DOLLARS AND SENSE

Common sense answers to questions on personal finance

by Joe Plemon 

Q:   Joe, we have a CD which will mature next month, giving us $14,000.  We have both recently retired and need some guidance on what to do with the money.  Fortunately, we don’t need it to live on.  We are considering renewing the CD or perhaps purchasing a Roth IRA.  What are your thoughts?  

A:  Once you clarify your priorities, your answer will be obvious.  I recommend the following:   

Priority One: Getting out of debt.  If you have any debt other than your house, you should set aside $1,000 as a small emergency fund and use the rest for debt reduction.  Think of it this way: if you had no debt and no savings,  would you borrow money in order to create a savings account?  Probably not, but keeping that savings without paying off debt is the same thing.  Don’t do it.  Once your debt is gone, use the new cash flow to quickly replenish that savings.   

Priority Two: Emergency Fund.   If you don’t have debt (other than your house),  you should use the money to build up three to six months of expenses in an emergency fund.   Store this money in a Money Market account instead of a CD because, when emergencies happen, you don’t want to pay a penalty to get to your money. 

Priority Three: Investments.  If you already have a fully funded emergency fund, and if you plan to leave the money alone for at least five years, you should consider investing this money.   Because you are retired, a Roth IRA (Individual Retirement Account) is not an option because the Roth must be funded with earned income.  However, you can still  choose from a number of good mutual funds.  Tip:  Always use a broker who has the heart of a teacher.  If he doesn’t help you understand your investments, fire him and find one who will.  

By understanding and practicing these simple priorities, you can always have a built in plan for your finances.