It’s been an ugly year in the financial markets, and a lot of investors are rattled.
The University of Michigan Sentiment Index, which tracks consumer confidence (and thus, the likelihood of spending more), recently reported that confidence hasn’t been this low since 2011. Plus, anyone who’s been at the gas pump or grocery store knows that inflation is high and could linger for some time. When markets are this uncertain, many investors wonder where they should invest their next dollar. Here’s our take.
Shore up your personal balance sheet
When a potential client visits to see if we might be a good fit for their wealth management needs, we often ask them to bring in documents that can help us assess their current financial situation. These include pay stubs, tax returns, bank, credit card, and retirement plan statements, any outstanding debts, and so on. The more detailed the information, the better we are able to advise these folks on their best “next-dollar” decisions.
This analysis helps us quickly determine if someone is using their financial resources efficiently. Some of the things we look for are: Is this person carrying too much high-interest debt on too many credit cards? Are they paying too much for a house or luxury cars? Do they have enough insurance?
Your best “next-dollar” decision may be to address gaps in your current finances. Depending on your unique circumstances, possible areas to focus on may include (among others) establishing an emergency fund, refinancing a high-rate mortgage, consolidating debt, or repricing your homeowner’s policy. Shoring up your personal or household balance sheet is often the best use of your next investable dollar for one simple reason — it can help alleviate any immediate financial stress that you may be feeling.
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Focus on your long money
Once immediate needs are out of the way, you can turn your attention to retirement or legacy planning. We often call this “fortress” investing — or protecting and growing your serious money.
If your employer offers a workplace retirement plan such as a 401(k) or 403(b) plan, you should consider signing up. A workplace plan offers powerful benefits. The contributions you make lower your taxable income and come directly out of your paycheck — you never see the money. Earnings will compound in your account on a tax-deferred basis until they are withdrawn.
Withdrawals are taxed as ordinary income, but it’s possible you may be in a lower tax bracket when you retire.
Make sure you contribute what is needed to qualify for any employer matching contributions.
Once your workplace plan is established, consider opening a traditional Roth IRA outside of the 401(k). (A Roth IRA outside of a 401(k) plan allows your contributions to grow for a longer period, offers more investment options, and makes early withdrawals easier. Unlike a 401(k), there is no deduction of contributions in a Roth IRA. Contributions are made with after-tax money and earnings grow tax-free. Best of all, qualified withdrawals are tax-free and can pass to your heirs tax-free!
Your maximum contribution to all of your IRAs combined (that is, Traditional IRAs and/or Roth IRAs) is $6,000 in 2022 ($7,000 if you are 50 or older), and your ability to contribute to a Roth diminishes at higher income levels. If you file taxes as a single person, your Modified Gross Adjusted Income (MAGI) must be under $144,000. If you’re married and filing jointly, your MAGI must fall under $214,000.
Any additional retirement money that the rules don’t allow you to invest in a Roth IRA should be invested into your workplace plan (subject to the plan’s annual limits). If you have too much money stashed in qualified plans, consider setting up or adding to a taxable investment account. What you put in is not deductible; however, because dividends and income from those accounts are taxed at a more favorable capital gains rate, you preserve the ability to do tax-loss harvesting, and there are no required minimum distributions (RMDs) at around age 72, unlike with a 401(k).
Invest in YOU Inc.
For years, we’ve maintained that the best investment you can ever make is in yourself!
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Think of it: What stock or bond is going to generate the annual income that you earn from your job? In March 2022, for example, the dividend yield on the S&P 500 (that is, the amount of distributable cash generated by a broad measure of the U.S. stock market) was 1.37%. Now, let’s say you earn $80,000 a year. The investment you’d need to have in the S&P 500 to generate that same annual income would be about $5.8 million!
Often, the best next-dollar investment is not buying the next stock, bond, or fund. Instead, invest in education or training that will help you be more effective in your job. Improve your health and well-being or take up new interests outside of work that can improve your quality of life.
Finally, if you’re interested in learning about strategies that will help you tackle debt and maximize your savings over time — in the context of developing a comprehensive financial plan — you may want to consider working with an experienced and knowledgeable financial adviser.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Wealth Enhancement Group does not offer tax or legal advice.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on News Radio 830 WCCO on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL.
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