How to invest the money saved in 2020, according to a financial planner

0


When you buy through our links, Insider may earn an affiliate commission. Learn more.

  • If you managed to save a lot of money in 2020, there are several ways you can implement it in 2021 to build wealth.
  • A financial planner recommends paying off high-interest debt, then increasing your retirement savings to get the maximum match from your employer.
  • Next, consider investing in a Roth IRA and setting up recurring deposits to transfer extra money to a brokerage account.
  • SmartAsset’s free tool can find a financial planner to help you take control of your money ”

Let’s face it: 2020 hasn’t been favorable to our plans. From travel plans to weekly nightlife routines with friends, many people have found themselves holding onto money they would otherwise have spent.

With this decrease in spending, many Americans who didn’t need the money to make ends meet started putting their money into savings accounts. Data from the Federal Reserve Bank of St. Louis shows that between February and April 2020, savings balances increased by about 7.1%. This is compared to the 1% month-over-month increase over the same period in 2019.

As the pandemic continues into 2021, it’s worth thinking about how to make that extra money work harder.

Incline Wealth financial planner John Bovard heard this question over and over again in early 2021. “Talking to my clients at year-end reviews… the extra money I have? “

Here is the answer he gave to his clients.

Start by filling your emergency fund

Before investing this money, Bovard suggests doing a few things first.

Many of his clients have already filled and supplemented their emergency funds. But, a full emergency fund should be a first step for anyone who doesn’t have one yet. Typically, financial planners suggest saving between three and six months of spending in a savings account.

Then pay off the credit card debt

After that, he recommends turning to credit card debt. Paying off credit card debt or any high interest debt should take priority over investing.

With an average credit card interest rate of 14.5% and an average market return of around 9% every 10 years, that debt can cost more than an investment can earn.

Increase your 401 (k) contribution

After credit card debt, Bovard recommends making sure you get the maximum match on your 401 (k), if available. A match is basically free money from your employer, but it’s only available if you put in enough money. Double check to make sure your contribution is high enough to take advantage of the full match before investing outside of your 401 (k).

Fund a Roth IRA

For anyone who doesn’t yet have a Roth IRA, opening one can be a smart way to put aside the extra money you’ve saved in 2020.

A Roth IRA is easily funded with money you have already paid taxes on and can be opened through a number of banks and online investment services. One of their big benefits is that the money grows tax-free for retirement, so you can keep more of your money later. Anyone under the age of 50 is allowed to contribute up to $ 6,000 per year to these accounts, or $ 7,000 if you are over 55.

Bovard suggests investing in a Roth IRA before a general taxable investment account for two reasons. “I like the Roth IRA, first because of the tax treatment. Second, because in an emergency you can withdraw what you have invested,” he told Insider via email. .

Set up an automatic investment deposit

After checking all the above steps, Bovard suggests going further in investing by setting up an automatic and recurring deposit. “I love the automatic monthly contributions to a brokerage account. It can be one of the easiest ways to build long-term wealth, ”says Bovard.

While markets have seen extreme highs and lows during the COVID-19 pandemic, regularly investing money in the market over time can help mitigate these extremes. This strategy, called the average dollar cost, is preferred by financial planners. It’s about regularly investing the same amount of money over time. “Setting this up as a monthly contribution that is automatically invested is the best way to do it,” he says.

A secondary benefit to setting up these deposits is that they will continue effortlessly and indefinitely, even when life returns to normal. “If the money is automatically deposited, it’s in the account before it can be spent, which allows for the magic of compound returns over time,” he says.


Share.

Comments are closed.