Part of being an adult means putting aside some of your cash money – and not using it.
Because emergencies happen. Problem, since more than half of all Americans apparently don’t have enough cash saved to cover a $1,000 surprise expense. Almost as many Americans don’t expect to be able to afford retirement. Let’s change that. Our friends at Vanguard can help you out with the whole savings and investing thing.
How do I get my finances in order?
First get a handle on how much money is coming in (hi, paychecks) versus going out (bye, paychecks). Be realistic. One way to do this is comb through last month’s bill. And the one before. Some banks can help with this. Other options: consider using an app like Mint or a spreadsheet like this one to make sure you have a good handle on what’s happening to your money each month. Then it’s time to budget.
How do I do that?
Some people recommend the 50/30/20 rule. Half your paycheck goes to things you need (rent, food). Another 30% goes to things you want (travel, wine). And 20% goes to paying off debt or to savings and investing. You could also set your savings goals first – what you hope to save up and by when. After you figure that out, you can work out how much you get to spend on everything else. Do what works for you – you have options.
What’s the difference between savings and investing?
Both involve setting aside cash money. Think of savings as the money you want handy in case of an emergency that could happen in the near term (like a health issue or a broken dishwasher). Investing is all about putting your money somewhere you think it’ll grow. Investments are typically riskier than savings, but they can pay off way more in the long run…as long as you invest wisely.
Should I invest or save?
Ideally, both. Save for the now. Invest for the later. If you have debt (hi, student debt), first come up with a plan for paying that off.
What if I’ve got extra money?
That’s totally up to you. But everyone and their mom recommends you do a combination of saving and investing. If you want to save for the now, you have options. Like...
Savings account: This can store your money and let it grow juuuust a little bit. The average interest rate on a savings account is a fraction of a percent. So don’t expect to get rich. Think of it as keeping your money safe.
CD: Not that one. This is a Certificate of Deposit. Banks often let you open a special kind of account with better rates than you would in a regular savings account. But you have to not touch that money for a certain amount of time (think: a few months up to a few years). When you shake on it, they issue you a CD.
Bonds: The one that lets you loan money to a company or to Uncle Sam – not the other way around. If you buy government bonds, people often expect their money to grow niiiice and slow.
Ok. Now how do I live it up in retirement?
You're probably going to need to invest. Here are some ways to grow your cash for decades out...
401(k): An employee-sponsored retirement savings plan. If you do a traditional 401(k), you’re investing using pretax dollars – which can lower how much taxes you owe right now. Some companies will match the amount you contribute to your retirement, up to a certain point. Your company gives you options for how to invest it. If you like their options and have enough saved, you’ll probably want to take advantage of this.
IRA: Individual Retirement Account. You can put aside up to a few thousand dollars every year into these – and decide how you want to invest it. If you do a traditional IRA, you hit snooze on paying taxes on the money until you take it out. If you do a Roth IRA, you’re paying the taxes up front.
Stocks: Lots of people invest their money directly into the stock market. It can be risky business, but if you put money into an index fund like the S&P 500 – which samples the stock market as a whole – and then don’t touch it for decades, people have historically made some bank.
Mutual funds: Some people think they can beat the stock market by buying and selling just the right stocks at just the right moment. But if you want help managing your money, you might consider a mutual fund. Aka it’s professionally managed. It’s still a good idea do your research first, though.
What if I have no self-control?
We won’t judge. But here are some tips to get you on the savings train…
Look at your life, look at your choices: Think about the costs that keep coming up and whether there are cheaper alternatives that could work for you. Anything from your housing situation to making coffee instead of buying it. By changing up your habits – how you spend money without thinking – you could save hundreds of dollars a month. Ding ding ding.
Automatic transfer: Transfer a little cash into your savings each month so you don’t easily spend it. Talk to your bank – many banks will let you set this up to be automated so you don’t even have to think about it.
It can be fun spending money. It can be even more fun watching your savings grow. You’ll thank us later.
We Skimm'd more investing topics for you here...