As the new year unfolds, it presents a great opportunity to discard unproductive financial habits and adopt better ones. Whether you’re aiming to eliminate high-interest credit card debt or planning to create a budget for the first time, understanding that achieving these goals requires dedication and time is crucial.
The question arises: how should you allocate any extra funds? If you can set aside an additional $100 each month, there are various strategies to grow your wealth and finally gain financial footing.
We consulted financial experts to discover how they would put an extra $100 to work in the coming year, and here’s what their insights revealed.
1. Increase your 401(k) contributions
Mitchell Bloom, a financial planner from Bloom Wealth in Colorado, suggests that if your workplace offers a 401(k) plan—especially with an employer match—it’s an excellent starting point. An employer match is essentially “free money,” so take full advantage of this benefit.
You can aim to raise your contribution percentage to funnel around $100 more into your 401(k) monthly or, if permitted by your workplace plan, contribute a flat $100 each month.
Remember, funds in a 401(k) can grow without being taxed until you withdraw them upon retirement, allowing for compounding over time.
If you don’t have a 401(k) option at work, there are still alternatives available.
Consider using affordable advisory services like Betterment, which can create a fully diversified portfolio using fractional shares to maximize a smaller investment, advises Bloom.
2. Set aside $100 monthly for a Roth IRA
According to Jeff Rose from Good Financial Cents, saving in a Roth IRA can be a wise move, provided you meet the eligibility criteria. Although contributions to this account are made with taxed money, they can grow tax-free until retirement. Once you reach the age of 59½, you can withdraw funds without incurring income tax, which is certainly beneficial.
In 2020, individuals could contribute up to $6,000 to a Roth IRA or traditional IRA, with an additional $1,000 allowed for those aged 50 and up, totaling $7,000.
However, be mindful of income limitations. Married couples filing jointly cannot contribute if their earnings exceed $206,000, with phased-out contributions for incomes between $196,000 and $205,999. For single filers, the limit is $139,000 with phased-out contributions between $124,000 and $138,999. (Also see: 401(k) or IRA? Having both is essential.)
3. Build an emergency fund
If you haven’t established an emergency fund yet, financial advisor Jake Northrup from Experience Your Wealth highly recommends doing so. Your emergency savings should ideally cover at least three months of living expenses, if not more.
It’s wise to keep this fund in an easily accessible account, like a high-yield savings account. Although such accounts may not yield high returns, having readily available cash is crucial in unexpected situations such as medical emergencies or job losses.
Maintaining a fully funded emergency fund can prevent the necessity to rely on high-interest credit cards, which can lead to increased financial strain. (See also: 7 Simple Ways to Establish an Emergency Fund From Scratch)
4. Prepare for future healthcare expenses with an HSA
Financial planner Taylor Schulte, who also hosts the Stay Wealthy Retirement Podcast, recommends that after securing an emergency fund and eliminating high-interest debt, the next step should be contributing to a Health Savings Account (HSA).
He considers the HSA to be a “magical unicorn” among tax-advantaged investment accounts because it offers triple tax benefits.
You can invest funds each year tax-free, let them grow without taxation, and when you make withdrawals for qualified healthcare expenses, you won’t incur taxes then either.
To qualify for an HSA, you must be enrolled in a high-deductible health plan. For 2020, the IRS defines this type of plan as one with a deductible of at least $1,400 for individuals and $2,800 for families, as noted on Healthcare.gov. Total out-of-pocket expenses for these plans must also remain under $6,900 for individual plans and $13,800 for family plans.
Morgan Ranstrom, a financial planner in Minneapolis, MN, advises maintaining sufficient funds in your HSA to cover your insurance’s annual deductible for unexpected medical costs, while you can invest any excess for long-term growth.
With regular contributions, investment growth, and minimal withdrawals, this account can effectively fund retirement medical expenses without penalties, which is quite advantageous.
5. Eliminate high-interest credit card debt
Although paying off debt may not seem like a traditional investment, the financial returns can be remarkable. By eliminating debt, you cease incurring high interest rates, which translates to more disposable income for saving or investing.
Debt expert Chris Peach, who provides guidance through his Awesome Money Course, advises examining your credit card interest rates, especially since the average APR exceeds 17%.
“For most people, securing an 18% return on investments is a far-fetched dream,” he states. However, paying down high-interest debt can deliver that same return by allowing you to save the money that would have otherwise gone towards interest.
Consider a scenario where you carry a $10,000 balance on a credit card with an 18% APR. Making minimum payments would extend repayment over 94 months, accruing an additional $8,622 in interest. But if you added $100 extra per month towards that payment?
“Even though that might not seem like a lot, an additional $100 monthly would reduce the payoff time by 47 months and save nearly $4,000 in interest,” Peach remarks. “Not a bad return on a $100 monthly commitment.”
6. Invest in your personal growth
Russ Thornton, a fee-only financial advisor who specializes in retirement planning for women, emphasizes that investing in yourself can yield significant benefits. “This could involve purchasing books, enrolling in online courses, attending workshops, joining professional associations, or personal training,” he explains.
Gaining new knowledge or enhancing existing skills can lead to promotional opportunities or higher salaries, while learning new abilities may allow you to develop a side hustle for additional income.
Expanding your professional network through associations or events can also create valuable connections, potentially leading to new personal or career opportunities, Thornton adds.
Enjoyed this article? Pin it!
About the Author
