- Emergency Savings (not an investment account but should have prior to investing)
- Roth IRA
- 401k or Company Retirement Plan
Managing your money at a young age can be intimidating so hopefully this breakdown can help.
1. Emergency Savings
This sounds boring but it is the most important. This account will be your go to for short term expenses. Saving for a rainy day is often disregarded but it can help you prepare for difficult circumstances. I strongly suggest keeping the emergency fund in place so you are never that guy or girl begging your family or friends for money.
I recommend saving 3-6 months expenses in a high yield savings account. To do this, find out what you spend per month and multiply it by 3x-6x. This money is meant for major one-time expenses and emergencies. Examples would be car or house down payment, major car repair, expenses after losing your job, and other large one-time expenses.
2. Roth IRA
In my opinion, I would consider opening a Roth IRA account at a young age. Normally your salary increases during your career. Before the age of 35, you are normally not in your prime earning years yet. The more money you make the higher tax bracket you will be in.
For example, if you make between $40K-$80K in 2020 you will pay 22% of that in federal taxes. Later in your career if you make between $163K-326K you will pay 32% of that in federal taxes.
The key here is to fund your Roth IRA at a young age when you are making less and in a lower tax bracket. It also gives your money an opportunity to grow tax free while being invested. When you retire you can withdraw this money tax free. The max amount you can contribute in 2020 is $6,000. Often people like to contribute monthly to these accounts, anywhere between $100-$500 a month.
3. 401K or Company Retirement Plan
Your employee match is free money! Make sure you are contributing enough to get your match.
For example, if your salary is $65,000 and your match is 4%. That means your company will match 4% of $65,000 (Which is $2,600). If you contribute $2,600 to your 401K your company will add another $2,600.
The money you contribute to these retirement plans will be taxed when you withdraw it. You cannot withdraw it until you are age 59 ½ unless you want to pay a 10% penalty to the IRS. The money you contribute is not taxed in the year you contribute. If you make $100,000 in 2020 and contribute $10,000 to your 401K you only pay taxes on $90,000 for 2020.
- Build emergency savings account.
- Consider opening up a Roth IRA and contribute. (max contribution $6,000 in 2020)
- At minimum fund your 401K or 403B to get your match.
- If you have money left over, continue to add to your savings or open an non-retirement investment account.
If you have questions about your specific situation or would like to open an investment account contact me firstname.lastname@example.org.
Roth IRA – Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All investing involves risks including loss of principal. No strategy assures success or protects against loss. Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor