Determining the best way to ensure your financial security can seem overwhelming.
For James and Michelle Bethe, deciding what to do with the $200,000 they had saved was paralyzing. As a teacher, Michelle, 36, has a retirement pension and James, 38, has some money in a 401(k) plan.
For Michelle, it is better to keep the money in the bank for emergencies. James, however, wanted to get rid of his car payments and pay off part of his mortgage.
“The ultimate peace of mind is being financially free,” said James, who lives in East Brunswick, New Jersey, with his wife.
Their solution came in the form of a verdict on CNBC’s “Money Court,” delivered by O’Shares ETF President Kevin O’Leary.
James and Michelle Bethe disagreed about what to do with their $200,000 savings.
Source: James and Michelle Beth
He decided they should put $130,000 toward their mortgage and pay off the remaining $20,000 on the car loan. The rest was left for savings. To start investing, he suggested that Bethes automatically start putting $100 a week into an index fund.
However, everyone’s situation is different.
In general, it’s best to take a balanced approach: paying down some debt while saving, said Cathy Curtis, founder and CEO of Curtis Financial Planning, based in Oakland, California.
High-interest credit cards should be the first thing you get rid of, said Curtis, a certified financial planner and member of CNBC’s Council of Financial Advisors.
However, she wouldn’t necessarily speed up the repayment of student loans, especially if they are government loans. Instead, just make sure you pay your bills on time.
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Curtis generally doesn’t like car loans, as cars are a depreciating asset. However, interest rates have been low, so she just kept making the payments on time. If you receive a bonus or have extra money, pay it.
“Prioritize car loan payment, but not before saving,” he said.
In general, Curtis doesn’t recommend paying off mortgages unless you’re nearing retirement, since the interest rates are really low. If he doesn’t have a low rate, he’ll consider refinancing.
Sorting the savings
Contribute to a 401(k) or 403(b) plan, if it’s available to you, Curtis said. It should be enough to get the employer contribution.
Then, he advises taking the rest of your retirement savings allotment and putting it into a Roth IRA, if your income qualifies (income limits can be found here).
You can withdraw penalty-free contributions at any time, just like if you need a down payment on a house.
If you have a 401(k), don’t qualify for a Roth and have multiple savings goals, open an investment account, Curtis said. She recommends investing through regular rollouts, known as dollar cost averaging, rather than a lump sum.
Of course, if you can max out your 401(k), go for it. In 2021, you can contribute up to $19,500, plus an additional $6,500 if you’re age 50 or older.
If you have a secure job, create an emergency fund that covers six months of essential expenses. If it’s not insurance, your savings should cover a year’s worth of bills, Curtis said.
Put it in a high-yield savings account that can earn a little more interest than a regular bank savings account, he said.
Finally, don’t forget about a health savings account, which is available to those with high-deductible health plans. Contributions, growth and withdrawals are tax-free. While you can spend the money each year on qualified medical expenses, you can also let it grow for medical expenses in retirement.
As for Bethes, O’Leary’s resolve worked. After paying off part of her mortgage, they refinanced at a lower interest rate and lowered her monthly payments from $2,400 to $1,400 per month. They paid for the car and then continued to save, bringing their bank savings account up to $90,000.
Instead of opening an investment account, James has started contributing back to his 401(k) and is getting a matching contribution from the company.
“I’m definitely extremely happy with the decision,” he said. “It honestly changed our life.”
TUNE IN: CNBC’s “Money Court” with Kevin O’Leary airs Wednesdays at 10 pm ET.
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Disclosure: NBCUniversal and Comcast Ventures are investors in acorns.