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Getting married is an exciting time, and you may have sudden access to a considerable amount of cash, as cash is becoming a more popular gift of choice for newlyweds. In fact, wedding planning and registry website The Knot saw a 10 percent increase in the number of couples requesting cash on their registries in the first quarter of 2022, compared with the same period in 2021, according to the New York Times.
Get that money working for you in the best ways possible – below are six ways to ensure your wedding cash is put to the most efficient use.
Pay off your highest-interest debt first
Wedding money can be tempting to spend, but if you hold credit cards or loans with high interest rates, they need to be paid off first.
Many with high debt become comfortable making their regular small debt payments. Whether it is a monthly credit card bill or student loan payment for example, it becomes routine and can be difficult to increase your payback. It’s already hard enough to watch your money go to creditors.
Enter $10,000 or $20,000 of sudden money from a wedding, and it might not seem the best use of your newfound cash to simply throw it into the mountain of debt. You might say to yourself, “What’s $20,000 really going to do against my $250,000 loan? I might as well enjoy it now while I can.”
But this thinking can lead you down a rough path, especially in an increasingly high interest rate environment. Even a (relatively) small payment on your debt can make a significant difference and hedge against the crippling interest rates you are already paying.
If you want to start small, pay off the credit card with the highest interest rate first, and then chip away at the rest.
Stack your emergency fund
If you have no emergency savings, this is perhaps even more important to prioritize before your retirement savings and after your debt repayments.
In the past, financial advisors suggested that only 6-9 months of living expenses should be held in cash, with any left over put into suitable investments. Post-pandemic, though, that number has increased, and many say it’s wiser to have 1-2 years of living expenses on deck in case of an emergency. One year of living expenses can be ample for most in the case of job loss, but two years might be necessary for some.
Of course, this number will differ depending on whether you have a mortgage, children, cars, etc. If you do not already have ample savings, then this is really where you should park cash once you have your debt paid down.
If you’re concerned about paying off debt and not having emergency money, toggle between the two. Start paying off high-interest debt as much as possible, while stowing away 20-30 percent to your cash reserves.
Tee up your retirement accounts
Third on the list of financial priorities after debt payment and cash accumulation is saving for the future. Wedding cash is the perfect place to start a nest egg, but the amount needed before you move on to other investments will vary from person to person. (Here’s how much you should have saved at each age.)
You might already have a 401(k) set up, and even an IRA or two, but a sudden infusion of cash is a perfect way to maximize your retirement savings. A 401(k) contribution is made with money from income, so you might up your workplace contributions and then pay other expenses from your wedding cash.
But you don’t need to go through that with an IRA, and it’s a perfect opportunity to max out your IRA, or set one up for the first time. The 2022 contribution maximum for both Traditional and Roth IRAs is $6,000 per person, though those age 50 or over can contribute an extra $1,000.
Ideally, a couple could use the money from their wedding to max out contributions for two whole years – the IRS allows you to contribute to your IRA until tax day of the following calendar year, with contributions counting for the year prior. For example, this year you can contribute all the way up to tax day in April 2023 to deposit money into an IRA that would count for 2022 contributions.
This means a couple can quickly put away $24,000 towards their (separate) IRAs.
Consider index funds
Once you’ve paid off your debts, saved for retirement and are comfortable with your cash on hand, you can consider other long-term investments to set you up for the future.
An S&P 500 index fund can be a great way to invest in the broad index without purchasing individual stocks. Index funds tend to be less expensive than actively managed funds, and are a good investment to buy and hold for a long period of time. Since index funds mimic the underlying index, a larger team of analysts and managers is not needed, thus keeping expenses low.
Index funds also provide diversification, meaning the investor is exposed to less risk than purchasing individual stocks. Another bonus is that index funds are also more tax efficient as they do not trade in and out of stocks like other investment accounts would, meaning they generate less taxable income.
Pay into a 529 plan
If you are considering starting a family, it is never too early to start investing in a 529 plan. These tax-advantaged plans are created for the purposes of saving for a child’s education. Anyone can contribute to them, and the after-tax money you use to contribute to the plan grows tax-deferred. If used for qualified educational purposes, the money also comes out entirely tax-free.
The other big benefit to 529 plans is that you can invest in potentially high-return assets, helping you gain purchasing power in the fight against spiraling college costs.
There are many different types of 529 plans, and each state administers its own plan, although most states do not have a residency requirement to purchase their plan. However, each state does have their own rules and stipulations, so it’s important to shop around for the best fit.
Invest in a home
Using money from wedding gifts can be a great way to help fund a down payment on a house. If you want to purchase a house in the next few years, you can keep a greater percentage of money in cash so that you can reach your goal sooner. But many would-be homebuyers make the mistake of throwing all of their money into a down payment. It’s important to maintain a balance between this goal and your other cash priorities such as retirement accounts.
Most financial advisors ideally like to see something called high post-purchase liquidity for their clients looking to buy a home. Post-purchase liquidity is how much cash you will have (or how “liquid” you will be) once the closing is over. You might have $100,000 in the bank, but if the down payment is $65,000 and closing costs $15,000, what are you left with after the sale?
While it makes sense to put the majority of your savings into buying a home if that’s your goal, it should not be at the sake of continuing to contribute to crucial years of retirement savings. Moreover, an emergency fund should always be established before taking on debt – of any kind.
If you’re lucky enough to receive significant cash from your wedding, it’s important to make sure that money is put to the best use. Whittling down high-interest debt and building a nest egg are at the top of the list. Beyond that, it’s important to make sure your money is working for you and your spouse’s future and not just sitting in the bank. Long-term investments with low expenses will help ensure your financial future will be just as happy as the day you were married.