What Do I Do With $1,000 Today?
By Cole Kimball and Michael MerrillA nearly impossible question to answer, but one that could highlight an important way we encourage clients to think about their savings. When it comes to financial planning an important but often overlooked concept is the principal of matching your investments to their time horizons. There is no perfect investment and if we were to say that there was one recommendation that would fit all readers needs we would inevitably fail someone. What is right for the physician who will enter practice next year most likely will not be appropriate for the physician entering retirement next year. With this in mind, the following examples of what to do with $1,000 may not be appropriate for everyone.
Open an Online High-Interest Checking and Savings AccountMost "brick and mortar" banks will offer checking, savings, or money market accounts that are yielding less than 0.16%. Go to Bankrate.com and do a filtered search for internet based checking and savings accounts. As of the date of this article, FNBO Direct is offering an online checking account with no monthly fees, no minimum balance, bill pay features, and a current yield of 0.65%. Another bank, Barclays, is offering an online savings account with no fees, no minimum balance, easy transfer of money to and from other bank accounts, and is currently yielding 1%.
Purchase a Short-Term Municipal Bond Mutual FundIf you have at least a 2-year time horizon on your current savings (for example, money you intend on needing at least 2 years from now for a home down payment, new car, etc.), consider opening a brokerage account and purchasing a short-term municipal bond mutual fund. Be sure to compare fees and expenses, as these can vary from $0 to $20 per transaction. The trailing 12-month yield on a short-term municipal bond fund can be as high as 2% to 2.5%. Furthermore, the interest earned in most situations is exempt from federal tax. For a cardiology fellow earning $60,000 per year, the tax equivalent yield you would have to earn in a taxable savings account in order to earn 2.25% would be 3%. This is a great way to get the most bang for your buck on short-term savings when you have at least a 2-year time horizon.
Open a Roth IRAWhile your income is low and you're still eligible to contribute to a Roth IRA, consider doing so. With a Roth IRA, your contributions are not tax-deductible. Instead, they are classified as post-tax. The investment earnings grow tax-deferred and, upon reaching the age of 59 ½ (and owning the account for at least 5 years), you are able to take tax-free distributions. This will be one of the few "buckets" you'll be able to pull money from that provides you with tax-free income in retirement. Regarding the investments you should consider in a Roth IRA, a good rule of thumb when you are first getting started in the world of investing is to keep it simple. Consider utilizing a target date retirement fund. Many mutual fund companies offer target date retirement funds that ultimately invest into a portfolio of 10-15 different mutual funds offered by the fund company. The further the target date (year) is from today, the more aggressive the allocation will be. Over time, as you get closer to the target year, the allocation automatically shifts to be more conservative. This is a fantastic option for investors that are starting with $1,000 due to the instant diversification it provides. For questions related to any of these topics, please contact Cole Kimball or Michael Merrill, CLU, ChFC.
Cole Kimball and Michael Merrill are financial advisors with the independent financial services firm, Finity Group, LLC. To ask them questions or arrange a consultation, email them at email@example.com or firstname.lastname@example.org. Office Address: 4380 SW Macadam Ave, Suite 245, Portland, OR 97086. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Finity Group, LLC and Cambridge are not affiliated.
Keywords: Financial Management, Income Tax, Investments, Income, Retirement
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