Student Debt Guide: Saving and Investing Money
Learn how to invest and save like a pro.
January 09, 2013
Nobody ever said being an adult was easy and knowing how to save and invest properly is not exception to the rule.
But, who better to advise you on saving and investing money than Mark Kantrowitz, a nationally recognized finance guru?
Here are tips, right from the expert, on how to save and invest like a pro.
• Save for a rainy day.
Before you start investing any of your money, you should build an emergency fund, which is often called a “rainy day” fund. This fund usually contains the equivalent of 3-6 months of your salary. This is your safety net so, if something were to happen, you’d be prepared.
For example, if you lost your job, this money will help you pay your bills while you look for a new job. Some people recommend saving even more—around 6-12 months of your salary—in the rainy day fund. How much you’re willing to save and how much you feel comfortable having tucked away is up to you.
Keep in mind that this fund is for emergencies only, not day-to-day expenses. It still should be saved in an accessible form though, such as a savings account.
• Demolish Debt
If you have some debt, it’s best to accelerate repayment of the debt before investing the money. For example, if you’re paying 15% interest on your credit card balance, paying off the balance is like earning a 15% return on your investment, tax free.
Believe it or not, often times you’ll get a better return by paying down debt than by investing the money, since interest rates on loans are often higher than the interest rates on savings.
• Save for Retirement
This is the main exception to the aforementioned return on savings because some employers will match your contributions to a 401(k) plan, which is a specialized savings plan for retirement. You should save enough to maximize the employer match, since that’s free money.
When saving for retirement, it is best to save a fifth of your salary for the last fifth of your life. Live below you means, so you will have the means to live when you retire.
Unfortunately, people save about 7 or 8 percent of their salaries, on average, for retirement when they should be saving more.
• Invest in Savings
After you’ve paid off your debt, you can start investing the money in other savings plans, such as saving to buy a car, for a down payment on a house, or in a college savings plan.
• Automate Savings
To make it easier to save, make the saving automatic. Most banks and brokerage firms will let you set up an automatic monthly transfer from your bank account to a savings account for free. That way, you won’t be tempted to spend the money since it won’t be there.
• Break it Down
Take saving one step at a time; nothing happens overnight. Break down your savings goal into monthly amounts to make it more attainable.
It is more important to get started, though, than to save a particular amount.
After you’ve set up an automatic transfer, you’ll quickly get used to not having the money in your bank account and can increase the amount you save each month.
Whenever you get a raise, increase the amount you save. Also save half of any windfall you get, such as bonuses, tax refunds and inheritances.
• Make Smart Investments
Bank certificates of deposit are the safest investment because they are FDIC insured and there is no risk of loss to the investment. But they also have some of the lowest rates of return. Getting a higher rate of return will involve taking on more risk, such as investing in the stock market.
When investing in the stock market, start by investing in a broad-based index fund, like an S&P 500 fund or a total stock market index.
These funds mimic the performance of the stock market as a whole, so you won’t lose as much money as you might if you invested your money in one bad stock. It’s a way of not putting all of your eggs in the same basket.
Most people are unable to beat the performance of the stock market as a whole, so why not invest in such an index fund? Consider the fund’s expense ratio. The best index funds will not only perform close to the underlying index, but will also have a low expense ratio and minimize the tax impact of the investment.
What are some of your favorite money saving tips?