…Follow this 10-step guide to saving and investing, and you’ll be much more likely to gain financial security in your life.
This article is a severely edited ([ ]) and abridged (…) version of the original article by Christopher Smith for the sake of clarity and brevity to provide a faster and easier read.
1. Live on Less Money Than You Make
…Think that’s an impossible goal? It can be tough to get started, but here’s some help. (Hint: It all starts with making a budget. It’s difficult to save money if you don’t know where your money is going in the first place.)
2. Be a Saver Before You Become an Investor
You can lose some or all of the dollars you invest but, when you save, you aren’t putting your money at risk… so start by…[creating[ an emergency or rainy day fund…[consisting of] six months of living costs.
- If you’re starting from nothing, open a savings account at an online bank or credit union that requires only a small minimum (or even zero) deposit. Even if you can contribute only $10 per pay period, start there and allow that money to build over time…Don’t feel that you need to save that amount tomorrow…Start where you can and just develop the habit of saving first; then worry about getting to six months.
- If you’re a high-income earner, look at using a tax-free money market fund (a municipal money market fund) instead of an online savings account. A savings account could force you to pay federal taxes as high as 37% on the interest you earn. Municipal money market funds are exempt from taxes.
3. Make Investing for Retirement Your Highest Priority
It can be tempting to postpone the delayed gratification of retirement investing and spend your money on other things, but it’s important to be disciplined [so,] once you’ve protected yourself against emergencies with some savings, start investing for your retirement. How to invest for retirement can be a daunting prospect, but the tips below show you the easiest path.
4. Enroll in Your Company’s Retirement Plan
If you’re an employee, talk to the appropriate person at your company about enrolling in the retirement plan. This simple step can set the financial foundation for the rest of your life…
The most common type of company retirement plan is a 401(k). Many companies offer “matches,” giving you even more incentive to fund your retirement plan. A “match” is money your company adds to your 401(k) plan based on your own contribution. The most common company match is 50 cents for every dollar you contribute, up to 6% of your annual salary…[so] always contribute enough to get the full company match because that’s free money. Employees can contribute up to $20,500 to their 401(k) plans for 2022. Anyone 50 or older can add an additional $6,500 in catch-up contributions.
5. Start a Roth IRA if You Don’t Have Access to a Company Retirement Plan
If you don’t have the option to join a company retirement plan, don’t worry. There,,,[are] alternatives, either a Roth ARA or a traditional IRA….
- With a Roth IRA, you contribute after-tax dollars but your money grows tax-free, and you can withdraw it without owing any taxes during your retirement years. No matter your age, if you’re not a big income earner, a Roth IRA is recommended.
- With a traditional IRA, you contribute pre-tax dollars (these dollars don’t count toward your taxable income). Your money grows tax-deferred, but you’ll pay taxes on it when you withdraw it during your retirement years. If you’re over age 40 and you earn a big paycheck, a traditional 401(k) is recommended so you can get the upfront tax benefit. You’ll likely have a lower income tax rate during retirement so even though it’s safe to say taxes will rise in the future, you’ll still probably end up saving money….
6. Put Your Money in a Target Date Fund
Now that you’ve set up your 401(k) and/or your IRA and have started contributing to them, make sure to put that money to work. You’ll have choices for how to invest the money…but a target date fund as a simple, smart investment solution. Just pick the year closest to when you think you’re going to retire, and slap all the money you’re saving into that choice…You don’t have to do a thing other than invest your money. It’s the ultimate in ‘set it and forget it’ investing — and could be the best and easiest investment choice you ever make.
Target date funds automatically rebalance your portfolio with the proper mixture of investments based on how many years you are away from retirement. When you’re young, retirement fund administrators will invest heavily in stocks. When you’re older, they’ll reduce your exposure to stocks, hopefully leaving enough in your portfolio so that your returns outrun inflation.
7. Automate Your Investment Contributions
The beauty of company-sponsored retirement plans is that, when you set up the account, you can have your contributions automatically deducted from your paycheck…[which] prevents you from spending money that you should be investing. It also aligns with a “set it and forget it” strategy which is by far the easiest to maintain.
8. Increase the Amount of Money You’re Investing Over Time
…[When] you think about how much money you need to save for retirement or even for your emergency fund, it’s easy to get overwhelmed…[so] tackle it one paycheck at a time, one monthly contribution at a time…[and when] you’ve established a good emergency fund and have automated your retirement contributions…take the next step…[of increasing] your contributions by one cent for every dollar you earn…every six months…You’re not going to miss that one additional cent, but you’ll steadily increase the amount of money you’re putting aside for your future and you’ll be living on less than what you make.
…Save a dime for every dollar you make if you start investing in your 20s..[because] if you’re not putting that dime in, you’re not going to have saved enough money. If you start in your 30s, you’ve got to do more than a dime, and [in your] 40s more than that, [etc,]…As I mentioned earlier, start putting in what you put in and then step it up every six months.
9. Don’t Change Your Investment Plan Due to Big Swings in the Market
Once you’ve gotten this far, your biggest enemy is the temptation to wander off the path and, for some people, that happens when the market crashes…[but] this is not a time to jump in — or jump out — of the market, especially when you’re young…[and especially] where you put money in once a month or once every pay period. Leave it alone….
10. Set Aside Any Extra Cash
If you’ve reached step 10 in your life, congratulations. You’re on your way to building wealth…and if you have more income after that…set a monetary goal for each of your priorities (a new car, a new house, a major trip, etc.) and open separate savings accounts for each goal…
…[The above] saving and investing advice is simple to follow. It also helps take away the stress you may have about money, because you can follow this plan and achieve financial freedom.