Last updated: 27 Aug 25 23:52:24 (UTC)

My Six Bread-and-Butter Finance Fundamentals

“There came a moment early in my career where it dawned upon me that those basics, those boring fundamentals, were truly the keys to success.” ―Michael Paulding Thomas


My name is Michael Paulding Thomas. Since 1989 I’ve been helping families build generational investment plans based upon historically defensible returns. Though retirement income planning is my primary focus, all good plans start with basics that are universally fundamental to all families. Following are my top six.


1) War Chest / Emergency Fund

“A year’s living expenses in a war chest will save you from more bad decisions than you can imagine.” ―Nick Murray


Get six months to a year’s living expenses in a money market fund (or other non-equity account) as quickly as you can, even if you have to live on coffee and rice while you’re saving toward this goal. This will give you piece-of-mind, and let you weather out the “financial storms”, and avoid liquidating your retirement accounts. Cars break down, pipes wear out and break, and kids get sick. Build yourself a “reserve account” to pay for these unexpected events.

Don’t be too concerned with the rate-of-return that you’re getting on this account. Growth is not the primary purpose ― you just want to make sure it’s there when you need it. Even a bank savings account is fine. However, keep it in a separate account from all your other funds.



2) Living Trust

“A living trust is one of the most loving things you can do for your family.” ―Gary Fitzgerald


When you pass away, your estate normally goes through a process called probate, which can be costly and delay the transfer of property to your beneficiaries.

There are only three ways to avoid probate: 1) live forever, 2) don’t own anything, or 3) get a living trust.

Briefly speaking, there are three primary benefits of a living trust:

  1. Private: the size and distribution of the estate remains private.
  2. Avoids Probate: saves the beneficiaries time, money and hassle.
  3. Living Benefits: your instructions regarding your health and finances are followed if you are still alive but become incapacitated.

Don’t rely solely on a will! Wills still go through the probate process.


“A will is nothing more than instructions for a probate court. A living trust bypasses the process entirely.” ―Gary Fitzgerald




3) Term Life Insurance

“Insure against what can go wrong in order to acquire the luxury of investing for what can go right.” ―Nick Murray


Do you know exactly what would happen to your family financially if you didn’t wake up tomorrow?

Life insurance ensures that if a breadwinner passes (and thus their income stops) the family has the funds to continue living their lifestyle and doesn’t tap into their retirement accounts.

There are two types of life insurance:

  1. Term: Pure insurance. Cheaper.
  2. Cash-Value: Insurance + Savings. More expensive.

Always buy term insurance and invest the cost difference in equity mutual funds. Never, ever buy any form of cash-value life insurance (whole life, universal life, variable life, etc.) regardless of what the insurance salesperson tells you.




4) If Kids, UMTA and 529-Plan

Uniform Transfers to Minors Act (UTMAs) and 529 College Plans are both tax shelters for minors that reduce, or eliminate, taxes on the interest earned inside the accounts.


5 Facts About UTMAs

These custodial accounts, which are named for the Uniform Transfers to Minors Act, let investors take advantage of the lower tax rate for children while saving for their future.

  1. Any money given to a child is irrevocable. When he/she reaches the age of majority, they are entitled to the account and they can use the money for any purpose (not just for college).
  2. For children under age 19 the first $1,300 of earnings each year are tax-free. Earnings between $1,300 and $2,600 are taxed at the child’s rate; earnings above $2,600 are taxed parent’s marginal tax rates.
  3. For 2025, anyone (it doesn’t have to be a parent) can contribute up to $18,000 per child each year free of gift-tax consequences ($36,000 for married couples).
  4. You can use any mutual fund as the investment inside of the UTMA.
  5. You can start a 529-Plan for as little as $50 per month.

You can read more about UTMAs on the American Funds web site (my fund family of choice). If you have questions or want to set one up you can schedule a call with me here.


6 Facts about 529 College Plans

  1. Earnings grow federal tax-free and aren’t taxed when the money is withdrawn for higher education.
  2. If the child doesn’t use it for higher education, then it may be converted into a Roth IRA (with some restrictions) or given to another related child. There are other options as well.
  3. The parent is the owner and stays in control of the account.
  4. Every parent is eligible to contribute - there are no income limits.
  5. You can use any mutual fund as the investment inside of the 529-Plan.
  6. You can start a 529-Plan for as little as $50 per month.

You can read more about 529 Plans on the American Funds web site (my fund family of choice). If you have questions or want to set one up you can schedule a call with me here.


Pro-Tips

  1. Both UTMAs and 529-Plans are “shelters” that go around an investment. Always use 100% equity mutual funds as the investment (I recommend American Funds). The mutual fund is the candy and the UTMA/529 is the wrapper.
  2. Put your first $20,000 (approximately) into a UTMA. Any amount above that put it into a 529 Plan. Remember, the first $2,600 of interest earned in an UTMA is tax-free/tax-reduced anyway and it has more flexibility that 529-Plan since it can be used for any purpose, not just college education.

5) Work Retirement Plan (401k, SEP-IRA)

There are a number of work retirement plans but the two most popular are 401ks and SEP-IRAs. 401k are usually offered by C-Corps and S-Corps for W2 employees. SEPs are usually used by self-employed people paying themselves via 1099 (there are exceptions to both).

If you have both a job (W2) and are self-employed (for example. you work at a corporation and also sell real-estate on the side), then only your W2-income is considered for your 401k and only your 1099-income is considered for your SEP-IRA.


401k Tips

  • The limit of your contributions for 2025 the limit is $23,500 (it is possible to go even higher with custom 401ks - if you are an owner of a C/S Corp, ask me about that).
  • No income limits on Roth contributions (if offered). Pro-Tip: always utilize the Roth version if it is offered.
  • Most 401ks have matching contributions from your employer (free money). For example, a 50% match up to 6% of income, means that for every dollar you contribute to your 401k from your paycheck your employer will contribute 50 cents, up to 6% of your income. So, if you contribute 7% of your income only the first 6% will be matched.
  • Tax deduction of your contributions regardless of your income (if using the Traditional 401k option). However, as noted above, always take the Roth option if available.

SEP-IRA Tips

Are you self-employed or have a “side-gig” and are paid via 1099? Consider a Self-Employed Pension Individual Retirement Account (SEP-IRA) as a way to save for retirement.

  • The maximum contribution for 2025 is 25% of your net 1099 income or $70,000 (whichever is lower).
  • As noted above, if you have a “regular” job as well (W2) then that income can’t be counted toward your contribution limits.
  • All of your contributions tax deductible and the earnings grow tax-deferred (you pay tax when you take withdrawals at retirement).
  • A SEP-IRA is a “shelter” that goes around an investment. Always use 100% equity mutual funds as the investment (I recommend American Funds). The mutual fund is the candy and the SEP-IRA is the wrapper.

  • Pro-Tip: Your goal is to completely fully-fund your work retirement plan(s) to the max each year. (and your IRA, as well, see below).


6) Individual Retirement Account (IRA)

There are two basic types of Individual Retirement Accounts: Traditional IRA and Roth IRA. (A SEP-IRA is really a business retirement plan, even though the word “individual” is in the name.)

  • Both IRA types have a contribution limit for 2025 of** $7,000** for those under 50, and $8,000 for those 50+. These limits are the total amount between all IRA (if you have more than one). You can open up five IRAs, for example, but the total contribution between all of them can’t exceed $7,000/$8,000.
  • For Roth IRAs the growth of your investment and withdrawals are completely tax-free. This is why the Roth is the best option - you never, ever pay taxes on your earnings!
  • However, your Modified adjusted gross income (MAGI) must be below certain levels to be allowed to contribute to a Roth. For single people you must earn less than $150,000 and for married couples it must be less than $236,000.
  • For Traditional IRAs the amount you contribute is deductible from you taxes, but the withdrawals you take at retirement are taxed. Though there is no income limit to being able to contribute to a Traditional IRA, your ability to deduct traditional IRA contributions from your taxes is dependent on your income and your workplace retirement plan, and/or your spouse’s.
  • You can open an IRA for as little as $50/month.
  • Non-working spouses can contribute to their own IRA.
  • Kids under 18 can have an IRA if they have earned income. My youngest client was 2 years old! He was a baby model for the Sears catalog.
  • Both IRA types are “shelters” that go around an investment. Always use 100% equity mutual funds as the investment (I recommend American Funds). The mutual fund is the candy and the IRA is the wrapper.

  1. Contribute to your 401k up to the point where your employer matches. Then stop.
  2. If you are also self-employed, then contribute to maximum amount allowed into your SEP-IRA.
  3. Contribute the maximum to your Roth IRA if your income is within the limits. If not, then contribute the maximum to your Traditional IRA.
  4. Go back to your 401k and contribute up to the maximum above the matching-point.
  5. Do all of the above (that are available) for your spouse.
  6. If you still have money available for retirement after doing all of the above, then talk with me for more options.


Michael Paulding Thomas



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