- In order to save money you have to set systems in place. When you are following a set of rules that you make for yourself it is easier to make sure that you save. So I recommend having a specific amount of money that is set aside each month- this can be wither a dollar amount or a percentage of your paycheck, ex 20%. This amount gets taken from your paycheck immediately! If you get paid by check or direct deposit- the minute the money hits your account you transfer it to your savings account. Many accounts allow you to do automatic deposits so you can set those up to withdraw money from your checking account and into your savings account the day you get paid. If you get paid in cash, immediately separate the savings portion and place it aside. Don’t go shopping before having the savings portion in a separate envelope that you won’t spend. Tell yourself that it is not your money. It belongs to your savings account- not to you.
- Dream! Your state of mind is very important when it comes to saving. If you feel like you are depriving yourself in order to save then you are more likely to keep spending the money instead of saving. If you allow yourself to dream and imagine what opportunities your savings will allow you later in life you will have an easier time putting that money away.
- Celebrate small goals! Set small achievable goals for saving and then celebrate when you reach them. You can make a visual aid to help you stay on track and celebrate those small successes!
Where do you put the savings portion of your paycheck? What do you do with the money you have made so far that you don’t know what to do with?
Welcome to the savings ladder. The process is simple; when you complete one step you simply move up the ladder and do the next step. If you need to take money out of a ladder step, climb down one and start over.
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Follow these five simple steps:
Emergency Fund-Put away $1,000 in an emergency fund. This money should be accessible to you in times of emergency. It can be in a checking account or a simple savings account. You do not want it tied up in something that takes a while to withdraw or has penalties for withdrawal. This money is for emergencies only! Anything that can be foreseen is not an emergency (friend’s wedding, new clothes etc.) Hopefully, you will never touch this money- but if you have to immediately replenish the account so it has $1,000 in it.
Here is an example of an easy account to open: https://captl1.co/2vl8R8a
Retirement- Take $5,500 and put in a Roth IRA (or SEP IRA if you are self-employed). Why do I suggest putting money away for retirement as the second step? There are 2 reasons for this:
Compound Interest- the earlier you put in money the more it grows and accumulates interest.
Usually, when things get tough (as they usually do) the first thing people do is lower their long-term saving contributions. By putting this money away now you are making sure that at least you have some form of long-term savings put away. The way to financial plan is to assume that later in life you will have less money, not more. That way if that is true you have planned appropriately. If you do have more money later in life- you will just be richer.
The easiest way to do this is to open a Targeted Retirement Account. Pick an account that allows withdrawals in the year you plan to retire (at age 55) and max it out every year as soon as possible. The maximum contributions are $5,500 for someone filing taxes independently.
Some accounts need a large minimum deposit in order to open. If you don’t have that kind of money, simply open a savings account such as Barclays or Ally and deposit the money in there. Once you reach the minimum deposit amount you can open your account.
I am not an expert on investing- so I won’t tell you what to do besides to open the account. But here are some links to help you get started!
Vangaurd Target Retirement Fund: https://investor.vanguard.com/ira/iras
Vanguard SEP: https://investor.vanguard.com/what-we-offer/small-business/overview
3-6 Months savings- Take all your expenses and multiply that by 6, or take only the bare minimum and multiply by 3. This is the amount that you need to have in this account. This savings should also be fairly easy to access. A simple savings account should do the trick. No CD’s or mutual funds. You are not going to make money off this account- you just want it there when you need it. Of course, if you can put it in a savings account that pays interest that will just work in your favor!
Intermediate Savings- What are your upcoming big expenses? Finishing your degree? Going to graduate school? Will you need to pay for a wedding? If none of these apply than you can just start putting money away for a house. This account should be a money-making account but you don’t want something too risky. A good mutual fund should do the trick. You want the money to work for you but you don’t want to take too many risks as you may need the money in the near future. Even if you don’t it’s a good idea to have money in an account that makes money but is not too risky. The amount that you out in this account will vary based on your needs.
After that- You have enough for school? For a wedding? For a down payment on a house (or getting there)? Start diversifying. Put your savings money in different brokerage accounts, mutual funds, CD’s, start trading etc. Never put all or most of your money in one place and don’t invest more than you can afford to lose.