The Most Important Personal Finance Question – What Do I do With my Extra Money?
It’s a topic that is visited, revisited, and analyzed many times over. All of us have experienced high school before and many of us have attended college or technical training. We have dealt with tough times and tight financial months at some point. Then once we get a decent paying job (or a job, period) we begin collecting regular paychecks. In a couple months of continuing the frugal lifestyle we learned in college or however else we came to being employed, it’s almost surreal to see a four digit number sitting in our checking account. Many people simply spend more money when this happens – bigger apartment, nicer car, more stuff in general. You can do this, sure, but what if you aren’t into any of those things and can get by just fine with what you have? Here are some options for you for those looking more long-term and those looking to avoid a debt trap when things start to break down.
IRAs and other retirement accounts
If you aren’t contributing into a retirement account of some sort, you should begin contributing. The earlier you begin contributing the easier you’ll have it later in life. Traditional IRA, Roth IRA, 401K; all of these are solid accounts and each provides various benefits. One of the main benefits of retirement accounts is the tax benefit. A traditional IRA involves tax-deferred growth – you only pay taxes on the account when you withdraw from it. A Roth IRA offers tax-free growth – you don’t pay taxes when you make withdrawals while in retirement.
Savings accounts and certificates of deposits
Savings accounts are easy. It’s connected with your checking account and many banks allow you to transfer money back and forth electronically. While the interest you gain on that account is quite small, you’re able to withdraw money from the account quickly in the case of an emergency. A CD is a little different. A CD provides you with higher interest earnings than a savings account. There are minimum deposit amounts for CDs and opening a CD also incurs a fixed term. This fixed term means money cannot be withdrawn from the CD before the account matures without paying a penalty. Depending on whether or not you may need to withdraw the funds quickly, a CD will provide more return than a savings account in the long-run.
Money market accounts
If you’re interested in a higher interest rate than a savings account (up to 1%) but with more spending flexibility than a CD, money market accounts are a solid investment. Banks are less-restricted when it comes to money market accounts. Banks can invest this money into treasury notes, municipal bonds, or treasury notes. In contrast, what a bank can do with a savings account is loan it out to people who need to borrow money and charge that person interest. It’s another type of account to store your money in, but if you’re able to afford letting it sit and grow for a year or longer it may be best to open up a CD and allow your money to grow that way.
These are all long-term options easy to set up and to understand. While contributing the maximum to an IRA ($5,500) isn’t as “exciting” as putting that towards a new boat down payment, the lasting effect of that investment is much greater. It’s surprising to see how many 20-30 year olds function without anything to show for years of employment. It wasn’t just with those skating by on minimum wage either; some of these young people were making above $60,000 and still living month to month because they’d spend so much on instant gratification purchases (dining out, movies, tech toys, etc.). This is precisely how people fall into the pit of debt. An unpredictable event occurs (serious injury, newborn child comes along, vehicle permanently dies, job loss, etc.) and you’ve got nothing to fall back on, no safety net to catch you. Put that money away and don’t allow the sinkhole of debt to encapsulate your livability.
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Category: Financial Planning
