Go to college.
Take my dream vacation.
Buy a home.
And the list goes on and on.
If we can change our outlook on saving money from “what it’s depriving me of today” to “what joys it’s going to bring me tomorrow,” the topic of financial planning becomes a little less daunting.
Saving money can be fun. Think back to when you were a kid and you saved up for your first major purchase. What was it? Probably something fun, like a toy, a cool video game or a special item of clothing that made you feel like a million bucks when you put it on. How long did you have to save up for it? What did you do to earn the money?
The concept is no different now that we’re older, and saving is important for all of us — no matter our age or income bracket. We all have goals for our lives, now and in the future, and money is the tool that can help make many of those dreams achievable.
Where do I start?
You start by spending less than you bring in. It’s the same simple principle you used as a kid. Yes, you likely have more financial responsibilities now, but you also must have the discipline to ask yourself some tough questions about each purchase you make: Do I need this? Will I use this? Can I afford this?
- Budget — Do you know how much money you spend every month eating out? Or on coffee? Or on clothes? When you add up the numbers, you might be surprised by how you spend your money and where. That’s where a budget comes in handy. Each month, categorize where your income will go and why. Plan for your mortgage/rent, car payment, utilities and other obligations. Account for what you want to spend on entertainment and other “fun” items as well. When you plan, it’s easier to stay on track.
- Pay down debt — Start paying down your debts and pay more than your monthly minimum. If you’re just paying down interest, you’ll never get out of debt.
- Create an emergency fund — Unexpected expenses come up, but today’s out-of-the-blue costs don’t have to cause you to change your plans for tomorrow. Build up a pool of money over time to cover these one-off surprises, like medical bills or car repairs, and avoid putting these items on a high-interest credit card.
- Save — Many financial experts recommend saving 10 to 15 percent of your income (and that’s on top of having an emergency fund already established). Of course, the amount you save depends on your own goals, comfort level and financial obligations. If you currently aren’t saving anything, start with saving two to three percent. Then, work your way up over time.
- Invest — Make your money work for you. Rather than saving your money in a cabinet or safe, work with a qualified financial planner to help you select savings vehicles that will pay you interest over time.
Talk to a financial planner. They are professionals in their fields and are available to share ideas and strategies with you.
Here are a few key investment options that can help just about anyone become a little savvier about savings.
- CD — A certificate of deposit (CD) is a specific kind of savings account that offers a higher rate of return than a typical savings account. In exchange, the depositor agrees not to withdraw the money from the account for a predetermined amount of time.
- Money market — A money market is a general term that can refer to two things: 1. A bank-issued product that is FDIC insured, or 2. A non-FDIC insured wealth management tool managed by a financial advisor.
- Annuity — A fixed deferred annuity is a financial product that offers a way to save for the future, providing several unique benefits that include a fixed interest rate and certain tax advantages.
- Bond — When you invest in a bond, you’re essentially lending your money to an entity (it could be the government or a private company). In return, that entity repays your investment plus a predetermined amount of interest over time.
- Stock — A stock is a share of ownership in a company, which people purchase in hopes of having their money grow as the company’s value increases over time.
- Liquid investment — A liquid investment is one in which you can have immediate access to the initial funds you invested, such as withdrawing money from a savings account.
- FDIC-insured investment — This is an investment the federal government insures, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank’s closing. The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies or annuities.
- Short-term vs. long-term investments — Short-term investments are expected to grow for several months to a year and then be turned into cash. Long-term investments are those you expect to hold onto for several years.
No risk, no reward
When it comes to investing money, there is always some risk. Whether the risk is large or small, risk tolerance is based on your personal ability to stomach large swings in the value of the original amount of money you invested. Your experience with investing, your age, your financial situation, your objectives and the timeframe in which you need to meet those objectives all play a role in determining the amount of risk that’s right for you.
Smart financial planning is about preparing for the future while remaining happy today. It’s creating a long-term plan that you can and want to stick with. Try not to feel overwhelmed. You did this as a kid, and you can do it now.