24 Dec I’m getting a raise. What should I do with the money?
Q. I got a raise and for the first time I have extra money after paying expenses. I’m deciding if I should start an IRA or if I should save the cash for a while. How can I decide which is best?
A. Congratulations on your raise!
Before answering your question, it’s important to make a distinction between saving and investing.
Saving is putting money aside, little by little, usually into a bank savings account, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.
He said this is done to save for something specific, like a vacation, a deposit on a home or to cover any emergencies that might arise, like a broken boiler.
On the other hand, investing is taking some of your money and trying to make it grow by purchasing things you think will increase in value. Essentially, investing is making your money work for you, he said.
Green said investing wisely is an important piece of a sound financial plan.
“That being said, as important as it is, there are certain things you should `check off your list’ before you consider investing,” Green said. “For starters, if you don’t have a cash reserve saved up in case of emergency, you should have three to six months’ worth of living expenses in a liquid account which you could access if needed.”
Having a healthy emergency fund means you have some financial security if something goes wrong, he said.
After funding your cash reserve, you can begin to save for goals you have for the future.
You can also start to think about investing.
Green said whether or not you are ready depends on the time horizon for your goals. For short-term goals (1 to 3 years), it makes sense to save cash deposits in bank accounts. You don’t want to put your money at risk if you plan on using the funds soon, he said.
For medium-term goals (3 to 7 years) it really depends on your risk tolerance, meaning that if you are willing to take on some risk, it could make sense for you to invest your savings until you reach that goal, he said.
For long-term goals (8+ years), Green said it may be best to consider investing.
“Over time, money loses its buying power due to inflation,” he said. “Having your money sitting in a bank account — therefore earning no meaningful return — can seriously affect the value of cash savings over time. Growth from investing can combat loss of buying power.”
So which choice it best for you? It depends on where you are overall with your finances. Good luck!
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This story was originally published on Dec. 24, 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.