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You’ve got money! Now what?
The day has finally come when you are spending less than you earn, which means you’ve got some extra money and you need to decide what to do with it. Now that you’re paying attention, you’re feeling bombarded with conflicting messages about where to put it–banks, stocks, IRAs, 401ks, savings accounts, savings bonds, insurance, business opportunities and the list goes on… You’re hearing promises that make them all seem like opportunities too good to pass up–high returns, guaranteed rates, bonuses, and tax benefits. Yet you weren’t born yesterday, you know there’s a catch somewhere, whether it’s hidden fees, locking up your money for a certain period of time, or the risk of losing it all. You don’t know who you can trust to give you a straight answer and you certainly don’t have the time or patience to read the fine print or scour the web to research all the possibilities on your own. You just want to know where you can put your money so it’s working for you, safe, growing and accessible in case you need it–all at the same time.
Here’s your straight answer–there’s no one perfect place to put your money. Instead use the next best choice: spread it out in several places which in combination provide the benefits you want. The question is, where do you start?
1. Before committing any money to your nest egg, which by definition you won’t be needing for a long time, cover your short-term needs first. Build your emergency savings fund of 6-12 months living expenses and pay off high-interest debts. Save for any short-term major purchases such as a new car or down payment on a new home in separate accounts.
2. Do you have anyone in your family who depends on your income? Whether it’s kids, a non-working spouse or aging parents, if you have loved ones who are counting on you for a nest egg to protect them if anything were to happen to you, buy some term life insurance. The younger, healthier and lower-risk your lifestyle is, the lower the cost will be. This is also a good time to review if your other insurance plans are comprehensive enough to protect you in an emergency including auto, homeowners or renters, health and umbrella liability.
3. Do you have a 401k plan at work? If it offers a matching contribution, sign up to contribute up to the matching limit, e.g., employer offers 4% match, you contribute 4% of your paycheck. If your 401k doesn’t offer a match, skip to the next step.
4. If you are 10 years or farther away from spending your nest egg and under age 60, contribute the maximum to a Roth IRA. If you’re closer to needing to spend your nest egg or over age 60, contribute to your 401k or a Traditional IRA.
5. Once you’ve contributed the maximum to receive a matching contribution in your 401k and the maximum you’re allowed to contribute to your Roth IRA, go back to contributing to your 401k. This should keep you busy for a while since the maximum contribution in 2011 is $16,500 or $22,000 if you’re over age 50.
6. After maximizing contributions to your 401k and Roth IRA, you’ve got free range. Take your pick of investments–since each of them offer their own benefits, the choice depends on your situation and preference. Do you want more tax savings, guaranteed returns or the potential for high earnings with the tradeoff of possibly losing everything (“play” money)? If you’ve arrived at this step, you can afford to hire a professional to help you navigate your choices.
Figuring out where to build your nest egg doesn’t have to be as hard as facing the toothpaste aisle in the drugstore with rows and rows of boxes touting promises ranging from cavity protection to whiter teeth. Whichever one you choose, if you also floss, see your dentist and curb your saltwater taffy addiction, you’ll know your teeth will be okay. Choose a few different locations for your nest egg and you’ll know your financial future will be okay.