“Savings and investment…” These are two words that can often feel like a snooze-fest. But hold on! What if managing your money could be less overwhelming and even, dare we say, exciting? It’s time to unravel the mysteries of saving and investing, turning them into powerful tools for building a brighter future. So, let’s dive in and discover how to make your money work for you, starting with setting clear financial goals and crafting a budget that keeps your spending in check.
Know your financial goals
First things first. Before exploring savings and investment strategies, it’s crucial to understand your financial goals. These goals can be short-term (saving for a vacation), medium-term (buying a car), or long-term (retirement planning).
- Short-term goals: By short-term, we mean within 1 year. For example, saving $1,000 for a holiday trip or paying off $5,000 in student loan debt.
- Medium-term goals: By medium-term, we mean 1-5 years. For instance, saving $10,000 for a down payment on a car.
- Long-term goals: By long-term, we mean 5+ years. For example, building a retirement fund of $500,000.
Knowing what you’re working towards keeps you motivated, gives you direction, and allows you to track your progress and make necessary adjustments, such as cutting back on that daily latte or choosing a high-yield savings account.
How to budget
Budgeting is the process of creating a plan for how to spend your money. This plan helps you balance your income with your expenses, ensuring you live within your means. Budgeting not only keeps your spending in check, but it also helps you identify wasteful expenses and reallocate funds for savings and investments. The budget approach I find most useful is the 50/30/20 approach:
Example:
- 50% Needs: Rent, groceries, utilities.
- 30% Wants: Dining out, hobbies, “fun” purchases.
- 20% Savings/Investments: Emergency fund, retirement.
Effective budgeting is the cornerstone of sustainable financial health. By following a budget, you can free up money to save, invest, and achieve your other financial goals faster.
How to build up your savings
Savings act as a financial safety net, providing security and peace of mind. The purpose of saving is to cover unexpected expenses that pop up and fund future goals. The first savings pot you want to set up is your “emergency fund.” This covers unforeseen expenses like medical bills or car repairs. Next is saving for your future with retirement accounts while also working towards your short-term goals and funding immediate wants like vacations or gadgets.
Types of savings accounts
Here’s a more detailed look at different types of savings accounts:
Basic Savings Account:
- Pros: Easy to open and access your funds whenever needed, usually with no or low minimum balance requirements.
- Cons: Offers very low interest rates, often below the rate of inflation. This means your money may lose purchasing power over time.
- Best for: Short-term savings, keeping funds readily available for emergencies or upcoming expenses.
High-Yield Savings Account (HYSA):
- Pros: Offers significantly higher interest rates than basic savings accounts, often beating inflation and helping your money grow faster. Many online banks offer HYSAs with competitive rates and no monthly fees.
- Cons: May have limited access to your funds compared to basic savings accounts, sometimes with restrictions on the number of monthly withdrawals.
- Best for: Growing your savings more aggressively while still maintaining some level of access for unexpected needs.
Certificates of Deposit (CDs):
- Pros: Provides the highest interest rates among savings accounts, especially for longer terms. Your money is guaranteed by the FDIC, making it a safe investment.
- Cons: Your funds are locked in for a fixed term (ranging from a few months to several years). Early withdrawals usually come with penalties, which can eat into your interest earnings.
- Best for: Money you won’t need to access for a specific period of time, and want to earn a guaranteed return on.
Remember, when choosing a savings account, consider your financial goals, risk tolerance, and the accessibility you need to your funds. It’s also wise to shop around and compare interest rates and fees from different banks and credit unions.
Use investing to grow your wealth
Investing (as compared to saving) allows your money to grow over time, outpacing inflation and building wealth over time. The point is to purchase assets like stocks, bonds, or real estate with the expectation of generating a return. Here are three benefits of investing:
- Compound Interest: You make interest on interest, i.e., earnings on your earnings. Einstein reportedly called this the 8th wonder of the world, and it is how your money makes you more money.
- Beat Inflation: If your money isn’t beating inflation, it’s losing value, so getting returns above inflation is essential. While a HYSA offers good returns, investing offers even higher returns than traditional savings.
- Wealth Accumulation: This is where you remember to take care of the ‘future you’ too. Investing is one of the most effective ways to build wealth and generational wealth.
Types of Investments
Before you dive into investing, be sure you know what you’re doing; otherwise, you’ll be on a fast track to making a mistake and potentially losing your investments.
- Stocks: Owning a stock gives you a % ownership in a public company. Stock picking is a high-risk, high-reward game not to be dabbled in.
- Bonds: Loans to entities like companies or governments. They tend to be lower risk with lower, fixed returns.
- Index Funds/ETFs: Diversified portfolios of financial assets that tend to be low-cost and are either self-managed or managed by professionals.
- Real Estate: Property investment with the potential for rental income and appreciation. Another alternative is REITs – Real Estate Investment Trusts.
I always say to invest in your financial education before you invest your finances.
Retirement planning
Planning for retirement ensures financial freedom and mental peace in your golden years. However, to get there requires long-term savings and investment strategies tailored to your future needs.
Here are some different ways to fund your retirement:
- Social Security: Provides basic income, but not enough for most, even today. Instead of this being part of your retirement plan, see it as a cherry on top when you retire.
- Employer-Sponsored Plans: Be sure to take advantage of your company-sponsored plans, 401(k), 403(b), which often have an employer match.
- Individual Retirement Accounts (IRAs): A Traditional or Roth IRA is another great way to invest in a tax-advantaged way.
How to plan your retirement
Make sure to start early on saving for retirement. Whether you’re 21 or 41, start NOW. The earlier you start, the more you can benefit from compound interest. On top of that, stay consistent. Consistency is key to building wealth. And, if it’s possible, maximize on your employer match. It’s like free money from your employer. And don’t forget to adjust contributions and investments annually to ensure they are in line with your most recent goals.
Example Retirement Saving Scenario:
- Starting Age: 25
- Monthly Contribution: $500
- Retirement Age: 65
- Estimated Nest Egg Upon Retirement: $1 million (assuming 7% annual return)
Starting early and contributing regularly maximizes the benefits of compound interest, ensuring a comfortable retirement.
Where a prenup comes in
Savings and investment strategies are great and all, but what happens if you get married? You need to make sure your strategies align with your partner. And what better way to get on the same page as your partner than getting a prenup. Yes, seriously. During the prenup process, you and your partner will undergo several serious conversations about the future. Including how marital expenses will be paid, who owns what, at what ages you want to retire, and much more. Don’t skip the prenup when planning out your savings and investment strategies.
The bottom line on savings and investment strategies
Navigating the world of savings and investments doesn’t have to be overwhelming. Remember, you’re not alone in this journey, and millions are taking similar steps towards financial empowerment. With clear goals, a well-structured budget, consistent savings habits, and informed investment choices, you can pave the way to a secure future. It takes time and effort, but imagine the peace of mind from a robust emergency fund, the excitement of growing investments, and the freedom to pursue your dreams without financial worry. Start small, stay consistent, and keep learning – you have the power to shape your financial destiny and build a life where your money works for you.
Frequently Asked Questions (FAQs) about savings and investment strategies
Let’s discuss a bit more about savings and investment strategies (yay!). Here are some FAQs on the topic.
Q: How much should I save each month?
A: Aim for 20% of your income, but start with what you can and increase gradually.
Q: What’s the difference between saving and investing?
A: Savings are for short-term goals and emergencies; investing is for long-term growth.
Q: When should I start investing?
A: Take advantage of compound interest as soon as possible. So… start today.
Q: How do I choose investments?
A: Consider your risk tolerance and goals, and diversify your portfolio. Check out The Witch of Wall Street for more on how to get started with investing.
Laura Tynan is the founder of The Witch of Wall Street, a personal finance and investing community, where women are shown how to manage, multiply and manifest money, using simple strategies. Laura holds a BSc Hons in Finance, is a Chartered Accountant, and is certified in EFT Tapping, Breathwork, and RRT. She has been recognized by the Financial Times as a Top 20 Future Female Leader and by Yahoo! Finance as a Global Champion of Women in Business. She is a multi-award-winning speaker who has spoken at, and been featured in, Forbes. Laura hosts The Witch of Wall Street podcast and is the author of the personal finance and investing book for women, by the same name, which is available now on Amazon.
0 Comments