What should I do with my money? Where should I put all my savings? Where do I put the extra money that I have? What to do with your money to help you reach financial success?
What Should I Do With My Money?
There are two things you should do with the money you have:
- Pay off debt.
- Save for the future.
Debt can really hold you back from moving ahead in life and being able to achieve financial success. So paying down consumer debt or any other debt that you feel holds you back should be prioritized. Some advise paying down all your debt before saving any money, but I think I would prefer to do it concurrently. The only exception to this rule is if you have extremely predatory debt and/or debt that is threatening in any way. Then, you absolutely should pay that down as soon as possible.
There are two main ways that experts suggest you pay off your debt. One is the Avalanche Method, and one is the Snowball Method.
The Avalanche Method involves paying off the debt with your highest interest rate first. The Snowball Method involves paying off your smallest debt first (regardless of interest rate). It does not matter which one you pick. The most important thing is to make a plan and stick to it. That is the only way you will achieve financial success.
What To Do With Your Money: Savings
You saved the money from your paycheck. Now what? What to do with the money that you want to save? What should I do with my money?
When you have a clear guide and clear goals about where your money goes, then you can take all the extra thinking about where your savings should go; the less you have to think about when it comes to your money, the better!
I like to simplify things as much as possible. That is why I created this simple guide to where all my money should go. I decide before I make my money where I should put it. That makes it easier to make the decisions when I actually have the money in hand. Also, it takes so much of the emotional energy out of deciding where to put my money. I never have to ask myself, “What should I do with my money?”- it has already been decided.
Wondering Where to Put Your Money?
This is where you should put your money:
Life Happens Fund
Put away $1,000 in this fund. This money should be accessible to you in times of emergency. I used to call this my Emergency Fund, but I have since changed the name to the Life Happens Fund. Because Life Happens, and you can’t possibly plan for everything. 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 withdrawal penalties.
I used to think that this should be for emergencies only, but I decided that this is really for things you didn’t budget for because you couldn’t predict them or didn’t know you had to budget for.
Really, you should try to budget for events as much as possible. For example, back-to-school expenses come up every year and can be planned. Holidays, gifts, clothes, etc., should all be part of your budget, and you should have an “Envelope” for each. Of course, it would be best if you did not take things like that out of the Life Happens Fund. BUT… if you would otherwise go into debt for it, then, by all means, take it out of this fund. This money should act as a buffer between you and your debt.
This account will help your cash flow unexpected expenses and keep you debt-free and able to handle life’s surprises. Hopefully, you will never touch this money- but if you have to withdraw money, then immediately replenish the account, so it has $1,000 in it.
Start stashing money away in a retirement fund. There are many different types of retirement funds that will be good for different people depending on their income, age, and expected tax obligations.
Why do I suggest putting money away for retirement as the second step?
There are two reasons for this:
1. Compound Interest- the earlier you put in money, the more it grows and accumulates interest.
2. 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 best way to create a financial plan is to assume that you will have less money later in life, not more. That way, if that is true, you have planned appropriately. If you end up having more money later in life- you will just be richer, which I am going to guess is absolutely fine with you.
IF YOU HAVE JUST GOTTEN A JOB, ESPECIALLY IF YOU DO NOT HAVE KIDS YET, THEN SAVE AS MUCH AS YOU CAN!
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 $6,000 for someone filing taxes independently. Keep in mind that just like all investment options -there are pros and cons to these accounts.
However, 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 years old, it’s not too early to start thinking about retirement.
Some accounts need a large minimum deposit to open. If you don’t have that kind of money, open a savings account such as Barclays or Ally and deposit the money 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!
3-6 Months Savings in a High Yield Savings Account
This money is the Emergency Fund. Take all your expenses, multiply that by 6, or take only the bare minimum and multiply by 3. This number is the amount that you need to have in this account. These savings should also be fairly easy to access. A simple savings account should do the trick. No CDs or mutual funds. You will not 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!
Coming Soon Savings (money you will need in 3-5 Years)
What are your upcoming big expenses? Finishing your degree? Going to graduate school? Are you planning a wedding? If none of these apply, then 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. This account is for the money you don’t need now or very soon, but you will need it in the next 3-5 years. You probably will have advance notice before liquidating the account, so you can afford to put tie it up a bit more.
A good mutual fund or index 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 soon. 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 put in this account will vary based on your needs.
The Sky is the Limit: Get Rich
This step is where you can get creative and get rich. Do 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, index funds, mutual funds, CDs, 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. This step is where you start to accumulate assets.
At this point, you are ready to start some real investing. I have not reached this point yet, so I can only point you to the experts to help you. Many great money blogs and sites break down the different types of brokerage accounts and what fees and limitations are involved with each one. You also may want to consider hiring an expert if needed. They can manage your money for you and give you advice.