Build a Savings Account First and Then Invest
If you’ve been wanting to invest, this may burst your bubble or even seen counterintuitive. However, before you begin building an investment portfolio, it’s important to have a solid cushion of savings at your disposal. After all, life is full of surprises. You don’t want to be caught in an emergency that leaves you needing immediate cash when all your funds are tied up in stocks, bonds, or certificates.
Still, having your sights set on investing in your future is fantastic! We have some tips to help you save for the short-term so you can invest your money, watch it grow, and save for those bigger goals like retirement.
Consider the 50/30/20 Rule
Some financial advisers suggest that as you create a budget you breakdown your expenses into three categories: necessities, discretionary and savings. In this scenario, 50% of your income should ideally go toward necessities, like your mortgage, other bills, transportation, and food costs; another 30% covers discretionary non-essentials like dining out, paying for those “extras” on your cellphone plan and buying clothes and shoes; finally, and perhaps most importantly, 20% of your monthly income should go into toward savings.
In a perfect world, you would make enough money to have this scenario play out in your own life. But, maybe you live paycheck to paycheck, with very little money leftover for the nonessentials – let alone savings. If this is the case, make it your first goal to find balance in your budget. Cut back where you can, and designate ANY amount of money each month toward savings – even if you start with $10 per paycheck. By setting up an automatic transfer to occur, you'll ensure that you save before any expenses come out of your paycheck.
Save Three to Six Months of Living Expenses
Once you’ve established a habit of saving regularly, the next step is to determine a savings goal. You’ve already assessed your budget, so you know what your monthly expenses are. Experts suggest that a good goal is to have enough in savings to cover your living expenses for three to six months.
In the event of something unexpected happening in your life, you’ll have breathing room to figure things out. Calculate exactly how much you need to live on each month and start increasing how much you save. Simpley add $10 to the amount that is automatically transferring to your savings each month, and continue to increase the amount slowly over time. Then, if someone in your household is out of work temporarily or you have an unexpected expense, it doesn’t put you in crisis mode due to a lack of money.
Establish an Emergency Fund
As you’re saving toward your initial goal of living expenses, you may have to dip into it for emergencies. That’s OK in the short-term. But once your fund is established, you don’t want to dip into it if you can avoid doing so. Instead, begin saving in a separate account for emergencies.
This may be unexpected vehicle maintenance, an illness or injury or a home appliance breaking. By saving toward these unexpected (and yet also inevitable) expenses, you protect your monthly bottom line as well as the living expenses that you worked so hard to put away.
Depending on your financial situation, it could take a while to reach these savings goals – but we promise it’s worth the work! You’ll feel so accomplished and secure in where you stand financially that you’ll be able to invest with confidence knowing that you’ve taken all the right steps to get where you’re going.