If you’re able to save money, you’ve already taken a big step toward financial success. The next step is figuring out what to do with it.
You have lots of options available, including bank accounts, investments, and paying off debt. Choosing the right ones will depend on your current situation and goals. To give you some ideas, here’s advice from three financial experts on where to put your money.
1. Ramit Sethi: Investments, savings goals, and guilt-free spending
Ramit Sethi is the author of I Will Teach You to Be Rich. It’s a big promise, but he has the advice to back it up.
In terms of where to put your money, Sethi takes a balanced approach. He recommends people follow his conscious spending plan to decide how they want to divide up their income. He says to aim for spending no more than 50% to 60% of your take-home pay on fixed costs, meaning your regular bills. Here’s what he recommends for the rest of your money:
- Put 10% in investments. This includes any type of investment account you have: brokerage accounts, a 401(k) plan, and individual retirement accounts (IRAs).
- Put 5% to 10% toward savings. This includes short-, mid-, and long-term savings goals. You could put money toward any savings goals you have, but common examples include an emergency fund, vacation fund, and a down payment on a home. Use a high-yield savings account with a competitive interest rate.
- Put 20% to 35% toward guilt-free spending. This is absolutely anything you want, whether that’s a spa day, a designer bag, or going out to restaurants every weekend.
2. Warren Buffett: An S&P 500 index fund
Warren Buffett doesn’t need an introduction; the legendary investor is currently worth $119.2 billion. So, you could do a lot worse for advice on managing money.
He has also consistently pointed out that investing doesn’t need to be complicated. Here’s his advice on how to invest: “Consistently buy an S&P 500 low-cost index fund. Continue buying it through thick and thin, and especially through thin.”
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The S&P 500 is an index with 500 of the U.S. stock market’s largest companies. Its returns can vary from year to year. That’s normal with the stock market. But historically, over long periods, it has averaged a 10% yearly return. You can find S&P 500 index funds with just about all the good online stock brokers.
3. Erin Lowry: An emergency fund, debt, and a Roth IRA
Erin Lowry is the author of Broke Millennial. Even though millennials are her target audience, she provides personal finance advice that can benefit anyone.
Lowry recommends that everyone starts with their emergency fund. As she puts it, “You should build an emergency savings fund regardless of your debt burden.” Without this, you’ll need to go into debt for any unexpected emergency. A common rule of thumb with emergency funds is to save enough to cover three to six months of living expenses.
Once you have $1,000 to $1,500 in emergency savings, Lowry says you can start focusing more on paying down debt. So, if you have debt, you can divide your money between that and continuing to build your emergency savings.
Another helpful tip from Lowry is to invest through a retirement account as soon as you can. She recommends Roth IRAs, which let you make tax-free withdrawals in retirement. But if you have a high income now, you may prefer traditional IRAs. Contributions to those are tax-deductible.
Finding the right places to put your money
If you’re starting out with debt and no emergency savings, Lowry’s advice is excellent. Start with $1,000 to $1,500 in emergency savings. Then, focus on paying down debt and saving for your emergency fund.
Sethi’s method of dividing your income between fixed costs, investments, savings, and guilt-free spending is smart, too. It’s simple, it’s easy to follow, and it covers all the bases.
You also need to know what to invest in. While you have no shortage of options, there’s a reason Buffett always recommends S&P 500 index funds. If you put your money there, and keep it there long term, you’re probably going to do well.
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