Better than a hot stock tip, these fundamental changes to your finances can help you make the most of your money.
Everybody likes the idea of a good investment tip, but the chance that any one stock or bond will make a huge difference to your long-term finances is slim.
Instead, the best investments you can make right now are not based on hot stock tips. They're based on timely ways of getting the most you can out of today's financial environment.
11 Smart Investments You Can Make in 2020
1. Maximize your 401(k) match
Experienced investors learn to be skeptical of sure-thing tips and rate-of-return promises that are too good to be true. But there is one type of investment that guarantees an excellent - and immediate - return on your money.
If your employer sponsors a 401(k) plan with a matching contribution, that employer match represents a sure thing - but only if you take advantage of it.
While contributions to 401(k) plans come primarily from the employees themselves, according to data from the Vanguard Group, most 401(k) plan sponsors do kick in some money as well. Often these employer contributions are based on a percentage of how much you put into the plan.
Matching contributions give you an immediate, guaranteed return on your money.
This isn't chicken feed either: employers often match 50% of an employee's contributions, and some matches are as high as 100%. Those numbers represent an immediate return on your investment in the fund.
If you are not contributing enough to get the maximum employer match your plan allows, then you're leaving some guaranteed return on the table. That's why maximizing your 401(k) match potential is one of the best investments you can make in this or any year.
2. Fund your HSA beyond this year's needs
A Health Savings Account (HSA) is a tax-advantaged way to save for healthcare expenses. Many employees start out using them to pay near-term healthcare bills, but an HSA can also have great long-term-retirement-saving benefits.
Contributions to HSAs are tax deductible. But they have an added tax benefit: Distributions from these accounts are not taxed as long as they're used for qualifying medical expenses.
So, while retirement-plan contributions are generally taxed either before going into the plan or upon coming out of it, HSA contributions can avoid taxation altogether. So, it pays to contribute as much as you can to an HSA and accumulate enough money in it to supplement your main retirement savings. Some employers even contribute to their employees' HSA accounts too.
Your contributions - and the return on your investments in the plan - are tax-free as long as you ultimately use them for appropriate medical expenses. Given that healthcare is a large portion of retirement spending, this makes HSAs an excellent way to add to your retirement savings.
3. No employer-sponsored benefits? Use an IRA
Not everyone is lucky enough to work for an employer who offers savings plans like a 401(k) or an HSA. If you don't, then you need to take matters into your own hands by funding an IRA.
IRAs can have one of two kinds of tax benefits:
- Traditional IRAs allow you to deduct your contributions to the plan and delay paying taxes on money in the plan until you withdraw it in retirement.
- Roth IRAs don't allow you to deduct your contributions, but then the money you take out in retirement isn't taxed.
In either case, the ability to manage when you pay taxes on the money plus allowing your investment returns to compound without year-to-year taxation can help you get more out of your savings.
Along with the tax benefits of an IRA, it helps to have a place to set retirement savings apart from money you use to pay routine bills. This will reduce the temptation to dip into those savings too soon, leaving the money available to you when you retire.
The combination of tax benefits plus helping you develop a long-term savings discipline makes IRA contributions one of the best investments you can make right now.
4. Get your emergency fund recession-ready
The possibility of recession is becoming a bigger part of conversations about the economy lately. Before the next recession comes, a great investment would be to get your emergency fund ready.
If you don't already have an emergency fund, think of it as a form of insurance against the unexpected. Whether it's a surprise expense or a loss of income, having some money set aside for emergencies can be a great comfort.
Even if you already have an emergency fund, you should take a look at whether it is really recession-ready. When the economy shrinks, it means a lot of people lose their jobs. It also means new jobs are hard to find, so you want to be prepared to ride out a long period of joblessness if necessary.
Having enough savings in your emergency fund to cover six months' worth of essential expenses is a good way to prepare for a recession. It gives you something to fall back on in times when your income might come up short.
This kind of cushion could also prevent you from running up expensive credit-card debt. That makes building up your emergency fund an especially smart investment in a time of economic uncertainty.
5. If you have young children, start a 529 college savings plan
Parents often start worrying about paying for college as their children enter high school, but the best time to start investing in your children's education is when they are much younger than that.
529 college savings plans do not allow you to deduct contributions, but they do allow money in the plan to grow tax-free. Distributions from these plans are not taxed as long as they are used for qualifying education expenses.
The tax status of 529 plans means there is no immediate benefit to contributing to them, since contributions are not deductible. However, since investment earnings are not taxed, the longer you have money invested a 529 plan the more likely you are to benefit from this tax break.
The sooner you invest in a 529 plan, the more of a tax benefit you're likely to get out of it. For parents of young children, that means that the sooner you start a 529 plan the smarter an investment it will probably turn out to be.
6. Rebalance your investments
The stock market has had a good year in 2019, earning about 20% in total return through the first 10 months.
When one type of investment has very good or very bad returns, it can throw your overall investment mix out of whack. That's why this might be a good time to rebalance your investments and get things back into alignment.
Investors should be aware of their mix of stocks, bonds, cash and other investments. That mix, known as your asset allocation, helps you manage the potential risk and reward of your investment program.
A big year for stocks may have pushed your allocation to stocks above where it would normally be. This means your investments could be at a higher risk level than you intend.
Trimming stocks back to your target allocation allows you to cash in some of your recent gains and make sure your risk level is back in line.
7. Think globally
Concerned about the economic outlook in the United States? Consider spreading your risk out on a global scale by investing some of your money in non-U.S. companies.
Global diversification probably won't shield you completely from the risks of the U.S. market. Large foreign companies tend to rely heavily on U.S. consumption of their products. If the U.S. economy struggles, it might also hurt some of these foreign companies as well.
Also, every country is prone to its own risks and economic cycles. Simply diversifying across multiple countries won't make your investments immune to the general risk of owning stocks.
However, global diversification can spread your risk out among countries that go through ups and downs at different times. This makes it so some of those fluctuations can cancel each other out.
You may choose to keep the bulk of your holdings invested in the U.S. for a number of reasons. Still, taking a portion of your money and investing it in non-U.S. stocks could be a timely way of making sure you don't have all your eggs in one basket.
8. Increase yield with a CD ladder
Interest rates have been falling, so bank customers should look to shift into higher-yielding products. One way to do this is to move more of your money into long-term CDs.
Long-term CDs generally pay higher yields than short-term CDs or savings accounts. So, even as most interest rates fall, you could take back some or all of that lost interest by shifting from short-term- to long-term-bank-deposit products.
Of course, the drawback of certificates of deposit with longer terms is they require that you lock your money up for a longer time. This is where CD laddering can help.
You can create a ladder with CDs maturing at different times. This allows you to have money becoming available to you at regular intervals while you benefit from the yield advantage of long-term CDs.
Giving you the extra yield of long-term CDs without tying up all your money for the long-term could be an especially smart investment in a falling-interest-rate environment.
9. Reconsider your banking business
Another way to fight back against falling interest rates is to take a fresh look at whether you're getting competitive yields on your deposits.
The latest MoneyRates.com America's Best Rates study found a difference of nearly 2% between the top savings account rate and the average rate. That means that most bank customers have plenty of room to improve their rates just by doing some comparison shopping.
Comparing rates always makes sense, but it might be especially timely now that rates are headed lower. When rates are on the move banks, react at different times and to different degrees. That makes this a good time to take a fresh look at how competitive your bank's rate is.
10. Invest in your job skills
Whether or not the country falls into a recession, the fact is that the economic growth slowed over the first three quarters of 2019. A weaker economy means a tougher, more competitive job market.
Technology and other factors can cause job skills to become out of date rapidly. If you haven't done so recently, this might be a good time to invest in updating your skills.
A weakening economy means it could become harder to find and hold on to a job. It also means that wages could tend to level off.
Faced with that kind of job market, one way to respond is by making sure your job skills are more marketable. This could help you hold on to your job, find a new job or possibly earn a bigger raise in the year ahead.
11. Retire credit-card debt
With savings account yields low and stock returns uncertain, perhaps the best investment is one that can save you a significant expense. One way to do this is to pay down your credit-card debt.
The average savings account rate is less than half a percent, but the average interest charged on credit-card debt has soared to nearly 17%.
Not only has the interest on credit-card debt risen sharply, but so has the amount of credit-card debt outstanding. The amount of debt Americans owe on their credit cards has jumped by over $200 billion in just the past five years.
Dealing with credit-card debt becomes especially difficult in a weak economy when incomes are squeezed. Paying your credit cards down now could give you some extra breathing room if a recession comes.
Eliminating credit card interest charges that average 17% is as good as earning 17% on an investment.
That kind of return is tough to beat, so paying down credit-card debt is certainly one of the smartest investments you can make right now.
>> How long could it take to pay off your credit card? Try our credit-card-payoff calculator
Stock tips are all well and good, but too often they don't come through. Even when they succeed, it's tough to invest enough in one stock to make a life-changing difference.
Instead, consider some of the investment moves described above. These represent more systematic changes to your finances that have a better chance of providing noticeable benefits.