$10K in the Bank? 9 Money Moves To Do Now

Have $10,000 in the bank for the first time?

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It’s a great feeling, and liberating. A cash cushion frees you from thinking about the big picture. For many people, this is the first time they begin to see their financial future as a possibility rather than an endless pursuit to get out of debt.

But all those endless possibilities can start to seem intimidating as they stretch out toward the horizon. Stay grounded by focusing on these priorities first.

1. Plan Your Emergency Fund

Everyone needs an emergency fund. How much varies from person to person, depending on factors such as the stability of your income and expenses and the security of your job.

For most people, an emergency fund that can cover two to 12 months of living expenses is appropriate. Workers with highly stable jobs and monthly expenses can survive on only a few months’ worth of expenses, while those who are self-employed or have variable expenses usually need more.

If two to 12 months of living expenses seems like a lot, don’t fret. You don’t have to save it all at once or even keep it in cash savings.

As a priority, just set aside $1,000 in your savings account. If you’re tempted to raid your savings every time you log in and see that balance like a cupcake waiting to be devoured, consider keeping it at a different bank as your checking account. Do it.

After the first $1,000, simply set aside a portion of your savings to fill your emergency fund. For example, if you maintain a 20% savings rate, you can ask your employer to split your direct deposit amounts so that all 20% goes into your savings account, then you can withdraw some of it each month. From savings can be transferred to investments or pay off debt. ,

2. Pay off high-interest debt

It’s hard to get excited about saving money at 1% interest or even investing at 10% return if your credit card balance charges 24% interest.

Pick your smallest loan and prioritize it above everything else. Once you’ve exhausted that, put all your savings into paying off the next smallest debt. it is called debt snowball method Because, with every loan you pay off, you have more money each month to pay off the next loan.

Psychologically, it also helps to get some early wins by taking out smaller loans first.

Check out our interview with Adam Carroll for more tips on getting out of debt fast.

3. Maximize Employer Matching Contributions

If you’re not taking full advantage of employer matching contributions, you’re leaving some portion of your salary on the table.

You earn an immediate return on every dollar invested with Employer Match. For example, if your employer matches your 401(k) contributions up to 5% of each paycheck, you earn a 100% return on every dollar you contribute up to that limit.

Don’t leave that money on the table. Contribute up to the limits set by your employer.

4. Open an IRA

If you don’t have an Individual Retirement Account (IRA), open one now. As such, right now open a new tab in your browser and spend 90 seconds opening a tab with a brokerage of your choice (I use Charles Schwab).

In 2023, Americans under age 50 can contribute up to $6,500 to their IRAs. Americans age 50 and older can contribute an additional $1,000 as a “catch-up contribution.”

I personally prefer Roth IRAs because they are compounded and tax-free, and you don’t owe any taxes on withdrawals in retirement. They are more flexible for early withdrawals if you decide to retire early or use the money for other uses such as buying a first home. But if you’d rather take the tax deduction now, more power to you.

Real estate investors can invest tax-free with a self-directed IRA if they wish, but it comes with more fees and headaches than investing in a regular brokerage IRA.

The more portion of your paycheck you can keep for yourself and out of (greedy) Uncle Sam’s hands, the faster you can build wealth and reach your financial goals.

5. Explore Other Tax-Advantaged Accounts

While your retirement account should remain your top investment priority, you also have options for tax-sheltered education accounts and health care accounts.

To save for the college education of your children or other family members, you can open a 529 plan or Education Savings Account (ESA). While 529 plans are administered at the state level — and each state structures them slightly differently — ESAs follow federal rules. It works like a Roth IRA for college costs.

Remember, though, there are dozens of ways for your kids to pay for college. There’s only one way for you to make sure you don’t run out of money in retirement: investing enough money. When in doubt, invest for retirement.

You can also open a Health Savings Account (HSA) to save and invest tax-free for health care costs. In fact, HSAs offer the best tax breaks of any tax-sheltered account. You deduct all the money contributed, which is tax-free, and withdrawals are tax-free as long as you put it toward qualified health care expenses.

Keep in mind that HSAs generally work best for healthy people because they are combined with a high-deductible health care plan. They make a good option for self-employed people who are healthy through their jobs or for workers without a comprehensive health insurance policy.

6. Stock Investing: Start With Index Funds

Not sure how to invest in these retirement and other investment accounts?

Keep it simple, and only invest in index funds that reflect the larger market. For example, to invest in America’s 500 largest companies, you can invest in an index fund that mimics the S&P 500. To invest in US small-cap companies, you can invest in a fund that mirrors the Russell 2000 Index.

Or keep it even simpler and invest in an all-stock-market fund like Vanguard’s VTI for broad exposure to thousands of US stocks. Add exposure to foreign stocks with VXUS, the international fund counterpart. You could literally invest in those two funds and never learn a thing else about stock investing.

But if you want more guidance, consider starting with a robo-advisor.

7. Invest With a Robo-Advisor

With a robo-advisor, you fill out a short questionnaire with relevant details such as your age, goals and risk tolerance. It then proposes an investment portfolio that best suits your needs, and if you like the look of it, you can approve it and let the robo-advisor manage your investments for you.

They periodically rebalance your portfolio to ensure that it maintains your target asset allocation, so you don’t have to worry about it. In more advanced cases, they may employ tricks like tax-loss harvesting to reduce your tax bill.

Remember how I said I use Charles Schwab as my brokerage? They offer a free robo-advisor which I take advantage of. The only requirement is a $5,000 opening balance.

Another advantage is the lower expense ratio for index funds and robo-advisors. Because these are passively managed funds, they are incredibly cheap, so less of your money is spent by the fund to line their pockets.

You don’t need to be an expert stock investor. seriously.

8. Experiment with Real Estate Crowdfunding

Traditional real estate investing takes a lot of time, money and skill. Even if you use tricks to flip houses with no money, it increases your risk.

With $10,000 in the bank, you probably don’t have enough to go out and buy a rental property or flip a house. But you have a lot to invest in real estate crowdfunding platforms.

In fact, many crowdfunding platforms let you start with as little as $10 to $100. This means you can dip your toe in the water and see how you like it before spending more money.

For example, both Groundfloor and Fundrise let you invest with as little as $10. Concreit lets you invest with as little as $1. You can buy fractional shares in rental properties for $20 on Ark7 or $100 on Arrived.

At one time, people had to buy shares in publicly traded REITs as the only low-cost option for adding real estate to their portfolios. But public REITs share too high a correlation with stock markets to provide greater diversification benefits, so I prefer real estate crowdfunding as a low-correlation alternative.

9. Think Big: Plan Your Fire Escape

When you are in debt, you tend to think defensively. You only think about how to get out of that debt – it’s hard to think about the big picture of wealth building and passive income or retirement planning.

But as you leave behind high-interest loans and rack up your bank account balance, you may be asking the big questions. For example, when do you want to retire? You’d be surprised to know that with a high enough savings rate, you can basically retire at any time you’d like. I once calculated that if you saved 90% of your income and invested it at 10% annual return it would take about five years to retire.

Of course, most of us don’t want to live on only 10% of our paychecks, but the point remains. You are in the driver’s seat; You control how fast you build wealth and how fast you generate passive income from your paycheck.

Because when your investments generate enough passive income to cover your living expenses, your job becomes optional. This is called Financial Independence (FI), which is sometimes expanded to Financial Independence/Retire Early (FIRE).

As you become a more sophisticated investor, you can explore advanced planning tools like the Roth conversion ladder to quickly access your IRA funds or invest in real estate with a self-directed IRA. Instead of the typical 7% to 10% return earned by stocks in an average year, you can learn how to invest in real estate syndication for 15% to 30% returns. And when you become an Accredited Investor, a whole new world of private equity investing opens up to you.

But don’t worry about it now. Simply start by deciding when you want to achieve financial independence and work backward from there to determine how much of each paycheck you need to save and invest.

final thoughts

It’s all too easy to get overwhelmed with investing and personal finance questions.

Start by setting aside $1,000 in your emergency fund and maxing out employer contributions. Then, if you have high-interest debt, focus on paying it off. After that, consider funding your IRA, perhaps letting a robo-advisor handle the investments for you.

Don’t stress about it. If this starts to feel like a to-do list, just think of the list above as ideas and suggestions to get you started.

And when in doubt, ask for help. No one is born knowing how to manage money or investing – you learn by asking other people who know more than you.