Starting a pattern of saving-investing is starting a new habit. The time to do it is now and the way is to do it automatically. People who spend more than they make often end up in great debt. People who consistently spend less than they make use the difference to save and invest. Establish a budget to look at how much money you bring in each month and how much you spend, this is the place to start. Expenses can be reduced or eliminated so take action! Start by taking a look at your cell phone bill, cable bill, eating out and five-dollar coffees.
Other budget killers are things like paying high interests on credit cards and car loans. You should eliminate all high interest debts, try to minimize car loans and look into refinancing and/or consolidating Student Loans. Once you have done this you are now officially spending less than you make. So now it is time to start a savings program. See our article on Starting a Budget
Where to keep your money
Many people say it is wise to have an emergency fund in case of a job loss, Illness, unexpected expenses. So, yes you should have a savings account attached to your local checking account. This way, you can easily move funds back-and-forth between your checking and savings account, right online. Experts say, 1 to 6 months held in a savings account is certainly advisable. Keeping too much however in a low interest-bearing account is not however a fantastic idea.
Depending on your overall situation you may only need one month of living expenses in a savings account. This is true, especially if you have access to much more in just a few day’s notice. People leave way too much money in low interest accounts that really should be invested. Most brokerage houses can transfer money to your local checking account in 1-2 business days. So, if you also keep some cash in your investment account you may not need to keep a lot in a low interest bank savings account.
Start Saving-Investing The Easy Way
If you have never saved before you’re going to probably need to learn how to do it. The best methods are those whereby you have deductions automatically taken from your paycheck or checking account every month. This way, you do this before you do anything else and save according to what you can budget.
Your Best Savings Options
To do this every single month the places to start would typically be your company 401(k)/403(b) plan especially if you have a matching program. Many plans will match 3% if you contribute 6% of your income. Some plans will match 4% and some even match 100%. By taking advantage of matching you are looking at immediate gains of 25% to 100%. Wow, can you afford not to do this? Retirement saving is generally done pretax so saving $10 will cost you less than $10. Depending upon your tax rate may only cost you eight or nine dollars out-of-pocket. Add to this a match you might be getting $9 to $13 for every $6 you invest! Don’t overlook this time proven way to save!
For most 401(k) plans especially with a match you should save at least enough to gain the maximum matching contribution. Over time, you should also consider challenging yourself and move your contribution up to about the 10% level. If you are closer to retirement and have not been saving-investing heavily, you’re going to want to look at trying to reach the maximum levels of contribution.If over 50 you may also be able to make catch-up contributions so you can make to maximize your retirement savings.
More Reasons to Save
Now let’s move on to your general savings strategy. The first question is what are you saving for it could be for your first house, a new car or a better car, any large purchase or savings with the intent of long-term investment. In these various cases you may wish to take approach to some of them. Savings for a car or a home tend to be shorter term projects and then saving for long-term investment.
Shorter Term Saving-Investing
A savings project with less than a one-year time horizon should just be kept in your regular savings account A local account tied to your checking account is perfect. You don’t want to be bothered with trying to make a lot of money on the savings or potentially losing any of it, you just want to save it have it ready when you’re ready in 12 months. Longer projects such as saving for a car or a home with a 3 to 5 year goal could be looked as somewhat of a longer project. 3-5 years is long enough that unless you have a hard deadline and had to take money out when the market is low you can just wait 2-6 months longer.
Saving-Investing $500 per month for 36 to 60 months could afford you some good gains that you won’t want to miss by leaving your money sitting in a low interest-bearing savings account. Hopefully once you make this larger purchase you will also continue to save in the same account and you may not need all that you’ve saved so you will want to keep this going and you want to make it a regular habit.
Lets move on to some more advanced saving-investing topics in Part 2