Investing All-in-One For Dummies. Eric Tyson

for how many months’ worth of living expenses you should have:

       Three months’ living expenses: When you’re starting out, this minimalist approach makes sense if your only current source of emergency funds is a high-interest credit card. Longer-term, you could make do with three months’ living expenses if you have other accounts, such as a 401(k), or family members and close friends whom you can tap for a short-term loan.

       Six months’ living expenses: If you don’t have other places to turn for a loan, or if you have some instability in your employment situation or source of income, you need more of a cushion.

       Twelve months’ living expenses: Consider this large stash if your income fluctuates greatly or if your occupation involves a high risk of job loss, finding another job could take you a long time, or you don’t have other places to turn for a loan.

      Saving for large purchases

      Most people want things — such as furniture, a vacation, or a car — that they don’t have cash on hand to pay for. Save for your larger consumer purchases to avoid paying for them over time with high-interest consumer credit. Don’t take out credit card or auto loans — otherwise known as consumer credit — to make large purchases.

      And don’t be duped by a seemingly low interest rate on, for example, a car loan. You could get the car at a lower price if you don’t opt for such a loan.

      

Paying for high-interest consumer debt can undermine your ability to save toward your goals and your ability to make major purchases in the future. Don’t deny yourself gratification if it’s something you really need and want and can afford given your overall financial situation; just figure out how to delay it. When contemplating the purchase of a consumer item on credit, add up the total interest you’d end up paying on your debt, and call it the price of instant gratification.

      Investing for a small business or home

      In your early years of saving and investing, deciding whether to save money to buy a home or to put money into a retirement account (for the tax benefits and to work toward the goal of future financial independence) presents a dilemma. In the long run, owning your own home is usually a wise financial move. On the other hand, saving sooner for retirement makes achieving your goals easier and reduces your income tax bill.

      Presuming that both goals are important to you, you can save toward both goals: buying a home and retiring. If you’re eager to own a home, you can throw all your savings toward achieving that goal and temporarily put your retirement savings on hold.

You can make penalty-free withdrawals of up to $10,000 from Individual Retirement Accounts (IRAs) toward a first-time home purchase. You may also be able to have the best of both worlds if you work for an employer that allows borrowing against retirement account balances. You can save money in the retirement account and then borrow against it for the down payment on a home. Consider this option with great care, though, because retirement account loans generally must be repaid within a few years or when you quit or lose your job (ask your employer for the details).

      When saving money for starting or buying a business, most people encounter the same dilemma they face when deciding to save to buy a house: If you fund your retirement accounts to the exclusion of earmarking money for your small-business dreams, your entrepreneurial aspirations may never become reality. Consider hedging your bets by saving money in your tax-sheltered retirement accounts as well as toward your business venture. An investment in your own small business can produce great rewards, so you may feel comfortable focusing your savings on your own business.

      Saving for kids’ higher educational costs

      Do you have little ones or plan to have them in your future? You probably know that rearing a child (or two or more) costs really big bucks. But the biggest potential expense awaits when they reach young adulthood and consider heading off to college, so your instincts may be to try to save money to accomplish and afford that goal.

      

The college financial-aid system effectively penalizes you for saving money outside tax-sheltered retirement accounts and penalizes you even more if the money is invested in the child’s name. Wanting to provide for your children’s future is perfectly natural, but doing so before you’ve saved adequately toward your own goals can be a major financial mistake.

      This concept may sound selfish, but the reality is that you need to take care of your future first. Take advantage of saving through your tax-sheltered retirement accounts before you set aside money in custodial savings accounts for your kids.

There are numerous higher education options besides costly four-year colleges and universities. The traditional college path isn’t right for everyone. Consider alternatives to traditional college (and whether they are right for your child). While college is a traditional path that many high-school seniors follow, there are increasing numbers of attractive, low-cost, and faster alternatives to consider. For example:

       Last-mile boot camps: Last-mile programs teach students technical skills and clear the pathways to jobs in growing industries like technology, biotech, fintech, and healthcare.

       College minimum viable products (MVPs): These programs combine the technical skill training and placement of traditional last-mile programs with significant cognitive and noncognitive skill development that students get from a good college.

       Apprenticeships: Emerging apprenticeships provide pathways for jobs in the manufacturing, healthcare, pharmacy, information technology (IT), insurance, financial services, and software development industries.

       Staffing firms: These companies hire workers and staff them out to clients. For example, Revature, an IT staffing company, hires experienced software developers. Also, Avenica places students from many colleges and offers last-mile training across many industries.

       Vocational and trade schools: Also known as career and technical education (CTE), these schools provide gateways to a wide range of jobs in the automotive industry, culinary arts, emergency services, healthcare, and more.

      Investing short-term money

      So where should you invest money earmarked for a shorter-term goal? A money market account or short-term bond fund is a good place to store your short-term savings. See Chapter 4 in Book 2 as well as Book 4 for more information on these options. The best bank or credit union accounts may be worth considering as well.

Investing in Retirement Accounts

      During your younger adult years, you may not be thinking much about retirement because it seems to be well off in the distance. But if you’d like to scale back on your work schedule someday, partly or completely, you’re best off saving toward that goal as soon as you start drawing a regular paycheck.

      

Maybe the problem with thinking about this goal stems in part with the term retirement. Perhaps thinking about it in terms of saving and investing to achieve financial independence is better.

      This section explains the benefits and possible concerns of investing through so-called retirement accounts. It also lays out the retirement account options you may access.