What should you do with your surplus?

/ Planning Within Reach, LLC/

transcript

Hi, this is Linda Rogers from Planning Within Reach. The most common question that I get from pre-retirees - so people that are still saving for retirement - is where should I be saving? There are many different types of savings accounts, and people have debt, and they don't know where the money should be going first. So, of course, that is a hard question to answer quickly in a video. But I'm going to give you a checklist for you to go down just to look at in the priority order.

Pay off High Interest Rate Debt First

So first you want to look at credit card debt. If you have high interest rate debt, then you want to get rid of that as soon as possible. You want to also look at any other debt. If you have a HELOC or student loan debt, you want to look at the interest rates. So if you have a student loan that has 1% interest, which I've seen, then maybe it makes sense to keep that for now.

Take Advantage of your Employer’s Match

You also want to consider your employer's retirement plan. If you're lucky enough to have an employer match on your 401k, TSP, or 403b, you want to take advantage of that. So typically it is stated that if you save X percent of your salary, the employer will match, 100% of that. They won't usually match the entire contribution, although I have seen that. But you want to look and make sure that you are saving at least enough to get that free money. We do not want to leave that on the table.

Build a Cash Reserve

Then you want to look at your cash reserve. So this is money that you have set aside in the event of an emergency. It should be easily accessible, such as in cash. It can be earning an interest but it should not be invested in the stock market. The amount that you should have in there should be six months worth of expenses if you're single or a single income family or three months worth of expenses if you are a dual income family.

Save More to your Retirement Accounts

Then you want to go back to your retirement accounts. Again, if you've just been saving enough to get the employer match, we want to go ahead and bump you up and save more. There are limits that change every year. There's the 401k, but there's also IRAs and Roth IRAs. They all have different characteristics and different limitations. So you have to look through that and decide what makes sense for you.

Consider a Brokerage Account

After that, you can look at a brokerage account. That is a taxable account, but it still may make sense because the retirement accounts cannot touch be touched until age 59 1/2 or you will pay a penalty. There are some exceptions, but for the most part, that is the case. So if you want to retire early or you want money for another goal, maybe another investment property, then you may consider the brokerage account to help you save and do that.

529 Plans for College Savings, and More

Then you can look at 529 plans if you wanted to help your kids with college.

You may look at making extra mortgage payments. Even if you have a low rate, like 3%, that's a 3% guaranteed rate of return if you pay it off.

You can look at I bonds. Those are government bonds that are inflation adjusted that can help amplify your retirement income.

You can look at donor advised funds. If you're charitably inclined, then that may be a great way to give in the future. You put money into an investment account, you get the tax deduction now, but you can give the money away at at a later point. Meanwhile, the money can be growing tax-free.

So, as I said, this is kind of a quick overview, just a snapshot of what is possible. But this is what I help you figure out during the planning process - what you should be saving, where, what amounts given the limitations and your tax situation. Things are always changing, so we are always looking at that every year to make adjustments as needed. Reach out with any questions. Again, my name is Linda Rogers, owner of Planning Within Reach.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.