These Investment Accounts Are Saving People 18-65 Thousands a Year

• Author: Monica Jackson
• Posted: 2024-06-29

Everyone knows that saving money can be a huge struggle. While the common adage "A penny saved is a penny earned" is thrown around quite often, this is becoming less and less true for many Americans. Interest rates for traditional bank accounts continue to be next to nothing, with most banks giving consumers either no interest rate or something very small, such as 0.05 Annual Percentage Yield (APY).
 

What's Happening with These Interest Rates?

Unfortunately, when the federal reserve sets the official rate of inflation, banks adjust so they can meet their profit margins. While simply joining a credit union may seem like a solution, most credit unions still don't provide great returns on investments. Until 1974, the inflation rate was based on the price of silver. However, that is no longer the case, and this has led to decreased interest rates.
 

Shouldn't I Just Play the Stock Market?

"Day trading" is a hobby for some, but it's financial Russian Roulette for most. Some who are desperate to see their money do some work for them end up losing it all to day trading and "stock option trading," both of which are dangerous for Americans of average or lower income. It can also be just as addictive as casino gambling, since it's effectively gambling in most cases. This is not how to guarantee a secure financial future!
 

I Already Have a Savings Account!

Yes, and you should always maintain a cash account that's easy to access. This is known as an emergency fund, though financial experts disagree with how much cash you should store in this account. The first step, though, is to calculate your monthly expenses. Once you have those calculated, the most liberal expert estimate is financial expert Dave Ramsey, who suggests you save three months of full living expenses.

Suze Orman suggests that you should save more like six to eight months of living expenses. Of course, this should come after you pay off interest-accruing debts. This should be kept in a "high-yield savings account". This is a standard savings account that comes with a few federal regulations, the most important of which is that you may only make six withdrawals per month from the account. This should not be an issue for your emergency fund. Keeping up to one month of living expenses in a checking account is also advisable, but what about after that?
 

IRAs Are Your Friends

Chances are that your workplace offers a 401(k) or 403(b) plan. If your employer offers a match, your very first financial move should be to contribute at least the amount that will get you the maximum match offered. However, first ensure that your employer doesn't have a ridiculous "vesting period," which can be up to ten years in some cases. For some employees, this is the most they can contribute to retirement each year, and that's fine! However, if you're looking for additional tax-friendly retirement vehicles, IRAs are your friends.
 

Tax-Deferred IRA vs. Post-Tax IRA

An Individual Retirement Account (IRA) can be either "post-tax" or "tax-deferred". A tax-deferred IRA can be a great second investment account for those who already contribute the maximum allowed by law to their 401(k) or 403(b) plans. There's one fairly major catch, though! The most that can collectively be contributed to an IRA is regulated by the IRS, just as the amount you can put in a 401(k) is.

For 2020, the limit is $6,000 for most people. However, if you're 50 years older or more at any time during the year, your "catch-up contribution" is $1,000, which effectively allows you to contribute $7,000. Remember, this applies to all IRA accounts, regardless of whether they're tax-deferred or not!
 

Tax-Deferred or Post-Tax?

This is a great choice if you'd just like to extend your 401(k) contributions. You have full control over where your money is allocated. Most banks offer different levels of risk tolerance for this type of account. The best part is that the money you put into it isn't taxed! However, once you start receiving money, the distributions will be taxed.

Standard Roth IRAs, or "post-tax" IRAs, are great if you're not earning much at the moment, but you think you'll earn more later in life. You do pay income tax on these, but the investment growth over the years is not taxed, nor are the distributions!
 

Wrapping Up

Only you can decide the type(s) of account(s) that are best for you. If you aren't sure, always consult with a qualified financial adviser!