Is it time to invest?
“I have some extra money, where should I invest it?”
This is a popular question. Investing is key to building wealth, but understanding the big picture of your overall financial world is an important and often overlooked first step. You must know where you are before determining where to go. Here are some considerations to look both ways before investing:
10,000 foot view
I’m an accounting (nerd) at heart and like to have an overall view of your personal balance sheet –what assets and liabilities do you already have? Be as detailed as possible with interest rates, separate accounts and individual assets. List them out and that will help guide conversation.
oh crap fund
We are eager for our money to do the work! Lets make sure that a possible financial emergency doesn’t blow up our goals. These can sneak up anywhere: medical issue, car accident, natural disaster, loss of a job, divorce, ect. An ample emergency fund provides a safety net for those “oh crap” moments, so you can deal with life without going further into debt!
confront debt
Sometimes the hardest part is writing down all the debt on the balance sheet. Take a deep breath. We’ll need the details here – what is the interest rate for each debt? What’s the maturity? **Good news - You don’t have to be debt free to start investing!** Planners have debated late into the night about paying down debt vs. investing. ‘One size fits all’ is not a thing in personal finance, so be sure to talk to an advisor to help you prioritize debt and investing.
what is the timeline
“When will you need this money?” We want to match liquidity and time horizon when choosing how to invest. If you plan on spending the money in three years, then the money doesn’t belong in the stock market. On the other hand, money intended for retirement in twenty years may be appropriately invested for long-term growth.
don’t forget taxes
Back to my CPA roots! Taxes can sneak up and sabotage us. Lets be thoughtful about the location of our investments so that we align tax strategy with our investment strategy.
Investments in pre-tax retirement accounts such as IRAs, 403(b)s and 401(k)s allow for deferred tax each year. Money is only taxed upon distribution. There are no consequences for selling assets within a pre-tax retirement account. Investments in Roth accounts grow tax free as well. Lastly, investments in taxable brokerage accounts have tax consequences for each individual sale and dividend received. Choosing the right investment for the right account (pre-tax/Roth/brokerage) will help optimize results.
I hope you take the time to look both ways before making investment decisions. A holistic approach will help you along your financial journey, and always reach out for help when uncertainty is present.
Look Both Ways Financial does not earn commissions if you decide to invest your money. Although Kaki Perdue is a CPA, Look Both Ways Financial is not a CPA firm.
