It can be hard to start saving. Especially if you find yourself drowning in your lifestyle obligations. If you have student loans, a new mortgage, or maybe even a new baby, the Musts seem to outweigh the Wants.
But getting a good financial foundation beneath you is an important first step that almost every financial advisor will agree to. So, how do you start? The first thing that will make you successful is to make sure you build in consistency through out your plan. Let’s say you decide it’s time you built up an adequate Emergency Fund. You have been meaning to do it, but now that your obligations are adding up, it’s getting a little scary being out there “naked.” You start to think to yourself, ok, I’m employable, but what if I get laid off for some reason that is not my fault. Even if I think I could get a job quick, I would want to make sure it’s a good one. That could take 3 months if it was all a surprise. Where would I be? It’s not hard to imagine most people in your shoes would be grateful for a couple of weeks’ worth of severance, then it gets tough.
So, let’s start building that emergency fund, shall we? It’s always tough to figure out. Should I start investing this money or if I may need it should I keep it in cash? Most experts agree, you need to keep 3-6 months of expenses available in a readily accessible and not too risky fund. But, it’s also important to consider that once you start a momentum you should begin to build on that as a success trait. Let’s say you buckle down and think you can save $500 per month. Now you know this might be a bit tough, but you figure you can do it.
First, we recommend you are realistic with yourself. We would much rather see you starting at $400 and sticking to it month after month – only increasing it when you are sure. This type of investing and saving will get you far further then the stop and go method. So, consistency wins. Then, try and make it automatic. A withdrawal from your checking account each month should do it. People who invest this way are far more likely to continue it than those who figure they will just send the money in each month.
Next, why don’t you try and have your funds do some double duty. For example, start a ROTH IRA. A Roth IRA is the type of retirement account that you do not get a current income tax deduction for making contributions. But, over time, the growth in your portfolio will not be taxed. Then, as you retire and begin to use it, you will not be taxed on those funds either. A Roth IRA has limitations as to who can put new dollars in. Eventually, as your salary grows you might get cut off. But, having this type of account can really benefit you far into the future. As you begin withdrawals, you will be able to look at the then current tax code and decide when it’s time to spend Roth Dollars, Time to spend regular 401(k) or IRA dollars, and when it’s time to spend regular old savings, depending on the tax rates. We call it Tax Diversification.
But there is another little secret. All those deposits you make are eligible to be withdrawn without penalty. What this means for you is that you can actually use this type of account for an Emergency Account. If you need the money, it is there for you – but make sure you are not taking out profits, that can be painful tax-wise. The point is you may never have that emergency, or over time you could easily accumulate an emergency fund elsewhere. Remember to keep the funds you might need safe – but as it grows, invest the rest! This allows you to keep the momentum going right through your plan.
Bingo, question answered, should I start investing or saving for emergencies?!
Getting started financially is tough. Make sure that when you do, you are taking advantage of all the tips and tricks to get you there.