3 Things You Need to Start Saving For Right Now
When it comes to financial planning, there’s an overwhelming amount of information out there.
To help simplify things, starting today, you’re going to focus on saving for three specific things: retirement, emergencies and your dreams. If you start saving in these three “baskets,” you’ll be well on your way to building financial security for life.
Chances are, you’ve heard the importance of building a nest egg and saving for a rainy day — but you may never have thought to save for your dreams. If you don’t actively save for your dreams, though, they probably won’t become a reality.
Read on for more details on why and how to start saving today.
1. Save for retirement
Especially if you’re in your 20s or 30s, retirement may seem far off, but the longer you wait to start saving for your future, the further behind you’ll fall.
Ideally, you should aim to save 10-15% of your income in a retirement plan. That said, it’s OK to start small and gradually get to where you need to be. Even if the best you can do is to save 1%, don’t let that stop you from starting. Anything is better than nothing. Start small and commit to increasing your contributions every year or until you’re saving 10-15% of your income.
How to save for retirement
The simplest way to save for retirement is to fund an employer-sponsored 401(k) or 403(b) plan. With these plans, you get major tax breaks, you can contribute up to $19,500 in 2021 and your contributions are automatically deducted from your paycheck, meaning you’ll never even see the money. Plus, your company may offer a “401(k) match” and will match your contributions up to a certain amount, which is essentially free money.
If your company doesn’t offer a retirement savings plan or if you’re self-employed, you can open an individual retirement account (IRA) — either a traditional, Roth or SEP IRA — which also offer tax breaks.
Regardless of the type of retirement account you’re funding, you want to set up a system so that a certain percentage of your paycheck gets deposited directly into it. Again, if your company offers a plan, they’ll automatically deduct your contributions from your paycheck. If you’re funding an IRA, have a certain amount of money transferred from your checking account to your retirement account every time you get paid.
2. Save for emergencies
Having a cash cushion to fall back on if you lose your job or rack up a large medical bill is more important now than ever. You want to have at least three months’ worth of expenses set aside in an emergency fund, though, the more you can save for a rainy day, the better. The exact amount that makes sense for you ultimately depends on what you feel you need stashed away in order to sleep well at night.
Figure out what you spend each month, multiply it by three (or however many months’ worth of expenses you want to save) and start working toward saving that amount. The key is to make it automatic, so set up a recurring, monthly deposit from your checking account to your emergency account.
Where to keep your emergency fund money
You want to put this money in a separate account from the rest of your savings. It’ll create a barrier between you and your emergency fund — after all, you want to keep your hands off of this money unless you’re dealing with an actual emergency.
Look into high-yield savings accounts, where your money will be accessible but also earn more interest than it would if it were just sitting in a standard savings account (the national average interest rate on savings accounts is a scant 0.05% APY).
Before Covid-19 hit, internet banks were offering interest rates between 1 and 2%. That’s 20 to 40 times higher than the national average. While the pandemic has driven interest rates down significantly, you can still find some savings accounts out there with appetizing yields (around 0.5%), especially compared to the national average of 0.05%.
3. Save for your dreams
If you don’t actively save for your dreams, you may never achieve them. Setting up a dream account will not only get you closer to reaching your dreams, but it may help you realize that they’re closer than you thought they were.
If you don’t have a specific dream, open an account anyways. The moment you set one up, you’ll start to think of what you want.
Most people never fulfill their wildest goals and ambitions because they don’t think they have the money to do so. The point of setting up this account is so that you will have the money to go after what you want — after all, money is just a tool to free you to live your best life and to live rich now.
Where to put your dream fund money
To help ensure you don’t dip into your dream fund for other expenses, put this money in an investment account separate from your checking account and retirement account.
How you invest this money depends on your time horizon.
If you’re saving for a short-term dream — maybe you want to go to Hawaii at the end of the year or take piano lessons — put this money in a high-yield savings account, where it’ll be safe and highly accessible, but will also earn a little more interest than if it were sitting in a traditional savings account.
Again, the decent high-yield accounts right now are paying about 0.5%, so you’re not going to get rich off investing in a 0.5% account but at least you’re earning something and your money is accessible.
For dreams that are 2 or 3 years out, consider investing in a bond fund, which is generally less risky than a stock mutual fund. Major brokerage firms like Vanguard, Fidelity and Charles Schwab all offer bond funds.
Finally, when you are saving for long-term dreams that will take you more than three years to reach, consider investing in a balanced fund.
Balanced funds are mutual funds that invest in both stocks and bonds. Generally, about 60-70% of a balanced fund’s assets will be invested in stocks, with the rest invested in bonds (usually Treasuries). As a well-diversified fund, it’s less risky than a pure stock fund.
The bottom line: Investing in a balanced fund will give you slow and steady progress to where you want to go, without incurring a ton of risk.
Another option is to invest your dream money using a robo-advisor, like Betterment or Wealthfront. Robo-advisors use technology to build and manage an investment portfolio that’s right for you, depending on your goals and risk tolerance.
The way it works is, you go online and answer a series of questions about things like your time horizon, financial goals and risk tolerance. Using an algorithm, the robo-advisor will build a diversified portfolio fit for your situation.
Check out Finishrich.com’s top recommendations for robo-advisor companies.
How much should you save for your dreams?
Once you select an account to use, start funding your dream account right away so that your dream becomes that much closer to reality.
You should fund your dream account the same way you fund your retirement basket and emergency fund — that is, with a fixed percentage of your income that you automatically contribute every month. Making the process automatic is the best way to ensure you stick to your savings plan.
As for how much to contribute to this account, aim to save 5% of your after-tax income for your dreams. Of course, if your dreams happen to be really big, you may want to put away a larger percentage of your income.
Ultimately, it’s up to you and how much you think you can realistically save. Remember, the more money you put away, the faster your dreams will become a reality.