Make Your Money Work Hard

August 25, 2022

You’ve probably heard the adage “money can’t buy happiness.”  Is it true?

The role of money in happiness

A study by Nobel Laureates, Daniel Kahneman and Angus Deaton provides some support for the “money doesn’t buy happiness” mantra.

This study was authored in 2010. At that time, the authors concluded that once you achieved an income threshold of $75,000, further increases in income wouldn’t improve your ability to engage in activities that improve your emotional well-being, like enjoying leisure activities and maintaining your health.

Higher levels of income also had this negative impact: A “reduced ability to savor small pleasures.”

More recent research (published in 2021) by Matthew Killingsworth, challenged these findings.

A review of 1,725,994 experience-sampling reports from 33, 391 employed adults in the US questioned the $75,000 threshold. Those with incomes above $75,000 reported higher levels of both evaluative and experienced well-being, with a plateau occurring when income levels reached around $200,000 annually.

While the academics may differ in the details, we can all agree that money plays a role in happiness to some degree.

By following the basic rules of money management, you can start your journey towards financial independence.

A worthy goal

Putting your money to work is the key to planning for your future. While goals can differ widely, most people want to plan for a secure retirement so they can stop working.  Other goals include travel, engaging in a passionate hobby, or maybe volunteering your time.

Reaching your goals – whatever they may be – involves planning, saving, and investing. A wealth advisor can ultimately guide you through these steps but in your own way, you can make the initial steps.

First steps

You can’t make your money work for you if you don’t have money to deploy.

A recent study found that “61% of consumers were living paycheck to paycheck in December 2021”, and 22% struggled to pay their monthly bills.

The data was particularly troubling for baby boomers and seniors. About 54% of those in these categories were unable to save money.

Americans are woefully unprepared for retirement or even emergencies.  The study found savings for most age groups was less than $3000.

Recent geopolitical events and raging inflation will only exacerbate the problem.

Given this sad state of affairs, what can you do to start accumulating funds that you can put to work at any stage of your life?

Here are some tips to put your money to work and get you started.

1. Budgeting

Most consumers don’t have a budget and don’t track their spending, although a majority believe having one would help them reach their personal goals.

There’s evidence those with a budget feel in control of their finances, confident, and secure.  Those without one feel like they’re not in control, stressed, and worried.

Budgeting has additional advantages, according to Investopedia.

With a budget in place, ad hoc spending is reduced or eliminated. An expense is either within your budget or it isn’t.  

Instead of being tempted to make an impulsive purchase, you’ll understand that doing so could impede the chance of reaching a long-term goal, like buying a home.

Budgeting will also help you avoid debt. You’ll only spend the money that you have, as indicated in your budget.

It will provide you with an emergency fund and will accelerate your savings so you can start investing and earning a return.

There’s no shortage of software that can make budgeting less onerous.  You can find helpful recommendations here.

2. Reduce or eliminate debt

When you have debt – especially high-interest debt (like credit card debt) your money is working for the lender and not for you.

Make it a priority to reduce or eliminate debt, starting with the debt charging you the highest interest.

You can find useful suggestions for paying off debt here.

You might consider a debt consolidation loan that combines multiple balances from credit cards and other debt into a single loan with a fixed rate and term. You can learn more about debt consolidation loans on the website of the Consumer Protection Bureau.

3. Start investing  

When your income exceeds your expenses, you have an emergency fund and adequate insurance coverage,  it’s time to think about investing.

If your employer offers a company-sponsored plan, check to see if it will match a portion of the amount you contribute to the plan. If so, you should consider contributing at least the minimum amount that will give you the maximum employer match.

Remember, while your contributions (together with matching contributions) grow tax-free, withdrawals will be taxed at your marginal tax rate. You can read about the benefits of matching contributions on the website of the IRS.

IRS regulations require you to start taking minimum amounts annually starting at age 72, or earlier in some cases. The rules governing required minimum distributions are complex, and you must strictly adhere to them. Consider consulting with a competent tax professional.

You also have the option of investing in tax-advantaged accounts you can set up on your own. These include traditional and Roth IRAs and tax-deferred annuities.

You want to allocate some of your investment assets to an after-tax account. You can set up an after tax account. Gains in this account will be taxed at capital gains rates (which are lower than marginal tax rates). These rates are very favorable for most individual investors, but require you to hold your investment for more than one year.

Investing (whether in a retirement plan or an after-tax account) should be done prudently and be based on sound academic principles. Here are some tips for helping you on your investing journey:

  • If you need professional assistance, be sure your financial advisor is a “registered investment advisor” (“RIA”). RIAs are subject to extensive regulation and disclosure requirements. They are legally obligated to always place your interests above their own and to disclose any conflicts of interest.
  • There’s compelling evidence that supports investing in low-cost index funds, exchange-traded funds, or passively managed funds, in a globally diversified portfolio, with a suitable asset allocation (the division of your portfolio between stocks, bonds, and cash).

Make Your Money Work Hard

If you follow these basic guidelines your money will start working for you, and you’ll get closer to achieving your financial goals. Know more about money management and achieve financial independence with the help of our wealth advisors at Vistica Wealth. Set up a call →.

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