The earlier you start to save money, the more time you have for your portfolio to compound. However, even if you didn't start in your 20s and 30s, it is never too late to start building wealth.
A 40-year-old with $1,000 recently turned to Reddit for some advice about saving money and accumulating wealth. The Redditor wasn't happy with how the bank handled an investment inquiry the previous year and is considering a Roth IRA or a high-yield savings account. Redditors rushed into the comments to share their suggestions.
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Build An Emergency Fund First
The top comment came from a Redditor who suggested building an emergency fund before investing, especially in a Roth IRA. You can't access funds from a Roth IRA until you turn 59 ½ years old, unless you're okay with paying a 10% penalty fee. If the 40-year-old puts money into a Roth IRA, those funds are inaccessible for almost two decades.
Roth IRAs can be great resources for people who have emergency savings, but if you don't have any savings, you risk having to take out a loan to cover emergency expenses.
"I honestly wouldn’t even invest if you don’t have at least a three-month emergency fund," one commenter said.
The 40-year-old can still make money with their emergency savings. Finding a high-yield savings account makes it easier to grow the account. You can find some of the highest yields if you narrow your focus to online banks.
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Roth IRA Is A Great Starting Point
After the 40-year-old has established an emergency fund, a Roth IRA is the next logical step. This account lets the original poster invest while enjoying tax advantages.
"If you DO have emergency savings already, personally I prefer Roth IRA or similar type products if you have nothing else started," one commenter said.
The current contribution limit for a Roth IRA is $7,500, and the 40-year-old can continue investing until April of the following year to reach this threshold. That comes to $625 per month for 12 months or $1,250 per month for six months. It may not be feasible for the 40-year-old to reach this figure while he's building an emergency savings account. However, it's good to keep this tidbit in mind for next year.
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Put Extra Money Into A Brokerage Account
After establishing an emergency savings account and maxing out his Roth IRA contributions, the final step is to open a brokerage account and put money into it. While brokerage accounts do not have any tax advantages, you can access the money right away. If the 40-year-old needs money five years from now, the brokerage account is where he'll get it.
"Once you have like 3-6 months of expenses saved on your high-yield savings account, you can dump the next in a brokerage account," one commenter suggested. "Repeat the process every year. If you get to have a 401(k) in the future, try to contribute to that one first, before the brokerage one."
Right now, following all of these steps may sound overwhelming. However, it gets easier once you establish an emergency fund. That account will continue to accumulate interest while the 40-year-old will have more cash available to put into his Roth IRA and brokerage accounts.
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