It’s been a long time since we had an Ask the Readers around here. Time to remedy that situation! Jeff recently wrote with a question about saving. The lucky dog has saved so much that he doesn’t know what to do next!

Two years ago I started getting smart about my finances and in the time since, I’ve been able to put away enough money to max out my Roth IRA. I’m a grad student on a teaching-assistant income. As such, I don’t have a huge amount of cash lying around after I’ve maxed out the IRA, but I also don’t have a 401(k) — or, in my case, a 403(b) — to put that extra cash into.

So here’s my question: What’s the best thing to do with extra cash once the tax-shelters are maxed out? Just invest in the same type of mutual funds as I already have within my IRA? What if I’ve got a wedding or a house in the not-too-distant future (say, 2-4 years)? Any pointers on this would be greatly appreciated!

Jeff should be congratulated for maxing out his IRA. That’s awesome! Saving that $5,000 a year puts him far ahead of most Americans. In my opinion, he has three options, two of which he mentioned, and one he didn’t. My personal preference is to put things in this order:

  1. Debt reduction. If Jeff is carrying any high-interest debt — and he probably isn’t or he’d have mentioned it — attacking that is probably the best move.
  2. Targeted savings. If Jeff thinks he might be getting married and/or buying a house in the next few years, he could open named accounts at ING Direct (or another online bank) to focus his saving. Interest rates suck right now, but they’re bound to improve in time.
  3. Additional investing. A reasonable argument could be made that the market is in the middle of a bull run, and that it’ll keep climbing for a while. If Jeff thinks this is the case, he might be better off putting his money into a regular investment account.

Thought the stock market is attractive, it’s not nearly as attractive as it was a year ago. Besides, the stock market really isn’t a great place to save for short-term goals. You could argue that it’s been fairly low recently so your chances of seeing a drop are lower, but they’re still there. If you’ll need cash for a wedding or a house in a few years, Jeff should make sure he understands the risk involved before putting short-term money into the market.

If I were in Jeff’s shoes, I’d save the extra market investing for after I’d met my other savings goals. I’d keep maxing out the IRA every year, and put any extra money toward targeted savings. If he does invest, should he stick to his current mutual funds? That really depends on what those are.

What would you do if you were in Jeff’s shoes? Should he be focusing on his short-term goals? Or is he better off opening an investment account? How do you prioritize your saving strategy if you’ve already maxed out your IRA?

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