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A Beginners Guide to Saving and Investing
When you save, you win.
Managing your money puts you in more control of almost every area of your life.
Here’s what it comes down to:
Saving and investing is the best thing you can do to secure your financial future.
But yet, 40% of Americans say they don’t have enough money saved to cover a $400 emergency.
21% say they have nothing saved for retirement.
And I can’t tell you how many emails I get from readers in their 50s and 60s who have less than $25,000 saved for retirement.
Experience has taught these people a hard lesson.
And there’s nothing more important that I can tell you than this:
There is no pension for our generation. You must save for your own retirement.
When you’re ready to retire, either you’ll have enough money saved or you won’t – and you’ll wish you had.
But don’t take my word for it.
In a recent study, older people were asked what ONE piece of advice they’d give to younger people.
Can you guess what it was?
The overwhelming majority said, “Save for the future!”
That answer triumphed every. single. thing. And actually, they ranked that as more important than:
Finding work you love
Being responsible for your own life; and
Furthering your education.
And 93% said to start saving early and contribute to your workplace retirement.
Because the sooner you start, the more you can reap the benefits of compounding returns.
What you do today matters. You don’t have forever to do this stuff.
So before you let your hours and days drift away into a myriad of little things, wake up to the real purpose of your life.
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Start With an Emergency Fund
The first thing you want to do is build a buffer against debt.
Since 4 out of 10 Americans say they don’t even have enough money to cover a $400 emergency, this is a good place to start.
We all have to face a big financial emergency at some point. It’s not a matter of if emergencies happen, but when.
So saving and investing your money wisely is your barrier against new debt.
People lose their jobs.
Medical expenses happen.
You don’t want a single disaster to send you into debt that you have to carry around for months or years.
So start with a goal to set aside $1,000 for your emergency fund.
Once that’s done, you’ll want to work your way up to saving enough to cover 3-6 months worth of living expenses.
Money equals flexibility. If you have savings and need car repairs, a new AC unit, or experience a job loss, money works for all three.
Once you’ve got your emergency fund in place, it’s time to start making your money work for you.
Some people stray away from investing because it scares them.
I don’t know what I’m doing.
It’s too risky.
Can’t I just put money in a savings account instead?
Truth is, it’s not that scary. With that said, I do recommend finding a good investment professional in your area.
Find someone you trust and can ask questions to when you need help.
But, finding a professional doesn’t leave you off the hook.
You still need to learn the basic principles of investing. You want to know what’s actually going on with your money.
Before we start, I want to show you what investing can do for you:
Let’s say you invest $100 a month for 40 years (average working lifetime).
How much do you think you’ll have saved up for retirement?
$1,176,000! That $100 each month will turn you into a millionaire.
Not bad, right?
Most people blow $100 each month on eating out or Starbucks. You can do this.
The ideal strategy should include both saving and investing – not just saving.
Besides, you can’t get those kinds of returns from a savings account.
And actually, if you chose to put your money in a savings account instead of investing, you’d lose money. Talk about risky.
Why? Because of a thing called inflation. Prices increase at about a 2% average each year.
The average savings account pays annual interest of 0.09% – which is less than 1%.
Yep, that means the average savings account isn’t even keeping up with inflation.
Sorry, let me rephrase.
Here’s a video where our friends at Libro Credit Union summarized inflation:
So now let’s get into the two step process:
Step 1: Start With a 401(k)
If your company offers a match, start with their 401(k) plan.
A 401(k) is an employer-sponsored plan for retirement savings. It takes your retirement contributions automatically out of your paycheck.
If your job offers a 401(k), you’ll fill out an enrollment package, so make sure you know how to make your 401(k) selections.
If your company doesn’t offer a 401(k) or you’re self-employed, you should open one up yourself.
Don’t neglect your retirement savings just because you’re on your own.
How Does a 401(k) Match Work?
In most cases, your company will contribute up to a certain amount.
Most of the time the match is expressed as a percentage but sometimes it can be expressed as a dollar amount.
So let’s say your employer will match 100% of your contributions up to 6% of your salary.
In that case, you’d want to contribute at least 6% to take full advantage of your employer’s match.
After all, it’s free money they’re giving you!
But, not all employers will match your contribution 100%. Some may “match,” say, 50% of up to 6% of your salary.
So if you contribute that same 6%, they will only contribute 3%.
For my visual readers, here’s what that looks like:
Now, most companies offer what’s called a traditional 401(k).
Understanding the difference between a traditional 401(k) and Roth is important in your saving and investing strategy:
With a traditional 401(k), you won’t pay taxes putting the money in. Instead, you’ll pay taxes when you take the money OUT in retirement.
That means you’ll pay taxes on all the growth you’ve earned from your investments.
But some companies now offer a Roth 401(k) option. With a Roth 401(k), you pay taxes up front so that you won’t owe taxes when you withdraw.
If you can, I recommend choosing the Roth 401(k) over a traditional 401(k).
But if the traditional is the only option, it’s still a great way to start investing.
Step 2: Contribute to a Roth IRA
When it comes to retirement, the more you invest, the better.
But most experts agree to put in at least 15% of your income.
Once you’re contributing up to your employer’s 401(k) match, I recommend maxing out a Roth IRA.
So let’s say your goal is to put 15% into retirement.
And let’s say your employer matches up to 6% of your salary.
In this case, I recommend putting 6% in the 401(k) and the remaining 9% into a Roth IRA.
A Roth IRA, like a Roth 401(k) lets you pay taxes upfront, so you don’t have to pay any on the growth of your investments.
That means if your account grows by hundreds of thousands over time, you won’t owe any taxes when it’s time to retire!
How awesome is that?
In 2019, you can contribute up to 6,000 each year to your IRA.
If you’re 50 or older, you can contribute up to $7,000.
But if you’ve maxed out your Roth IRA and still need to get to 15%, then go back to your 401(k) and invest the remaining amount.
And if those options aren’t available to you, or you need another way to reach 15%, then open a taxable investment account like mutual funds – and let it do its thing.
Investing By Age
Anyone can do this. Remember, your saving and investing strategy will secure your financial future.
All it takes is discipline, focus, and the ability to pay off debt, budget, and save money.
But what does that look like in your 20s, 30s, or even 60s?
Here’s my list of the smartest moves for every age.
If you’re behind in the game, use that as fuel to work harder to reach your goal. It’s never too late.
20s - Laying the Groundwork
- Are you newly married or about to be? Start having conversations about money and get on the same page as your spouse.
- Build a solid emergency fund.
- Avoid debt like the plague. No credit cards, car payments, or financing furniture. And yes, 0% financing is debt too.
- If you have student loans, focus on getting them paid off quickly. I recommend using either the debt snowball or debt avalanche method.
- Get good medical insurance. A single hospital stay can bankrupt you in a heartbeat.
30s - Building the Foundation
- If you’re planning on having kids soon, make sure to budget for diapers, daycare, car seats, and other things.
- Buy enough term life insurance to cover your family should anything happen to you or your partner. We recommend getting 10 times your income. Learn why and get a free instant quote.
- Make sure you’ve built up your emergency fund to cover at least 3-6 months of your household expenses.
- If you’re planning on buying a home, make sure to save 10-20% for a down payment at a 15-year fixed interest rate. (Also keep your house payment less than 30% of your take-home pay.)
40s - Put the Savings into Overdrive
- You’ve made progress in your career, and your kids are out of diapers. This means there’s a little more money in hand to invest.
- Start putting money into your kids’ college funds.
- Stay out of debt, and keep maintenance going on your home and car to avoid costly repairs down the road
50s - Get Excited But Stay Focused
- You’re starting to look forward to a life without those long work shifts. Your saving and investing strategy is starting to pay off.
- It’s good to feel excited. But don’t cash in your retirement savings just yet—keep investing a full 15%.
- Now’s the time to focus on paying off your mortgage early. If your kids are out of the house, maybe you can downsize and pay cash for your next home.
60s - Enjoy It!
It’s time to retire! Woohoo! But that doesn’t mean being a couch potato. Find ways to stay active and tweak your budget!
The day you turn 60, buy long-term care insurance. A few years of long-term care can suck your life savings dry. So prepare in advance.
Enjoy yourself! With a paid off mortgage and an empty nest, you can focus on fun: traveling, visiting grandkids, and donating to charity.
Remember, this is a marathon, not a sprint. It takes patience, focus, and long-term investing to win with money.
So keep moving forward. You’re doing something now that you’ll thank yourself for later.
Create strong financial goals and constantly remind yourself of the importance of savings and investment.
If you want to learn more about retirement (you should) then I recommend picking up Chris Hogan’s book, Retired Inspired.
It’s a great beginners guide for retirement. You’ll be glad you did.
Thanks for reading.