7. Save for big purchases
Maxed out your annual IRA contribution and still have dough left over? Hot damn! It’s time to reward yourself with the fun stuff: saving up for your next big purchase!
- Start a Big Purchase account in Betterment. If it’s for Education, pick that option. One of our clients uses the Big Purchase account to save money to care for his parents in their golden years. In this case, a retirement plan would not be appropriate, since it’s not for YOUR retirement. (Most retirement plans restrict access to the funds until the account holder is of retirement age.)
- Decide how much you need and by when.
- Divide by the amount of time between now and then, and set up automatic recurring transfers from your checking account.
- Watch your nest egg grow!
8. Start a Individual Taxable Investment Account
If you don’t have a Big Purchase in mind, or you have some extra cash you want to put to work, then it’s time for our personal favorite: general investing!
Taxable investments technically aren’t as cool as company-sponsored or IRA investments because they aren’t protected from taxes as much. Taxes are taken out of your income before it’s handed to you, you invest it, and then when you withdraw it, any gains are also taxed. That said, you can access the money at any time without penalty, until retirement accounts. And it sure is fun to see your money spontaneously multiplying from one day to the next.
One really smart thing to do at this point is to start moving your wealth out of US Dollars. This is a great way to bring even more diversity into your wealth-building, and is a good cushion for times of recession. Real estate is the top choice for most; it’s a relatively stable and reliably growing market. It used to be that purchasing property was the only way to get into real estate. That comes with it’s own set of issues: saving for years, going into debt, keeping up with mortgage payments, and, of course, having your success hinging on just one or a handful of properties. Our favorite generation (Millenials, of course!) solved this issue with the rise of easily accessible online shared equity platforms.
Here again, we did plenty of research on the reputation, fees, and diversity of all the providers out there, and Fundrise comes out on top for us.
Other options for moving out of US Dollars are cryptocurrencies and foreign currencies, such as the Euro. Unlike many other countries, there are virtually no reasonable services available in the USA for holding foreign currency. Revolut is aiming to come to the USA soon, and will change all of that. Robinhood offers free purchasing of some cryptocurrencies.
If you want to stay in the stock market for now, Betterment far and away offers the best service for taxable investment accounts in that regard. Open a General Investing account. If you’ve input all your info into the RetireGuide, Betterment will set up the risk level for you. Research shows that there’s very little or no gain across the long term between medium- and high-risk investments, so we suggest sticking with medium.
In both cases, you’ll have the option to reinvest dividends. Choose this if you want all the gains from the account to stay in the account. If you choose not to reinvest dividends, you’ll get a little bit of income from it every month. This could be a good thing if you’re needing some extra passive income, but definitely not a good thing if you are already earning enough; it will increase your taxable income unnecessarily.
Congrats! You’re poised to build wealth.
If you’ve established your Safety Net and paid off your debt, you have a strong financial future ahead of you. If you’re maxing out your DCP, you’ll be ready for retirement in no time. Getting through all these steps every year? You’re well on your way to an early retirement! Turns out learning how to save and invest wasn’t so hard after all.
A few things NOT to do
1. Don’t use Smart Saver.
Betterment isn’t perfect; the one service we don’t see much value in is their Smart Saver account. It offers about 2% interest on your savings every year. However, this amount is not guaranteed, since the 2% interest comes from stock and bond investments, and, like all investment accounts, your money is not guaranteed by the FDIC. This isn’t such a big issue for long-term investing like the accounts described in the previous steps above. But it’s not a great place for money you expect to need this month. Money market accounts like Comenity guarantee the percentage interest, and they are FDIC insured. It’s a clear win in the savings account category.
2. Don’t withdrawal from DCP and IRA accounts.
You’ll get hit with some pretty harsh fees (there are some exceptions that reduce the loss, but it’s still a very last-resort option). This means that, while you should put as much as you can into retirement accounts, put it in knowing that you won’t use it again until you’re about 60 years of age.
3. Don’t fiddle with your taxable investment accounts more than necessary.
Every time you adjust the risk level or make a withdrawal, stocks get sold. Every time stocks are sold, you’ll owe taxes on any gains they made. Gains from stocks that you’ve owned for less than 6 months get extra heavily taxed. If you do need to make a change, rest assured knowing that Betterment’s complex algorithms go a long way to reducing taxes owed through some cool reallocation functions that leverage that 6-month rule.
4. Don’t get TOO crazy with individual stock/ currency purchases.
By owning portions of dozens of mutual funds which each have dozens of stocks in them, you probably already own a little bit of most companies on the stock market. That said, the more you get into finances, the more likely it is that you’ll eventually want to invest in more in a particular company. Some people eventually decide to diversify into cryptocurrencies. In this case, we suggest:
- Limiting yourself: don’t stop investing in your other accounts, and set an amount in advance
- Use an app that offers free trades, like Robinhood or M1
- Stick with stocks/currencies that are stable and have a long growth outlook
5. Don’t hesitate to reach out.
Got more questions on how to save and invest? Every Peace Corps affiliate gets a free coaching session. No spam, promise. We just love helping Peace Corps folks.