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Both are equally important, but…
BIG MISTAKE.
My Friend Is Getting A 30K Income Spike
The other day, I was chatting with a fellow friend about their upcoming 30K income surge. They vented they were in dire need of an emergency fund, so they never had to be in tight financial situations again. Their goal is to save $2,500/month.
Here’s the conversation I had with my fellow friend:
Starting in July, can you invest at least $1,000 a month (which equates to $6,000/year – the max contribution limit for a ROTH IRA), so you can reap the benefits of compound interest decades from now?
Investing in a ROTH IRA is essentially the same thing as building out your emergency fund, and here’s why: the ROTH IRA allows you can take any money out you invested penalty-free.
That was one of my regrets – focusing on the emergency fund instead of putting the money in an accessible investment fund or doing both, but still maxing the yearly investment contribution.
I could’ve had more money making me more money.
My recommendations to my fellow friend:
Recommendation 1
Figure out your retirement and investment goals to help determine the amount of money you need per month to get you from point A to Z. But always prioritize investing over saving.
Recommendation 2
Since you can save $2,500/month (a hefty price tag for most) starting in July, you can invest $1,000/month into your ROTH IRA + $1,000/month into a brokerage/investment account and save $500/month for your emergency fund.
For those 50 & under: To max out the ROTH IRA contribution ($6,000/year in 2021), invest $500/month starting in January or $1000/month starting in July.
Recommendation 3
Once January 2022 hits, don’t cut back on your investments because your ROTH IRA contribution drops to $500/month ($500 x 12 months = $6,000/year). Invest $1,500 into a brokerage/investment account in addition to the $500/month that will go into your ROTH IRA.
Recommendation 4
Get a third income to boost and reach your one-year liquid emergency fund faster.
Recommendation 5
Once you complete your one-year liquid emergency fund, invest the whole $2,500.
Now you’re golden.
Recommendation 6
Once your company implements the 401k matching program, max out the employer match and then aim to max out the 401K limit. Don’t ever miss out on free money; it’s one of the most ignorant and unfortunate things employees often do.
Recommendation 7
Never, I repeat, never prioritize saving or investing. Savers lose. Investors win – even with the risk that comes with it.
Last Thoughts
There is one thing an investor can never get back, and that is time. The time I took to build out a hefty emergency fund will never compare to the time I could’ve taken to focus more on investing.
The padded emergency funds are nice and cushy, but they don’t compare to the padded investment accounts that can exponentially grow your net worth.
One of the primary reasons people want the padded emergency fund is fear and a desire to feel safe. But there is a difference between having glorified savings versus owning investments that can eliminate your fear altogether because they create revenue for you.
I rather have multiple revenue creators and compound interest working on my behalf over padded savings account any day because then, I’m making myself recession-proof and financially liberated.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.