Save More Money

It’s a new year again. After resolving to upgrade the exercise and downgrade the carbs, you may also be planning to save more money. If so, here’s my updated annual list of the 10+ best ways to do it and 6 “investments” from which I’d socially distance.

Best Ways to Save

1. HSA

The best choice is a health savings account. This tax-sheltered savings is only available if you have a qualifying high deductible health plan. If you’re eligible, it’s the best deal around as it combines tax-deductible contributions with tax-free distributions. And, if you have other savings, don’t use the funds when you have medical expenses — let them keep growing tax-free. You can read more here.

2. ESPP

If you work for a public company that offers an employee stock purchase plan, take full advantage by maximizing the contributions to it. If you auto-sell your shares each period, in most plans, you’ll lock in a 17+% gain. That’s hard to beat. You can read more here.

Better Ways to Save

3. Your employer’s 401K

Not all 401K plans are great in terms of investment options and fees but you can contribute through payroll deductions which is a big advantage. Also, many employers offer a match and that’s free money you shouldn’t turn away.

If you’re self-employed, contribute to a SEP-IRA instead.

4. Roth IRA

It’s always sensible to fund a Roth IRA. You can still contribute even if you have a 401K at work. However, Roth IRAs have an income limitation so if your adjusted gross income is too high, you’re ineligible. You can read more here.

5. 529 plan

If you have children, grandkids, or other relatives and want to contribute to their college education, a 529 is the best way to do so. It works similarly to a Roth IRA — the investment income accrues tax-free and you’ll pay no tax when you use the funds for qualifying educational expenses. You can read more here.

6. Back-door Roth IRA contribution

This one’s a bit complicated so you can search the google tubes for the details but briefly, for those whose income is too high to be eligible to contribute to a Roth IRA, you may be able to make non-deductible contributions to a traditional IRA and then immediately convert the funds to a Roth without owing any tax. It doesn’t work if you have an existing traditional IRA for reasons I won’t go into here. This one is in Congress’ cross-hairs so it may not survive much longer.

7. After-tax 401K contributions

A little-known feature of some 401K plans is allowing participants to make additional after-tax contributions, up to a total of $61,000 per year. You receive no tax deduction but these additional contributions can be rolled into a Roth IRA when you leave your employer.

If you’ve maxed out contributions to your 401K and you’re not eligible for a Roth IRA, this is like a super-charged, back-door Roth IRA contribution. However, 401K plans often do not offer this option. This one is also in Congress’ cross-hairs so its days may also be numbered.

8. Series I Savings Bonds

The “I” stands for inflation and these are inflation bonds marketed directly to individual investors by the US Treasury. Simply put, the interest rate you earn fluctuates based on the current rate of inflation as determined by the CPI (consumer price index). These bonds have a base rate and then an adjustable rate that re-sets every six months to the then current rate of inflation. The interest income is exempt from state income taxes and can be deferred into the future on your federal taxes. Right now, they’re the best deal in town. You can read more here.

9. MYGAs

Multi-Year Guaranteed Annuity is the insurance industry’s version of a bank CD. You hand over your money to an insurance company for a specified term (usually 3 years or more) and they return your money, plus the interest at the end of the term, or roll it over into a new MYGA. Generally, it’s a better deal than a bank CD (though not FDIC guaranteed) and you can defer the interest income if you want. You can read more here.

Good Ways to Save

10. Pay off loans

It’s never a bad time to pay off your loans. You should probably start with the loan with the highest rate and work your way down. However, it sometimes makes good psychological sense to first pay off a loan with the smallest balance, just for the psychic satisfaction and sense of progress. Either strategy is a winner.

11. Invest in a taxable account

If the first 10 aren’t suitable for you, invest in a taxable account. Depending on your income and state of residence, a low-cost municipal bond fund combined with a stock index fund may be most tax- and cost-effective.

12. Give some money away

OK, this isn’t saving but if you’re thinking about donating some money to charity, “donor-advised funds” may be the best way to do so. With these, you donate the money to a fund you control and you can later designate the organizations to which the money is distributed. You get a tax deduction when you initially make the contributions to the fund. And, you can also donate appreciated securities. You can read more here.

Bad Ways to Save

There are 6 “investments” I’d avoid like the coronavirus:

1. Variable annuities

They’re complex, expensive, and offer little benefit. No one ever woke up one morning and said, “Today’s a good day to buy a variable annuity.” As the old saying goes, “variable annuities are sold, not bought.” However, a single-premium income annuity is a different animal and may make good sense if you’re about to enter retirement.

2. Whole life insurance policies

They’re a confusing bundle of term life insurance and forced savings. Like many bundles, they combine something you want with something you don’t need. Buy the term life insurance you need and save your money in one of the better ways I mentioned above.

3. Bitcoin and anything else crypto-sounding

It’s never a good idea to invest in something you don’t understand as it usually leads to the intersection of heartache and regret.

4. Metals

Investing in gold and silver incurs storage, insurance, shipping, and other transaction costs. There’s also no clear intuition for why these metals should appreciate over time beyond their industrial value, especially compared to other investments such as stocks, bonds, and commercial real estate.

5. Your brother-in-law’s latest no-lose investment scheme

You may end up on another road to heartache and regret.

6. Lottery tickets and sports betting

Save these for your entertainment budget; but if you must gamble, go to the casino where the odds are usually better and the drinks are usually free.

There’s no time like the present to make a commitment to save more.

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