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 59 1/2) and max it out every year as soon as possible. The maximum contributions are $5,500 for someone filing taxes independently. Keep in mind that just like all investment options -there are pros and cons to these accounts. In my own personal opinion, these are the easiest to “set and forget” for the uninitiated investor who needs to set up a retirement account- which you should do as soon as possible- COMPOUND INTEREST. So yes, if you are 18 year old, it’s not too early to start thinking about retirement.
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.