I’ve been watching the market, as I’m sure many of you have, wondering how low it will go. The only money I have is in the market, since we are not in a position where we have excess money to invest. I am not a financial planner and my advice should not be relied upon by everyone, but this is where my money would go.
First, if you work for a company with a matching retirement plan, fund your plan so you get the full match from your company. Even with the current market conditions, you will still make money on the deal. Let’s look at worst case scenario. Say you put $1 in your retirement account. In the lowest tax bracket (10%), it really only cost you 90 cents because you are not paying taxes on the dollar you put into your retirement account. If your company matches 50 cents for every dollar you put in, you now have 1.50 in your retirement account but it only cost you 90 cents. Even if you put money in when the market was at the top last year, and you’ve lost 30% of your investment, your account should be at $1.05. So your 90 cent investment has made you 15 cents. If you’ve been putting money in for years, you are probably head more than 15 cents per dollar invested. As long as your company is matching your investment, it’s worth it to put money in your retirement account.I would not put than what the company will match until you’ve completed the rest of the savings steps.
Next, I would be building up my emergency savings account. You should have three to six months worth of expenses in a savings account in case of an emergency. If you get sick or lose your job, having that money will help give you peace of mind and keep you from getting behind with your bills. Put that money in a high interest savings account (like ING direct or HSBC direct). Do not invest this money in the markets. You cannot afford to lose it. If you can’t afford to lose it, don’t invest it.
If you have three to six months of expenses socked away in your savings account, it’s time to get your debt paid off. Pay off those credit cards, personal loans, car loans and student loans. I’ve discussed this in previous posts, so I won’t go into it again.
Now, you should be in a pretty good financial place. You have some money saved for retirement, you have emergency savings and the only debt you might have left is a mortgage. With the extra cash you have left, try to make at least one extra mortgage payment a year. There are a number of ways to do this. You can actually make an extra payment sometime during the year. You can also divide your monthly payment by 12 and send 1/12 the payment in with your mortgage each month or you can pay half your mortgage payment every 2 weeks. By paying every two weeks, you’ll pay one extra payment each year. In order to do this, you’ll probably have to sign up for a program through your mortgage company. Even if there is a fee, you’ll still make out ahead. By making one additional payment on your mortgage each year, you’ll pay off your 30 year mortgage seven years early. SEVEN YEARS and save tons in interest over the life of the loan. On a $200,000 mortgage at 6.25%, you would save over $75,000 in interest over the life of the loan. I’d much rather have that money than give it to my mortgage company.
Now that you are on good financial footing, now it’s time to save more money. This is where a financial adviser comes in handy. He or she can help direct you. You might want to fund a Roth IRA or put more money into your 401(k). Whatever you decide to do, I’m a huge believer in making sure that you have enough put away for retirement before you start funding accounts for your children’s college education. There is no point putting money way for their education if you are going to have to rely on them for your retirement. Give your children the gift of not having to worry about your well being.
If you aren’t investing in your company’s retirement plan, go to your HR office today and get signed up.