Take advantage of these different but important accounts.
Many consumers struggled to keep up with bills in 2022, and as such, had little money left over month after month. But the hope is that things will be different in 2023, and that you'll have money at your disposal beyond what you need to cover your bills. At that point, you'll want to find the right home for your money. And here are three accounts worth considering.
1. A savings account
The events of the past few years have taught us the hard way that having savings is important. In 2020, many people lost their jobs when the COVID-19 outbreak erupted. And in 2021 and 2022, many consumers had a hard time coping with higher living costs fueled by inflation, especially once government aid ran out.
That's why it's so important to have a solid emergency fund -- money to cover things like periods of unemployment or unplanned bills. And the best place for your emergency cash reserves is none other than a savings account, where your principal deposits are nice and protected.
How much emergency savings should you aim for? The old convention was to save enough cash to cover three to six months' worth of bills. In the wake of the pandemic, some experts are now calling for eight to 12 months' worth of expenses in the bank. Think about the threshold that gives you peace of mind and aim to fill your savings account with enough cash to meet it.
2. An IRA
Ideally, you'll have some money at your disposal this year beyond what you need for emergencies. At that point, it's a good idea to invest that money for the future. And if you want to reap some tax benefits along the way, then putting money into an IRA, or individual retirement account, is a good idea.
When you fund a traditional IRA, your contributions go in tax-free. So if, for example, you put $3,000 into a traditional IRA this year, that's $3,000 of earnings you won't pay taxes on. Plus, once your money is in your IRA, you'll have the option to invest it as you see fit. You can choose to invest in individual stocks, or invest in different funds (like ETFs) that make it easier to build a nice, diverse portfolio.
3. A brokerage account
IRAs differ from brokerage accounts in that they're earmarked specifically for retirement, and they offer tax breaks that brokerage accounts don't. But brokerage accounts are far more flexible. With an IRA, you're generally required to leave your money alone until age 59 ½. If you take an earlier withdrawal than that, you'll face a 10% penalty that won't come into play with a brokerage account.
Meanwhile, like IRAs, brokerage accounts give you lots of options for putting your money to work. And many brokerage accounts these days allow you to invest on a fractional basis. That means you can purchase partial shares of stock to build a portfolio instead of having to commit to whole shares, which can, in some cases, be very expensive.
Where should you put your money?
Completing your emergency fund should be your first priority in 2023. But from there, it pays to branch out into investing. As such, you may find that it makes sense to put your money into a savings account, an IRA, and a brokerage account this year so you get the best of all worlds.
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As someone deeply entrenched in the world of personal finance and investment strategies, I can attest to the critical importance of making informed decisions about managing your money. The article you just read touches on key financial concepts that resonate with my expertise, and I'm here to elaborate on each point with precision.
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Savings Account: The author emphasizes the significance of a savings account, particularly in the context of recent economic challenges. I concur wholeheartedly. A savings account acts as a financial safety net, providing a secure place for emergency funds. The recommendation to cover 8 to 12 months' worth of expenses post-pandemic is well-founded. It reflects the evolving financial landscape and the need for a more robust cushion against unforeseen circ*mstances.
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Individual Retirement Account (IRA): The article rightly advocates for investing surplus funds for long-term growth. The mention of an IRA as a tax-advantaged investment vehicle is spot-on. Traditional IRAs, with their tax-free contributions, offer a strategic way to save for retirement. Furthermore, the flexibility to choose investments, be it in individual stocks or diversified funds like ETFs, aligns with modern portfolio-building strategies.
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Brokerage Account: The distinction drawn between IRAs and brokerage accounts highlights the balance between tax advantages and flexibility. The article correctly points out that while IRAs are designated for retirement with associated tax benefits, brokerage accounts provide greater flexibility for accessing funds. The mention of fractional investing, allowing investors to buy partial shares, underscores the accessibility and cost-effectiveness of modern brokerage platforms.
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Prioritizing Financial Goals: The advice to prioritize completing the emergency fund before delving into investments is a sound principle. Establishing a financial safety net is a fundamental step in achieving overall financial well-being. Once this foundation is secure, branching out into investments across savings accounts, IRAs, and brokerage accounts becomes a strategic move for optimizing wealth growth.
In conclusion, the holistic approach advocated in the article aligns seamlessly with established financial principles. Combining the security of a robust emergency fund with the growth potential offered by strategic investments in IRAs and brokerage accounts forms a well-rounded financial strategy. As an expert in the field, I endorse these principles and encourage individuals to leverage these accounts judiciously to secure their financial future.
