on the go. You probably won’t be drinking that coffee all day though, because it also gets cold quickly. This cup will also struggle if you put it in the dishwasher to re-use. It won’t work. It’s the perfect cup if you are on the go, want to have your coffee longer than the porcelain mug, but is not your all-day, re-usable coffee vehicle. Then we have the re-usable thermos mug. Mine is my faithful Yeti. This guy will go all day with you. The coffee will be hot all day, is good on the go, and can be re-used. We choose our coffee-sipping vehicle based on our coffee drinking needs.

The same is true of our financial accounts. Different accounts come with different features and restrictions. We need to choose the ones that are best for us based on our needs.

Porcelain Mug - Our short-term, basic account. This would be your checking account, savings account, money market account, or high-interest savings account. These accounts are accessible at any time. If you need money, you can swipe your card- same-day access to the money. These accounts only hold cash. They do not contain stock, bonds, or other investments. Therefore, you will gather some small interest, but you would not use these accounts to grow your money. Lastly, you do not receive any tax breaks for these accounts. Therefore you do not want to keep too much money in these vehicles because your money will not be making money for you. The industry standard is keeping 3-6 months worth of your monthly expenses in these vehicles at all times. These are your short-term, porcelain mugs, for your short-term needs.

Access- Yes
Growth- No
Tax Efficiency- No

Paper To-Go Cup- Our middle-term account. I say the middle term because it is your out and about cup, but not re-usable. So coffee in here will last longer than the porcelain mug, but won’t last as long as your re-usable thermos. This is your brokerage or individual accounts. These accounts can hold cash but are primarily used to invest money in stocks, bonds, mutual funds, etc. You would want this account to be making you money. You can access the money inside this account should you need to, but it can take up to 7-10 days to get the money to you. Lastly, you do not receive any tax breaks to invest in this. These are great for needs that are 3-10 years away- purchase of a home, a new car, a new roof, etc. Use these for your Mid-Term needs.

Access- Yes
Growth- Yes
Tax Efficiency- No

Re-usable Thermos - Our long-term account. This is your retirement accounts- 401k with employer match, Roth IRA, etc. These accounts are to grow money substantially over a substantial amount of time. Therefore, there are strict restrictions on when you can access the money (i.e. retirement age) and penalties if you access it early. Because you do not have access to it, you trade that for significant tax benefits (either a tax break every year when you save into it or you receive the money tax-free when you access the money in retirement). We must be saving this money regularly throughout our careers, starting as young as possible, to take advantage of the current tax efficiencies, as well as grow that money substantially for as long as possible.

Access- no
Growth- Yes
Tax Efficiency- Yes

Where this coffee analogy falls short, is that we don’t use all three types of coffee cups at one time. In our financial life, it is important to have all three cups going at the same time. We just treat each one differently based on the purposes of those accounts. It is important to have these up and running to achieve your goals and maintain financial health. If you need help setting these up or understanding what kinds of investments would be right for you, I always encourage you to work with a financial planner. Do not go it alone. Coffee is best when drank in good company!