In previous posts we talked about budgeting and how we can save, pay down debt, and contribute money into a retirement account all at the same time. To recap: pay yourself first (i.e. automatic deductions into retirement at least up to company match), then take care of high interest debt first and as quickly as you can while saving a little something. Re-calibrate these percentages as you pay off debt and have more to put into savings.
The next step, once you start saving your first $500, $1,000, and 3-month rainy day fund is to consider diversifying your assets.
If you already have a 401K consider opening a Roth IRA account for a second revenue stream when you’re older. If/when you leave your current organization you can roll your 401K into a Traditional IRA. The difference between the two is that, with a Traditional IRA, the money will be taxed when it’s taken out in retirement. With the Roth IRA the money is taxed now. Depending upon your tax bracket now and your projected tax bracket once you retire, it may be in your interest to tax the money you’re saving for retirement now. The idea is that you may not be in a top income tax bracket now, so there’s a benefit to paying at that lower percentage. Either way, it’s always good to diversify your assets.
Now, there are a lot of unknowns here – how your money will grow, what income tax bracket you’ll be in when you retire, what inflation will look like, etc. And this is my disclaimer that I’m not a certified financial planner and any investment you make comes with risk and zero guarantee that you’ll make any money. But in my humble opinion it’s good to not have all of your eggs in one basket. This may not be something you can do right away, but it’s worth considering if you have extra money in your budget. My bank, for example, requires at least $500 to start an investment account. I used an old Traditional IRA I had from a previous job’s 401K rollover. I simply converted it into a Roth IRA and, like my initial savings account, I just transfer a small amount into it every month until I have more in my budget.
Turns out you don’t need to be a bajillionaire to invest some cash. I’ve mentioned this before in another post, but the only thing you need in order to make your money make more money is an app called Acorns. Acorns takes every transaction you make with a registered card/account and rounds it up. It takes those extra pennies and invests it into their fund. I started last June and have received, over that time, a 5.18% return. Not too shabby. That app also allows you to divest any time. It’s an easy, mindless way to save an extra thousand a year, and if you use my referral link to sign up we both get some free cash.
If you’re just starting to save, then building up your emergency fund should be your first priority. However, if you already have a solid emergency savings consider diversifying your automatic deductions into multiple savings accounts. Keep building your emergency to equal 6-months of expenses, then consider the big ticket items you’ve always wanted to afford – a new car, a family vacation, a new house, etc. Chip away at that goal by opening a second savings account and diverting some of your budget there. Just like your first savings account it will start slow, but build up bigger when you’re not paying attention.