Keep your money working hard for you

Published 4:22 pm Friday, August 21, 2009

Labor Day is upon us, when we honor the contributions of working men and women—in other words, people just like you.

Of course, it doesn’t have to be Labor Day for you to be aware that you work hard for your money—and you’d like to know that your money is working just as hard for you. How can you help keep your money employed?

Consider these suggestions:

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Keep your money working for the future. The financial markets have been through some difficult times over the past two years. As a result, many people pulled money from their investments and stuck it in savings accounts—some of which paid around 1 percent interest—or Treasury securities, which may have paid even less in return.

While the need to feel “secure” is understandable, such a low rate of return can be detrimental to long-term financial goals, such as a comfortable retirement. To help achieve these goals, try to own an array of quality investments that are appropriate for your specific objectives, risk tolerance and time horizon.

Don’t interrupt your money while it’s working. You want your investments working to help you achieve your long-term goals. But this work can be interrupted by short-term needs, such as expensive car repairs, large doctor’s bills or costly new appliances. To avoid dipping into your investments—and thereby reducing their growth potential—to pay for these needs, you’ll want to establish an emergency fund containing six to 12 months’ worth of living expenses, kept in a liquid account.

Also, if you know you’re going to need a large amount of money within the next few years—perhaps for college tuition, a wedding or a long vacation—you may want to remove some of your investments from the ups and downs of the financial markets and place the money in vehicles that can help protect your principal.

Have your money work for you—not your creditors. Too much debt—specifically, too much of the wrong types of debt—is both a cause and a consequence of the economic malaise we’ve experienced. Try to reduce or consolidate your debts. For example, despite all the talk about a “credit freeze,” many reputable lenders are eager to help qualified borrowers refinance their mortgages. And refinancing your mortgage at a lower interest rate could free up hundreds of dollars per month—money you could put to work investing for your long-term goals.

Make it easier for your money to work harder. By making these moves, you can help your money work harder for you. For starters, defer enough of your salary into your 401(k) or other employer-sponsored retirement plan to earn the employer’s match, if one is offered.

Here’s another step to consider: Reinvest any dividends you may receive back into those investments. You probably won’t miss the money because you never actually had it in your pocket, and by automatically reinvesting dividends, you’ll increase the number of shares you own. Labor Day can be an enjoyable respite for you—but try not to let your money take a day off.