Marc A. Hebert's Money Sense: Points to consider when deciding what to do with money giftsBy MARC A. HEBERT
March 30. 2018 9:22PM
Maybe you received a very nice monetary gift for your birthday and you just don't know what to do with the money. We are glad you are being careful about its use and would suggest the following points for your new funds.
Prioritize your long- and short-term goals. Goals should be realistic and specific. Your goals are the guidelines for what to do with the money. For example, if you would like to purchase a house in the near future, the money might represent a down payment. Money to be used in the short term should be held in more conservative investments than money needed further down the road.
Establish an emergency reserve. A fund for unexpected expenses is always good to have. Financial planners usually recommend three to six months of livings expenses depending on the individual's unique situation. For example, a self-employed person might want more of a reserve just in case business is bad for a period of time. Money set aside for this purpose should be kept in a readily accessible, conservative account such as a savings account or money market fund.
Pay down debt. The first step is to know who and how much you owe. Make a list of the creditors, amount of the debt, monthly payment, interest rate and due date. You can use your credit report to confirm the debts on your list. A monthly bill payment calendar could give you clarity on the situation. Next, decide which debts to pay off first. You might want to pay off your high interest credit cards first. Seek reputable professional debt counseling help if you feel you need it. As you pay off debt, you will have additional cash each month to use for other purposes, such as retirement or building that emergency reserve.
Retirement funding. Retirement is expensive. The earlier one starts saving for retirement the better. Depending on your needs, you might consider a contribution to a Traditional or Roth IRA. You will need to review the eligibility requirements for these plans if this becomes your choice. If your employer offers a retirement plan, such as a 401(k), consider swapping the dollars by making larger contributions to the plan in exchange for using the gift money to live on. This will put your money into a vehicle that will grow tax deferred or tax free in the case of a Roth 401(k).
Buy a home. Your gift might represent the down payment on a home. Before you buy, consider all the aspects of home ownership. The monthly mortgage payment is only one part of the total expenses. Factor in costs such as home maintenance, repairs and insurance. Consider how long you might live at this location. In the end, you have to decide if home ownership is the right path for you.
Research. Consider reading one of the many books on personal finance that are available today. These will help you see where your finances might need some work and get you started. "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko will provide some insight into wealth accumulation. "Get a Financial Life: Personal Finance in Your Twenties and Thirties" by Beth Kobliner touches on many areas of personal finance. Even people past age 20 or 30 could benefit from reading it.
Consider a small indulgence. Life is about balance - saving for tomorrow versus having fun today. In view of this, you might want to spend a small amount on something you would have never done otherwise. Perhaps a nice dinner at a fabulous restaurant with a few friends would do the trick.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.