Much of the personal finance advice out there can be summed up in 3 words: Save more money. While the road to riches isn’t really that simple, saving money is a good place to start. That said, saving money involves a lot more decisions than you would think. Just for you, I’m going to tackle the 3 biggest saving questions:
- How much should I save?
- What should I save for?
- Where should I put my savings?
1. How much should I save?
- The general rule of thumb is that you should save at least 10% of your income (think of it as tithing to yourself). (FYI: If you ask 10 different financial gurus what percent of your income should go into savings, you’ll get 10 different answers. When you really get down to it, the percent of your income that you should save obviously depends on you – your income, your debt, your expenses, etc…)
- Saving 10% of your income may be hard: For people that are severely in debt or have a serious love of shopping, this number may feel huge, but I’d recommend saving something even if you can’t commit to 10% of your income. Even David Bach, the author of Automatic Millionaire and super promoter of saving (his plan, which he calls “paying yourself 1st,” encourages you to put money into savings before paying bills or even paying off debt) acknowledges that saving even 1% of your income is better than saving none at all.
- For saving inspiration: check out the book A Million Bucks by 30. The author, Alan Corey, lived in the Spanish Harlem and ate Ramen noodles every day for several years in order to save more than 50% of his meager income. Lots of Ramen and several lucky real estate deals later, he was able to add himself to the list of American millionaires before his 30th birthday. While I wouldn’t necessarily recommend this strategy (can you say “high blood pressure”?), if he can do that, you can put away 10% of your income to pay for your future.
2. What should I save for?
- Retirement: Saving for retirement is easily the most common savings goal. Most companies offer retirement savings in the form of an IRA, or individual retirement account. Saving for retirement can be especially beneficial if your company has a program that matches contributions you make to your IRA. Most companies do this up to a certain limit (often around $1000). If you are not putting in enough money to take full advantage of your employer’s IRA matching plan, you might as well be throwing your money out the window. (Email me and let me know which window).
- and Beyond: After retirement (a no-brainer), savings goals can get a little confusing. For some people, dividing your savings into various pieces can be motivating (i.e. having a different bank account in which to put savings toward your new motorcycle versus savings for unexpected emergencies). Nonetheless, I think finance gurus spend their spare time brainstorming outrageous new “must have” savings funds for the average American (having a vacation fund is one thing but having a separate savings account for unexpected pet expenses? For each pet? Come on.) For me, it all just seems more of a hassle than it is worthwhile. (For a good example of mini – savings funds gone wild, check out iwillteachyoutoberich.com. While I normally love Ravit’s blog, he’s gotten carried away here.) My advice: Open a savings account and write a list of clear definitions about what it can be used for (Unexpected car maintenance? Yes. Unexpected bar tab? No.).
3. Where should I put my savings?
To keep it super simple, here are 3 basic options.
- Open a savings account in a traditional bank: Offers easy access to your money and a (gasp) real person to talk to if you have any problems. Check out http://www.bankrate.com to compare the interest rates of banks in your area.
- Open a high yield online savings account: Upside is that interest rates are usually slightly higher than traditional banks. Downside is that you’re likely to spend a lot of time listening to awful elevator music if you ever need help (customer service hotlines suck) and your money isn’t an instantly accessible as it is in a traditional bank. I use E*Trade because they have a $1 minimum and a simple user interface. No matter what, always ensure that the online institution is FDIC insured (i.e. legitimate).
- Buy a CD (Certificate of Deposit): I would explain CDs, but I think JD Roth, the author of Get Rich Slowly, has already written the best description of CDs known to man, so I’m just going to send you check it out.
Ok. That’s it. Go save like a champ.