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Home›Working Capital Management›Where should you invest your next dollar? – Twin towns

Where should you invest your next dollar? – Twin towns

By Lisa Small
June 11, 2022
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It’s been a bad year in the financial markets, and a lot of investors are shaken. The University of Michigan Sentiment Index, which tracks consumer confidence (and therefore the likelihood of spending

Bruce Helmer and Peg Webb

plus), recently reported that confidence hasn’t been this low since 2011. Also, anyone who’s been to the gas pump or the grocery store knows that inflation is high and could linger for some time. When markets are so uncertain, many investors wonder where to invest their next dollar. Here is our opinion:

STRENGTHEN YOUR PERSONAL BALANCE SHEET

When a potential client visits us to see if we could meet their wealth management needs, we often ask them to bring documents that can help us assess their current financial situation. These include pay stubs, tax returns, bank, credit card and pension plan statements, unpaid debts, and more. The more detailed the information, the better we are able to advise these people on their best “next dollar” decisions.

This analysis helps us to quickly determine if someone is using their financial resources effectively. Some of the things we look for are: Does this person have too much high-interest debt on too many credit cards? Are they paying too much for a house or luxury cars? Are they sufficiently insured?

Your best “next dollar” decision might be to fill in the gaps in your current finances. Depending on your particular situation, areas you can focus on may include, but are not limited to, establishing an emergency fund, refinancing a high rate mortgage, consolidating debt, or repricing your home insurance policy. Strengthening your personal or family balance sheet is often the best use of your next investing dollar for one simple reason: it can help alleviate any immediate financial stress you may be feeling.

FOCUS ON YOUR MONEY LONG

Once the immediate needs have been eliminated, you can focus on planning for retirement or inheritance. We often call this investment “fortress” – or protecting and growing your serious money.

If your employer offers a workplace retirement plan such as a 401(k) or 403(b), you should consider enrolling. A workplace plan offers powerful benefits. The contributions you make reduce your taxable income and come directly from your paycheck – you never see the money. Earnings will accumulate in your account tax-deferred until withdrawn. Withdrawals are taxed as ordinary income, but you may be in a lower tax bracket when you retire. Make sure you contribute enough to qualify for any employer matching contributions.

Once your work plan is established, consider opening a traditional Roth IRA outside of the 401(k). A Roth IRA held outside of a 401(k) plan allows your contributions to grow for a longer period, provides more investment options, and makes early withdrawals easier. Unlike a 401(k), there are no contribution deductions in a Roth IRA. Contributions are made with after-tax money and earnings grow tax-free. Best of all, qualifying withdrawals are tax-free and can be passed on to your heirs tax-free.

Your maximum contribution to all of your combined IRAs (i.e. traditional IRAs and/or Roth IRAs) is $6,000 in 2022 ($7,000 if you are age 50 or older), and your ability to contribute to a Roth decreases at higher income levels. If you are filing taxes as a single person, your modified gross adjusted income (MAGI) must be less than $144,000. If you are married and filing jointly, your MAGI must be less than $214,000.

Any additional retirement money that the rules don’t allow you to invest in a Roth IRA must be invested in your work plan (subject to the plan’s annual limits). If you have too much money hidden away in qualified plans, consider creating or adding to a taxable investment account. However, what you pay is not deductible. Since dividends and income from these accounts are taxed at a more favorable capital gains rate, you retain the ability to reap tax losses and there are no required minimum distributions (RMDs) towards age. 72 years, unlike a 401(k).

INVEST IN YOU, INC.

For years, we’ve argued that the best investment you can make is in yourself!

Think about it: what stock or bond will generate the annual income you make from your job? In March 2022, for example, the dividend yield on the S&P 500 (i.e. the amount of distributable cash generated by a large measure of the US stock market) was 1.37%. Now let’s say you make $80,000 a year. The investment you would need in the S&P 500 to generate that same annual income would be around $5.8 million!

Often, the best investment of the next dollar is not to buy the next stock, bond or fund. Instead, invest in education or training that will help you be more effective at your job. Improve your health and well-being or discover new interests outside of work that can improve your quality of life.

Finally, if you want to learn more about strategies that will help you reduce your debt and maximize your savings over time — in the context of developing a comprehensive financial plan — you might want to consider working with an experienced and knowledgeable financial advisor.

The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. Wealth Enhancement Group does not provide tax or legal advice.

Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at [email protected] Securities offered by LPL Financial, member FINRA/SIPC. Advisory services offered by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.

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