Welcome to Select's newest advice column, Getting Your Money Right. Once a month, financial advisor Kristin O'Keeffe Merrick will be answering your pressing money questions. Have one you want to ask? Send us a note at AskSelect@nbcuni.com.
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Dear Kristin,
I'm 32 and have finally found some financial footing in my life. I have an emergency savings account, I contribute and max out my 401(k), and I am recently debt-free. In fact, over the past year, I have been able to save an additional $25,000.
My issue is that I don't know what to do with this money. I would like to invest some or all of it, but I'm overwhelmed by my choices of platforms and investing apps. Also, I'm not sure if I should consider hiring someone to help me on this journey. What do you suggest?
Signed,
Flush But Nervous, NYC
Dear FBN,
This is one of the most frequent questions I'm asked as a financial advisor, which is why I chose your letter to kick off this column. First, congrats on your recent financial success. Getting out of debt and creating a substantial savings account is a wonderful achievement, and you should be proud of yourself.
I have found that most people know the framework of early financial success — emergency fund, retirement account, ample savings that could be earmarked toward a future goal and little or no debt. Where many get stymied is determining how to embark on what I like to call the "middle bucket" journey.
What is a middle bucket, you ask? I refer to this bucket as your liquidity before you can access your retirement funds. Liquidity is essentially cash or the ability to turn something into cash.
For example, a stock in your portfolio is going to be more liquid than your home because you can sell the stock quickly and turn it into cash. Conversely, you can't sell your house in a day and get the cash in your hand immediately.
When I describe one's liquidity, I visualize three main buckets. Bucket One is your checking account and your emergency savings. Bucket Three is your "qualified money" — money that is earmarked for retirement and/or college savings. Bucket Two is your excess savings that ideally turns into your taxable investments.
This bucket is there to provide you with the money you need to live your life and achieve your goals. Some people will use this money to buy a home. Others will keep it invested and let it grow and compound over time as a long-term investment. Regardless of your goals for the money in this bucket, there are some things to consider before you start investing.
This money, once invested, becomes a taxable liability to you. Gains from your investments will be taxed as either short-term or long-term capital gains. Understanding how you will be taxed on your investments is an extremely important part of the investing process. Many people learned this the hard way when they all became day-traders during Covid. They were stuck with huge tax liabilities from their short-term gains when tax season arrived!
You will also want to make sure that you are taking the appropriate amount of risk when you're investing this money. Do you have this money earmarked for a goal at some point in the short or medium-term (1 to 5 years)? If that's the case, you should consider a lower risk tolerance in order to preserve your capital. You will want to ensure that the cash you are investing is available when the time comes to withdraw it. Taking on too much risk means you could risk losing some or all of that cash in the short term.
With all these factors to navigate, where does one even begin? Question number one is "Do you want to do it yourself?" Should you be picking your own investments?
Many people find choosing their own investments to be extremely overwhelming and want to outsource this. There are many financial platforms that will help you decide how to invest your money. To start, you will fill out a risk profile and then recommend a diverse portfolio that matches your risk tolerance.
Betterment and Ellevest are two good robo-advisors to research. Keep in mind that they will consider your risk tolerance and then put your money into their model portfolios — they are not bespoke to you. You will not have discretion over these investments, which means you don't make any trading decisions. There are fees attached to these robo-advisors. Generally, these fees hover around .50% per year based on the assets they manage for you. So if you invest $10,000, you will pay around $50 a year (which will increase as you make money on your investments).
There are also apps like Robinhood that will allow you to choose your own individual investments, but they do not provide advice, models or assistance. Tread lightly with these apps as they are not designed to help you manage risk. Instead they are designed for people with some experience in investing. If you are brand new to investing, this may not be the right option for you.
You could also hire someone. Many people worry that they don't have enough money to hire a financial advisor. However, there are some very good options out there that might make sense for you. Many advisors, like me, will schedule a session for a flat fee and work through your questions over the course of one or two sessions. You could also consider hiring someone for a flat-fee for a year and see if you are getting some value from the relationship.
If you have accumulated enough money that you no longer feel comfortable managing on your own, you can hire an advisor to manage your money for you. Most advisors charge an annual fee based on the assets that they manage. Those fees can range so make sure to understand what you're paying for before committing to someone. Paying for financial advice is a sound strategy, but you should be ready for this step as it's a big commitment of time and resources.
When looking for an advisor, keep a few things in mind. First, do you like the person and do you think they are capable of doing the job well? Second, do you think that this is someone you want to have a long-term relationship with? Third, do you fit into their business model and do they mesh into your life? Essentially, do you vibe with this person or team of people?
Finally, ask if they are a fiduciary. A fiduciary is someone who is obligated to keep your interest in the forefront of all investment decisions, they must be an investment advisor representative (IAR) and must have specific license to operate as such. You can also check out any advisor on Broker Check to make sure they are licensed properly.
Finally, I'll just say that it'snever too early or too late to seek out financial advice! I am a firm believer that the optimization of your finances can have a massive positive impact over time. Good luck and thanks for your awesome question.
XO,
Kristin
Kristin O'Keeffe Merrick is a financial advisor and money expert at her family-run firm, O'Keeffe Financial Partners, located in Fairfield, NJ.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
