Ramit Sethi is a New York Times best-selling author and creator of one of our favorite personal finance sites, I Will Teach You to Be Rich. In his weekly video Q&A for Lifehacker, Ramit answers common questions about personal finance, careers, and more. This week: What should you do with your extra money?
Most common money questions revolve around saving more, but what if you have money sitting around in a checking or savings account? What should you do with it?
Tom from Mountain View, CA, asks:
"I've been really good about keeping my expenses down, finding multiple sources of income and building a 12-month emergency fund. Through all of this, I've saved up quite a bit of extra money which is currently in a high yield savings account. I feel like I should be doing some more with this money, but I'm not quite sure what the best thing would be."
Obviously, this depends on your age and financial goals, but here are some specific recommendations you can use today.
Invest so your money grows for you. Counterintuitively, putting money in a savings account is not enough. With interest rates so low, you're actually losing money thanks to inflation. The real gains come from investing your money so it grows for you. A great starting investment is a low-cost target-date retirement fund, which automatically diversifies and rebalances your investments based on your age — for very low fees. Vanguard is a great company with low-cost target-date funds. Also consider T.Rowe Price or TIAA-CREF.
If you have "extra" money, use the 10 Year Savings Strategy. If you have extra money, use the 10 Year Savings Strategy to save for predictable expenses in the next 10 years (wedding, kids, house, etc). Set up specific sub-savings accounts for each of these items. (Interesting sidenote: I surveyed people in their 20s, 30s, and 40s, asking them what they wish they'd saved for 10 years ago. Here are the actual results, but in short: People in their 20s wish they'd saved for travel. People in their 30s wish they'd saved for buying a house. And people in their 40s wish they'd saved for retirement.)
The big goal: Automate your money. Saving and investing alone are great, but you want to be strategic with your money. Build a bulletproof personal-finance system to help you automatically take a percentage of every dollar you earn and funnel it towards the right goals — including investing, saving, and guilt-free spending.
Ramit Sethi is a New York Times best-selling author who writes about personal finance, psychology, and careers. Learn the word-for-word scripts to negotiate your salary, lower your cable fees, and earn more money at I Will Teach You to Be Rich.
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