Are you losing money by keeping too much cash? It's a controversial idea, but one that could change the way you think about your investments.
The earlier you start investing, the more potential for growth, but choosing the right accounts can be daunting. Certified Financial Planner, Jaime Bosse, suggests a simple strategy with three 'buckets' to help you make the most of your money.
After covering your daily expenses and saving for emergencies, it's time to think about investing. "If you have excess cash, you're actually losing out to inflation," Bosse warns. "Your money should be working for your future."
By spreading your investments across three accounts, you gain flexibility and control over your taxes. Each 'bucket' offers unique benefits, allowing you to access funds when needed and manage your tax obligations.
The exact allocation will depend on your income and circumstances, but the key is to utilize these accounts to your advantage. Remember, it's always wise to seek personalized advice from a trusted financial professional.
Here's a breakdown of the three investment strategies Bosse recommends:
Tax-Deferred Bucket: Think traditional IRAs and 401(k)s. These accounts let you contribute pre-tax money, reducing your taxable income for the year. Your investments grow tax-deferred until retirement, and withdrawals are taxed as income, usually penalty-free from age 59½ onwards.
Tax-Free Bucket: Roth IRAs and Roth 401(k)s fall into this category. You contribute money that's already been taxed, and your investments grow tax-free. Qualified withdrawals from age 59½ onwards are also tax-free and penalty-free. Roth IRAs offer additional flexibility by allowing penalty-free withdrawals of contributed funds at any time.
Taxable Bucket: Brokerage accounts are a great example. You invest money after taxes and can withdraw at any time without penalty. While you'll generally owe taxes on realized gains, these accounts provide maximum flexibility for non-retirement expenses, like a house down payment or a vacation, as you can access your funds whenever needed.
Certified Financial Planner, Patrick Huey, suggests starting with your company's retirement plan, especially if they offer a match. "If there's a match available, take it! It's free money from your employer to boost your retirement savings," Huey advises.
Using all three investment 'buckets' gives you options and flexibility. Experts recommend saving around 15% of your pre-tax annual income for retirement, including any company match. By splitting your money across these accounts, you can make significant purchases, lower your current tax bill, or reduce future tax obligations.
"Think of it as investing for your future flexibility, not just your retirement," Bosse encourages. "With money in these buckets, you're in control. You can work because you choose to, not because you have to. The world is your oyster!"
So, are you ready to take control of your financial future? Remember, it's all about giving yourself options and flexibility.
