Saving at Any Stage: Starting to Put Money Aside


young woman using laptop computerIf you’re able to consistently save some of your earnings, perhaps you’ve built good habits such as tracking your spending, starting a monthly savings plan and avoiding impulse purchases. Now is the time to start thinking more broadly to save for long-term goals, and figure out where your financial priorities lie.

1. Start your retirement savings plan.

Even if you have many years of work in front of you, it’s smart to start setting aside money for retirement. You should enroll in your company’s retirement plan and start making contributions to a basic index fund that tracks a broad stock market index or a lifecycle fund based on your retirement date. Many retirement plans include a company “match”—for instance, for every dollar you put in, the company adds a dollar, up to a certain percentage. If you don’t take advantage of the company match by signing up for the plan and maximizing your contribution, you’re effectively passing up free money. It’s like walking past a $20 bill on the sidewalk and not picking it up.

2. Build your emergency fund.

Financial emergencies are going to happen, whether they are a job loss or a family crisis that requires a last-minute plane trip. When emergencies hit, you need to have a reserve fund that can cover your living expenses. Most advisors recommend setting aside three to six months of living expenses in a savings account you can access quickly. This is when it helps to track your spending, so you’ll have a sense of what you actually need each month and what you can save.

Some people think they can simply rely on their credit card in an emergency, but that can compound your problems if you’re unable to pay off the bill quickly. You may end up paying interest charges on the amount borrowed for months or years into the future. For example, paying off the monthly minimum of $20 on a $600 charge will take you three years and cost you $157 in additional interest. If you pay off the bill in two years, you’ll pay $99 in interest charges, and over one year you’ll pay $50 in interest charges.

3. Tie your savings plan to your particular goal.

Once your emergency fund is set up, you need to prioritize your savings between short-term and long-term goals:

  • Short-term objectives include things such as saving for a vacation, expected home repairs, or buying a house in the next five years. In general, the sooner you will need the money, the more conservative you need to be with how you save and invest it.
  • Longer-term things include saving for your kids’ college education, or your retirement.

In general, the sooner you need the money, the more conservative you need to be with how you save and invest. For retirement accounts, you can tolerate much bigger risks if you have many years until you retire. If the stock market has a sudden decline and your retirement account goes down in value as a result, you likely have decades to recoup your investment.infographic showing problem with using credit cards in an emergency

4. Make sure that your dreams are realistic.

A big part of financial intelligence is making sure that your goals and your reality line up. If you want to buy a house someday, and you’ve saved little toward that goal, you’re going to need to step up your savings or you won’t get there. (Many home lenders require a down payment of 20%. For a $250,000 house, that’s $50,000, plus closing costs.) That doesn’t mean you can’t achieve your dream, but it does mean you might need to make some hard choices. Maybe you’ll need to get a roommate to cut down on living expenses, or give up your car and rely on mass transit and a sturdy bike. It also may mean you ultimately buy a townhouse instead of a house. Whatever your goals are, make sure they line up with your financial reality and you have a savings plan to get there.

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