Many people mistakenly believe investing money is a complicated game that’s entirely out of their reach. While you can make investing complex, you can also reach your financial goals over time using simple principles and habits.
Here are five tips to save and invest money wisely, no matter if you’re a Millennial just starting out, or you’ve been investing for decades.
1. Build savings for short-term goals and emergencies.
Though we tend to use the terms saving and investing interchangeably, they’re not the same thing. Savings is cash you keep on hand for short-term planned purchases and unexpected emergencies. The purpose of investing is to grow money to spend in the distant future, namely in retirement.
If you don’t have an emergency fund equal to at least three to six months’ worth of your living expenses, make accumulating one a top financial priority. Set aside 10% of your gross pay until you have a healthy cash cushion to land on if you lose your job or can’t work for an extended period.
You might save for a home down payment, annual holiday gift-giving, or unexpected medical expenses. Money you might spend within the next year or two should be kept 100% safe in an FDIC-insured bank account. Remember the purpose of savings is to preserve it so you can tap it in an instant if you need it.
2. Start investing sooner rather than later.
Once you’ve built emergency savings, it’s time to invest. An important factor in how much wealth you can accumulate for long-term goals depends on how long your money can grow.
Starting to invest early allows your money to compound, which means interest earned gets added back to your principal. So, you make interest on your interest, and the balance grows at an increasing rate.
For example, if you invest $200 a month from age 40 to 70, with an average 8% return, you’ll have just under $300,000 in retirement. But if you start investing at age 30, you’d have about $700,000 with the same contributions and return. Having a 10-year head start makes an incredible difference.
Don’t make the mistake of thinking you can’t afford to invest or that you’ll catch up later on. If you wait for a raise, bonus or windfall to get started investing, you’re burning precious time. Investing early is one of the best financial habits you can develop. Regularly putting aside even small amounts can go a long way toward reaching goals like retirement, buying a house or paying for college.
3. Make investment decisions based on your “horizon.”
Your investment horizon is the amount of time you need to keep your investment portfolio before spending it. For instance, if you’re 40 years old and plan to quit working and live solely on investment income when you’re 65, you have a 25-year investment horizon.
Horizon is critical to consider because, in general, the longer you have before needing to spend an investment, the more aggressive you can afford to be. But as you get closer to retirement, it’s wise to preserve your wealth with less risky investments, such as fixed-income funds and cash equivalents.
4. Use automation to stay disciplined.
It’s easy to procrastinate saving and investing, so the best strategy is to put it on autopilot. Have money automatically transferred from your paycheck or bank account into a savings or investment account every single month.
When you set up consistent, automatic deposits, you put money aside before you’re tempted to spend it. Automating investing is an excellent way to outsmart yourself, so you manage money wisely.
5. Use tax-advantaged accounts for faster results.
In addition to automating payroll contributions, another reason a retirement account helps you achieve financial goals faster is they offer terrific tax advantages. You accumulate a nest egg and cut your taxes at the same time.
When you invest in “traditional” retirement accounts, such as a traditional IRA or a traditional 401(k), you contribute on a pretax basis. That allows you to defer paying tax on both contributions and earnings until you make withdrawals in the future.
Or you may have the option to participate in a Roth retirement account, such as a Roth IRA or a Roth 401(k), which does require you to pay tax on contributions upfront. However, with a Roth, you can take completely tax-free withdrawals.
If your employer offers a retirement plan, start participating as soon as possible — especially if it matches some amount of your contributions. A good rule of thumb is to invest a minimum of 10% to 15% of your gross income. But there’s no shame in starting small. Even putting away just $20 a month is better than nothing.
If you leave your company, you can roll over your vested balance into another account, such as an IRA, a new employer’s plan, or one for the self-employed.
Years from now, when you have savings and investments to fall back on, you’ll be glad you took control of your financial future.
