Dear Dr. Don,
I’m in my early 30s, and the only debt I have is my mortgage. I have an emergency fund equal to one year of living expenses, and I’ve maxed out my 401(k). I’m able to save about $800 to $1,200 per month. What should I do with the excessive amount?
— Lily Lifegoal
You’re doing great with your personal finances, especially for someone in her 30s.
Everyone makes what economists call consumption/investment decisions. You’ve found a rough balance on the consumption side that leaves you with $800 to $1,200 per month available for savings or investing.
I draw a distinction between savings and investing. With savings you’re primarily concerned with protecting principal. In investing you’re looking to build wealth. It sounds like you have the savings side covered, and you should look to invest the money.
I’d suggest you get a little introspective, and try to define some life goals if you haven’t already. What do you want out of life? The financial planning industry is moving toward this life goal focus instead of letting financial decisions dominate. If you can figure out what you want out of life, you’ll have a better handle on how money can help you reach that goal.
Invest for what? That’s where the life goals come in. If you think you need to increase your retirement savings over and above the 401(k) limits, then look at your options in tax-advantaged retirement accounts. Even if you can’t make tax-deductible contributions to a traditional individual retirement account, or IRA, or aren’t eligible to contribute to a Roth IRA, you can make nondeductible contributions to a traditional IRA. You could then decide to convert the contribution to a Roth IRA.
Do some of your life goals include: owning a vacation home, collecting art, seeing the world, being mortgage-free by 40? How you invest to reach these life goals will vary by goal. Some require that you invest in the asset, not financial securities. Don’t let the money be the tail wagging the dog when it comes to deciding where to invest.
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