I’ve been posed this question off and on over the past few years, so I figured it best to say the order I put my cash away. If you’ve realized that you DO need to save it, you’ve already jumped the first snag; now the question is WHERE to put the money? There are so many options out there to put it, and just as many people that’ll line up to tell you where to put it, for a fee. Here @ the MiB I’ll give away my secret recipe for FREE! It has changed a bit since the original 1 year ago, but sticks to most of the same premises.
1. Pay Off Your High Interest Credit Cards – BEFORE you start investing, pay off your debt because you’re just building the CREDIT CARD COMPANIES net worth, NOT your own. These are going to stick you harder than anything else when they can charge you 20%+ to use their services. Pay them off and get to the positive.
2. Build An Emergency Fund – In the WORST case scenario you may lose your job; your wife may lose hers. You may have a month or 2 to cook on the credit card, but eventually, you’ll need some $ to pay the cards back. The standard amount varies, but I think 2-3 months of expenses should cover the downtime after credit cards have caught what they could – Put this money in a high yield money market account or high yield savings account.
3. Match Your 401k/403b – If your company will match your investment, you’re silly not to hit the match. This is FREE $ from your company, and IMMEDIATE 100% return on your investment. Try to find that anywhere else. If you do, please let me know. 🙂
Many pundits claim that you can find a better deal for your cash, but this is my party, and I vote for taking the $ when you can get it as it may not be there forever.
4. Strike Up The ROTH IRA If You Qualify – If you fall under the 170k amount in 2008 and are Married Filing Jointly, you can’t beat the benefits of a ROTH IRA. You contribute up to $4000 in 2007 ($5000 if over 50) and it is already taxed as you’re putting it in after you get paid, so Uncle Sam has already taken his whack at it.
One of the biggest benefits here is that you only pay the tax that Uncle Sam originally hits you with. That means, it gets taxed when you get your paycheck. It’s funded by the money you put in it AFTER taxes have been taken out. It doesn’t get taxed again, and therefore considered “tax deferred” when you take it out.
One thing anyone can agree with is that taxes are going to go up in the future, they always do. So you’re putting money in at THIS tax rate now and get it out TAX-FREE when you hit 59 1/2. For me that is 30 years into the future, and my guess is that taxes will be more at that time, I vote for tapping what I can.
5 If You Can’t ROTH It, Consider More “Traditional” Means – The one downside to the ROTH is that there are phase out periods of the ROTH starting at a combined MAGI of $160,000 in combined household income; and not contribution after $170,000.
If you make more than 170k combined in 2008, you’re out of luck for the ROTH, but a Traditional IRA offers the same fund choices (anything under the sun) but get taxed when you take it out at 59 1/2. The benefit here is that you’re not paying the tax up front, it’s tax-free putting it in, but taxable (at likely a higher rate) taking it out.
6. External Funds (Index Funds, ETFs, REITs, Mutual Funds) – They’re low risk, they’re already indexed or chopped up stocks that aren’t very volatile, easy to get in to, but do get taxed if they’re outside a ROTH or 401k likely, but if you’ve hit the other 5, this is a logical next step if you’re looking to stay in the standard investing world.
7. Start Your Own Business – So you’ve grabbed your free $ from your 401k, made under 170k last year to peg out your ROTH, and have started to dabble in the stock market with a brokerage account full of ETFs. Now you’re looking for something with a bit more spice. This one moved up since the last writing of the article because of this very site, as blogging indeed can become a business.
It’s risky too, but you don’t have to jump in head first. You can ease in and it won’t cost you much at all, but can certainly benefit from putting some advertising and marketing dollars behind it. It’s also beneficial tax-wise to be able to write off expenses that you’ve built up in building your dream job.
8. Individual Stocks – If you’ve got the moxie, some say to put this one higher up in the ranks; they’re not for me right now though. Blogging has turned into its own adventure as well as some other ideas in the mix that you may be reading about in the future. They’re risky but worth a look if you’ve mastered the previous 7. However, it is likely that you’ll have someone else doing your dirty stock-ings if you’ve dashed through the list thus far.
9. Other Investment Vehicles – Think real-estate or investing in other peoples ideas. Real-estate is coming at a bargain these days – but is still risky enough to lose your hat if you’re not careful. Becoming a venture capitalist isn’t easy, but if you’ve got the $, you can listen to their ideas and decide if you want to put your money behind them. Pricey, but if you’ve got the $, it can certainly be profitable.
Everyone has different choices as to where they put their money. I’ve said before that I’m not claiming to be a professional, just someone who has dug in a bit on it and come to these conclusions on my own.
It’s hard to argue with the start though; dumping your current debt is the first step because unless you’re an investing genius, it’s going to be hard to overcome that 26% that the credit card company is charging you right off the bat. The rest can be argued forever, but tough to scoff at removing the weight before digging in.
What’s your order? Am I missing something? Do you see it a different way?