What Should I Do With Extra Money Right Now?
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Will come back to finance friday, another special edition of money girl, where I answer your burning money questions. Today's topic comes from laun j, who says, i'm at twenty two years old, the recent college graduate who started my first full time job a few months ago. I currently have little bills and no dead.

I max out my rah I array for the year, but will only qualify for my company for a one k retirement plan once i've been employed for a year. I have about twenty thousand dollars in savings and want to buy a car in a year or so. What vice can you give about what to do without extra money? Thank you so much for your question.

Laun with a job, no debt and money in the bank, you are in an enviable position as a Young percent. So congratulations, cy, or late years ahead of where I was your age and probably where the listeners, uh, where or are at your age. So you have a lot going for you.

This podcast will answer your question about the smartest moves you can make right now, no matter if you have a little or a lot of extra money. Welcome back, everyone. thanks.

We're joining me on episode eight hundred seventy nine. I'm Laura atoms, an award d winning author, finance spokesperson, a speaker, founder of the money stack, a sub stack newsletter and host of the money girl podcast. Over forty three million downloads.

If you're getting value from the free content we d love creating here, please subscribe and consider submitting a five star rating or review on your podcast APP of choice. And if you have a question about money for the show, i'd love to hear that you can leave IT on our voice mail at three zero to three six four zero, three zero eight. You can also send an email and sign up for the free money stack newsletter when you visit Laura d.

Adams dot com. Whether you're fortunate enough to receive a cash gift, a bonus or a race, having extra money is an excEllent opportunity to improve your finances over the long term. First, I want you to identify or review your financial goals to know what you want to accomplish with your money.

For instance, are you like Lawrence and wanted buy a car in the next year? Or you may wanna throw a big party like a wedding or take a vacation, or paid down debt, start a business or get serious about investing for retirement? There are so many things that are unique to you, and you know how you see your financial future.

Only you know the answers to those questions. But depending on your financial situation and dreams for the future, i'm going to go through ten things to do with extra money right now in the order of highest to lowest priority. So number one is start or build an emergency fund.

Learn the first place extra money should always go is to create a financial safety and using a high interest savings account. Now, how much cash you should have depends on your income, expenses and goals. However, i'd say at least three to six months worth of your living expenses is always a good guideline.

For instance, if you spent three thousand dollars monthly on essentials like food, housing, utilities, insurance, transportation and health care, you might need nine thousand, maybe up to eighteen thousand, as a cash question. That savings will be your lifeline in a hardship like losing your job, getting a large unexpected bill or having a significant out of pocket medical expense. Saving, not investing, is the right move for reaching short term goals like being prepared for the unexpected high field savings is also where you should keep money earmarked for an upcoming vacation or buying a car in the next year or two.

While you certain ly don't earn as much on savings compared to investing, you can rest easy knowing your cash will be there plus interest the moment you need. You have virtually zero risk when choosing a savings account covered by F, D, I C or N C U, A insurance that's very different from investments which fluctuate in value and can lead to significant returns or losses. So don't risk losing money that you might need or that you plan to spend in the near future.

All right. The second thing to do with your extra money is make sure you have enough insurance. Another essential way to prepare for the unexpected and prevent financial hardship is having insurance like health insurance, renters insurance, disability and life policies.

If you have any insurance gaps you want to, to fill them using your extra cash before investing IT. Even if you get life and disability coverage through work, IT may not be enough depending on your situation. Plus if you leave your job for any reason, those policies typically end by the end of the month.

Now life insurance is essential if you have anyone who is financially dependent on you, such as a spouse, partner, child or other family member. Laura didn't mention that that may not be something that appropriate for her. The third thing to do with extra money is contribute to a workplace retirement plan.

If you work for a company or organization that offers a retirement plan like a four o one k four o three b or four fifty, even be sure to participate. That's the first place. Your extra money should be invested up to the annual limit when you're eligible to participate.

Lauren mentioned having to be employed for a year, so will cover other options for her. In the meantime, for twenty twenty four, you can contribute up to twenty three thousand, the most workplace retirement. If you're over fifty, you can make additional catch up contributions above to seventy five hundred for a total of thirty thousand five hundred.

And for twenty twenty five, the limit increases to twenty three thousand and five hundred. And it's got the same catch up next year. So that means you've got a total and thirty one thousand dollars for twenty five.

I always recommend investing at least ten to fifteen percent of your growth income for retirement or at at least enough to maximize any employer matching to start make a goal to increase your contributions annually until you eventually bump up against the allowable limit. And that limited bally goes up based on an annual cost of living adjustment. Maxing out an employer sponsored retirement plan is one of the best ways to grow your baLance, reduce taxes and achieve your retirement goals. However, before age fifty nine and a half, remember that withdrawal, not previously tax or subject to income taxes, plus in additional ten percent early withdrawal penalty. So it's typically not a good idea to put money in a retirement account that you might need to spend early.

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Number four is contribute to A A oh, I R A after maxing out an employer sponsored retirement plan. A rah ira is the next best place to invest extra money, so i'm really glad that Lauren has already funded one. It's available to anyone with earned income, including minors and seniors.

For twenty twenty four and twenty twenty five. The I R, A contribution limit is is up to seven thousand or eight thousand. If you're over fifty, you make after tax contributions, but enjoy tax free withdrawal after fifty nine and a half.

However, there are income limits to make raw ira contributions, and lets go through those. If you're a single taxpayer, you must have a modified adjusted growth income, or magi under one hundred sixty one thousand four twenty twenty four or under one hundred and sixty five thousand four twenty twenty five. Mary, taxpayers that file a joint tax return must have a magi under two hundred forty thousand for twenty twenty four or under two hundred forty six thousand four twenty twenty five.

And mary taxpayers filing separately must have imagine under ten thousand to qualify for raw ira contributions. If your income is below those annual limits for your tax filing status, you can partially or fully fun a rop ira and max out a workplace retirement plan or even a self employed account in the same year, giving you really nice tax benefits. Note that unlike a roth ira, a raw retirement plan at work has no income limits.

Okay, so you can contribute to a wrong and work no matter how much you make the fifth thing to do with some extra money is to contribute to a traditional I R A. If your income is too high to qualify for a ratha, your next best place to invest is a traditional account. Unlike a rap I ra, a traditional array has no income limits.

With traditional retirement accounts, you make pre tax contributions that gives you a good upfront tax deduction in the current year, even if you don't im ize deduction on your tax return. However, your and any spouses income affects whether you can deduct traditional I R A contributions when you also participate in a workplace retirement plan in the same year. Here's how IT works.

When you're twenty twenty four magi reaches eighty seven as a single taxpayer or one hundred forty three thousand as a joint tax filer. That's when you can no longer deduct traditional I R A contributions when you also have a retirement plan at work. Additionally, if you're not covered by a workplace retirement plan, but you're married and your spouse is the household match, I cut off for deducting all traditional I ra contributions is two hundred thirty thousand.

Now those deduction come off limits will increase in twenty twenty five to magi of eighty nine thousand as a single or one hundred forty six thousand as a joint filer when you participate in a workplace retirement plan and if you don't have a plan. But response does the household match I cut off increases next year to two hundred thirty six thousand. So that doesn't mean you can contribute to a traditional ira when you also have a retirement plan at work or self employed plan IT just means that summer all of your contributions may not be tax deductable.

R number six is to contribute to a self employed retirement account. We qualify for a self employed retirement plan with part or full time business income. The most popular are the solo for a one k and the sep ira. They allow you to contribute much more than with other retirement accounts, making them a really good choice for investing your extra money. I've been using a step ira for many, many years because it's just a really easy plan to maintain.

You don't have any annual paperwork um and it's a good option for business owners with or without employees, you can contribute up to sixty nine thousand for twenty twenty four or seventy thousand for twenty twenty five if you've got enough income to support those higher limits. Another great option when you have no full time employees except to spouse or a business partner is a solo for a one k however, with that plan, you must fund IT through payroll deductions, which creates a little additional ongoing administration. But a solo for a one k may allow you to make even higher annual contribution limits than with a sap iram.

okay. Moving on. The number seven is to contribute to a health savings account hsc, after you've exhaust all your retirement account options, the next best place to invest extra money is in ha. However, you probably know if you've been listening to money girl for any amount of time, that to have an h sa, you must be enrolled in a high deductable h sa eligible health plan.

You can purchase that on your own or through work for twenty twenty four, you can contribute up to four thousand, one hundred fifty dollars when you have an individual health plan, or eighty three hundred when you have a family health plan. And if you're over fifty five, you can contribute an additional one thousand dollars. And those limits will get bumped up next year.

So theyll be forty three hundred for a single plan and eight thousand five hundred fifty for a family plan in twenty twenty five, H S. Says, are really great plans because they have no restrictions on your income. They allow tax deductable contributions and they allow you to avoid tax on investment growth when the funds get spent on qualified medical expenses.

And those expenses, uh, you know, there are a broad range of goods and services like medical, dental, vision, hearing, co practical, ubuntu prescriptions and many over the counter medicines and products. You can spend those funds for medical services for yourself or your family, or you can even just keep your H. R.

A. BaLance invested in growing indefinitely without penalty. Now before age sixty five, withdrawing from an h sa for non qualified expenses like groceries or rent means they would be subject to taxes plus an additional twenty percent penalty.

So just like with a retirement account, you shouldn't put money in an h sa that you might need for everyday expenses. However, if you have an h to, say, baLance, after age sixty five, you can spend IT on non medical expenses without penalty. They will be suspected to income tax, but not a penalty.

okay? Number eight is to contribute to eight, five, twenty nine college savings plan. If your emergency and your retirement savings are on track, consider investing extra money in a five twenty nine plan to pay future education expenses like tuition, books, computer equipment, internet access and room and board for yourself or a family member.

Now Lauran didn't mention whether she's considering going back to school at in a point, but you know, this could be something to consider if he is. There are no income restrictions to make five twenty nine contributions. While those contributions are that tax deductable.

Your investment growth is never text. If you use five twenty nine funds for qualified education expenses, the only downside of contributing to a five twenty nine plan is that spending IT on anything besides qualified expenses comes with the penalty on the earnings portion of the distributions. You typically must pay income tax plus eight ten percent penalty on amounts that were not previously text.

Number nine is to use a bouchard account. Once you've exhausted all your tax advantaged account options to invest extra money, it's time to look at a taxi bruker account. The investment firm youtube should depend on the investment you want to purchase, but I really recommend sticking with the basics like mutual index or exchange traded funds.

While a broken age doesn't reduce your taxes, IT is a very flexible account that you can tap for any reason before age fifty nine in a half without penalty. That also makes IT an excEllent place to invest for medium term goals, maybe like buying a home or starting a business in more than three years in the future. And lastly, number ten, hire a financial professional.

If you have a significant windfall, consider hiring a pro IT could be a financial planner, insurance agent, a state attorney or account, just depending on your needs to help you understand your options and achieve your goals. But I will say before working with a financial advisor you wanted, look them up on brooker check. This is a free tool from the financial industry regulatory authority, or fina, that helps you learn about their background in any disciplinary history.

You can also check with your state security regulator to ensure you choose a qualified financial professional. And i'll put links to both of those resources in the notes for the show. Laura, thanks again so much for the question.

So depending on how much you want to to put down on your car and how much you need for your emergency savings, that will dictate how much you should keep in savings. And if you're not in a high field account, I would definitely recommend moving your money over two ones so you can earn a little bit more interest. And if there is any money left, you know, going in order of how we covered things here, if you got an h sa eligible health plan, that would be a great place for the extra money.

Or a five twenty nine if you're thinking about going back to school or opening up and investing in a taxable brigge account. I hope that helps. That's all for now.

I'll talk to you soon. Until then, here's to living a richer life. Money girl is a quick and dirty tips podcast, and I want to thank our fantastic team. Steve Ricky berg, audio engineers the show ran engages is our director of podcast, holly hutchings is our digital Operation specialist, Morgan Christian centers our advertising Operation specialist, vena tamela is our marketing and publicity ly associate, and the fanie hoops is our marketing contractor.

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