Ask Alan Advice Column #2

Ask Alan Advice Oct 13, 2020

I am very excited to respond to another request for advice! Please keep sending them in and I promise that I will get to them. For the second Ask Alan Advice Column, we have a CUNY student studying for their master’s degree and working part-time simultaneously.

Hi Alan, thank you for providing such a wonderful service during these difficult times. I recently decided to go back to CUNY for a masters degree and I am working part time. I have already taken your advice and started a Roth IRA buying only s&p 500 stock, and maxed out my contributions annually. I want to know how you would suggest I invest additional monies since I do not have access to a 401k. Should I just open up a regular account for investments or is there any better suggestions? Thank you!

Hello! Glad to hear you are striving to improve your personal finances despite the current troubling times.

Awesome to hear that you are studying for a master’s degree. It is a smart financial move to attend CUNY to keep tuition costs low for a fantastic education. Hopefully COVID-19 is not disrupting your studies too much. I know a few friends who also pursued CUNY’s graduate programs and it has worked out great for them in terms of zero or low college debt.

Great job on starting your Roth IRA and purchasing investments that track the S&P 500. For new readers, you cannot actually buy the S&P 500 itself since it is not a stock it is likely a mutual fund or exchange-traded fund (ETF) that is currently tracking the performance of the S&P 500.

If you are already saving for retirement and passively investing, then you are ahead of your peers financially. If I were you, I would continue to max out the IRA every year.

Since you are thinking about 401(k), it sounds like you are focusing on retirement savings. Depending on where you work, part-time work might offer 401(k) and other benefits. If you do not have access to a 401(k), I really think it depends on your financial goals and how immediately you need the money.

With your investments, you seem financially educated so I will skip the spiel about having 3-6 months of living expenses as an emergency fund in a HYSA and having a budget.

Generally speaking, most financial goals fall into two categories that dictate how you should save for them: long-term and short-term.

Personally I categorize anything 5 years or less as short-term. If your timeline is flexible, then perhaps you can consider your goals as long-term. Everyone's concepts and timeline for these goals will differ and developing an idea about what yours are will help greatly.

A few examples of short-term financial goals:
1. Furniture purchase
2. Vacation
3. Used car purchase

For short-term financial goals, I prefer to be more conservative (i.e. less risky) and save the money in a HYSA or CDs. If I know I need the money within 3 years to purchase a used car for work and that timeline is not flexible, I should not invest the money. What if the market collapses in year 3? I will not have money to pay for my car.

A few examples of long-term financial goals:
1. Saving for retirement
2. Down payment on a home
3. Capital to start a business

For long-term financial goals, I can afford to be more risky. Similar to what you mentioned, I would start a brokerage account and invest in the stock market. Just keep in mind that this means that my timeline is flexible. If the market crashes, I will be fine with waiting for a few years for the investments to recover.

I'm also a big fan of reducing the number of logins for financial accounts. Since you already have a Roth IRA, consider opening a brokerage account at the same firm. One caveat is to look up any fees associated with brokerage accounts. Just do a quick google search such as "Charles Schwab brokerage fees". Make sure the fees are acceptable and you should be good to go. As far as I know, most brokerages have reduced most fees to $0 to stay competitive against firms like Robinhood.

Don't forget about taxes! Contributions and earnings in a Roth IRA have already been taxed, but there is a different tax treatment for normal brokerage accounts. If you decide to sell your investment or if your investment earns you dividends, then you are responsible for paying taxes at a later date. Here is a guide on tax-efficient investing from Investopedia.

I am a huge fan of passive investing and you seem to be following the same strategy for your Roth IRA.

In terms of additional suggestions, I would need more details on your specific financial goals. What I can say for sure is that a brokerage account, if its funds are correctly invested, is a great way to accumulate wealth with relatively liquid financial assets.

If you are feeling particularly generous, you do have the option of donating a portion of your earnings and potentially reduce your income that can be taxed. Take a look at this WSJ Tax Guide for Charitable Donation in 2019.

To summarize, if I were in your position then I would:

1) Continue to max IRA contributions every year
2) Set aside any money for short term financial goals in a HYSA
3) Invest money in a brokerage account

Hopefully you found this helpful and good luck!

Cover Photo by Sharon McCutcheon on Unsplash