SCHWAB – POMERANTZ: Redditors Asked Carrie These Financial Questions. Can You Relate?

Dear Readers: Recently, I did my first ever Reddit Ask Me Anything (AMA). I was really excited about it, and not just because my kids are Redditors who constantly seek and give advice on the channel. I wanted to have a real-time discussion with people about something that’s weighing heavily on everyone’s minds: how to manage your personal finances during times of crisis. 

I had a lively two-hour chat with the Redditors and answered about 40 questions on topics ranging from what to do with stimulus money to advice for new investors to suggestions for recent grads entering the job market during turbulent times to whether I prefer burgers or burritos. It was so much fun, and I hope I offered some actionable advice and helped calm a few fears. 

I want to extend that conversation to my “Ask Carrie” readers, too, so here are some questions I didn’t get a chance to answer during the live event. Curious about what else people were asking. You can check out the full Reddit AMA conversation here.

Three New Questions About Managing Money Today

1) “What would be the best place to park my emergency money? I was thinking of splitting it between a money market fund and a high-yield savings account. I need high liquidity, although I won’t need the money for 2-3 years when I plan to purchase a second-hand car. What are your thoughts?” 

You actually have two issues here: where to put your emergency fund and how to save for a short-term goal. While they may seem similar on the surface, you really should look at each pot of money differently. 

An emergency fund needs to be safe, available immediately and only used if you’re in a jam — like a job loss or health issue. Ideally, it should be enough to cover three to six months’ essential expenses and kept in a separate account, preferably an interest-bearing checking account, a high-yield savings account or a money market fund. Once it’s there, don’t touch it until you absolutely need it. 

When saving for a goal like a car, it depends on your time frame. Any money you’ll need in three to five years shouldn’t be in the stock market, so you’ll want to be conservative here, too. But you have a few more options. A high-yield savings account or money market account is one choice. You might also consider CDs or a short-term bond fund, which would give you increased liquidity and possibly a bit more of a return — with a little more risk if rates increase, and interest rates are pretty low across the board right now. 

But no matter where you put this money, the most important thing is to keep the two pots separate. Then you can relax knowing you’re likely covered in case of the unexpected — and you can look forward to buying that car when the time is right.

2) “Where should a couple in their mid-30s with two young children and a higher than average mortgage put any extra income? We’re looking to invest any savings into something more lucrative for our future.”

Before we get into investing possibilities, let’s talk a bit about your mortgage. Since you say it’s higher than average, you might consider using some of your extra money to pay it down more quickly. Or you may do well by refinancing since interest rates are at historic lows. That could save you on interest and help free up more money every month, which you could then invest for your future. Consider how long you plan to stay in the house and the refi costs. 

As for investing opportunities, before you do anything else, both of you should make retirement a top priority by contributing to a 401(k) or IRA. (Be sure to contribute enough to a 401(k) to capture the maximum employer match.) If you have that covered, you might look into your eligibility for a health savings account (HSA), which is a tax-advantaged way to save and invest for health care costs today and tomorrow. 

Then there’s the kids’ educations. You could set up a 529 account for each and make regular contributions to get a jump on college. All of these opportunities combine potential growth with tax advantages — great for the present and the future.

3) “My job is considered essential so I’m still working and able to pay my bills. Because I have fewer expenses right now, I actually have some money saved for the first time. How should I go about investing it for the future? I’ve always been a paycheck-to-paycheck guy and don’t have anything saved for retirement (I’m 31). Not sure how to go about it after the stock markets have crashed.” 

I’m glad you mentioned retirement because that’s exactly where you should begin. If your company offers a 401(k), start contributing at least enough to get any company match. A 401(k) is an easy way to start investing and makes saving and investing automatic. At your age, I’d target saving at least 15% (including employer match) and avoid being too conservative with your investments. You have time on your side. 

With the money you’ve saved, I’d make sure you have an emergency fund to cover three to six months of necessary expenses (see question No. 1) before focusing more on retirement saving above any match. If you don’t have a 401(k), I’d recommend opening an individual retirement account (IRA) and setting up regular monthly payments to it from your paycheck. 

You can do this through a bank or brokerage company. You’ll have to choose your own investments, but fortunately, many broad-based mutual funds and exchange-traded funds give you a simple, low-cost way to begin investing in stocks, bonds and other asset classes. There are plenty of reliable websites that give details on funds, including performance and fees, and let you comparison shop. 

And don’t be too focused on the current stock market. Successful investing is about staying in it for the long term. At your age, retirement is a long way off, so you likely have plenty of time to ride out market ups and downs. In fact, when you’re trying to “buy low, sell high,” it can be better to invest after a market decline. But the most important thing is to get started.

I hope to do more Q&As in the future. Let me know what’s on your mind!

Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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