Is it best to save your money or to invest it instead? It’s possible and also advisable to do both, even if you’re on a low income, since you save or invest for different purposes.
Saving vs. Investing
Your savings are generally built up for short term needs, while your investments are long term. For example, you may put aside a small amount of money every month to save up to pay for a specific goal like a holiday, a new car, or to cover emergencies that might crop up.
Saving usually means putting your money into a savings account in a bank for easy access.
Investing, on the other hand, is putting money aside in order to make it grow. You invest by buying what you think will increase in value over time, and this can be anything from stocks to property, artwork to shares in a fund, and most things in between.
Most people invest for their retirement, or for long term goals such as their child’s college tuition or wedding.
Saving Ground Rules
A general and often cited rule for how much to save, is to have a minimum of three months’ worth of living expenses saved up in an easy access savings account.
The savings should cover rent, food, bills, educational fees, and other monthly expenses, to give you financial security if you lose your job or something else goes wrong.
Once you have your three months’ worth of living expenses set aside, you can start saving up for your short term goals. Another often cited suggestion is to keep saving 10% of your monthly earnings.
Investments and Long-Term Planning
The biggest reason to invest for your long-term goals is that inflation can seriously diminish the value of your cash savings over the course of the years.
The stock market, on the other hand, while unpredictable in the short-term, generally does better than cash over long periods of time and generates greater returns on your money.
It’s advised to lower the level of risk by investing in a diverse portfolio, so that your money is spread across different types of investments. A stock-heavy portfolio may be more volatile than a less aggressive approach, which will be a safer pay-off in the long run.
Therefore, 70 percent stocks to 30 percent bonds is about as aggressive as you want in order to maximize your money’s growth for retirement.
So let’s say your job is an entry level position without much extra financial room for saving and investments—how do you manage to save money and still invest?
A sound strategy is to set up automatic transfers from your paycheck or checking account to a savings account. Your bank will gladly assist you, and it’s a decision you’ll only have to make once.
If you start by setting aside as little as $25 each month, you won’t notice much difference in your disposable earnings but have a nice buffer of a few hundred dollars by the end of the year.
However, the real opportunity to save comes when it’s time for a raise, and that will most likely happen very quickly when you are in the beginning of your career.
If you make a commitment to yourself to allocate a portion, maybe half the amount of your new raise you get in the future to saving, you won’t notice it at all since you still have more spending money than before the raise.
This way, you’ll be able to save more and more as your income increases.
Other Investment Options
As far as investments go, the best option for young adults is an employer’s 401(k) retirement plan. Often, the employer will match a percentage of the employee’s contributions, which essentially is free money. Take advantage of it!
You also have the option to invest in a Roth individual retirement account, or IRA. This type of account can substitute as an emergency fund, while offering tax deductions at the same time if you make a lower salary.
As long as you meet the income requirements, you will receive a tax credit of 50 percent, 20 percent or 10 percent of up to $2,000 worth of any retirement plan or IRA contributions you make during a calendar year.
If you are married and filing jointly, your family will receive this credit on up to $4,000 worth of contributions. Don’t forget that your greatest return on investment comes from starting to set aside money when you are still young.
Putting aside $25 a week in an IRA, assuming an average return on your investment dollars of 8 percent over 40 years, will result in investments worth about $350,000 when it’s time to retire.
So get started with your savings and investments now, and see how quickly they’ll grow without you noticing much difference in your paycheck!
Christine Sato founded the site https://cpareviewcourses.org/ – an online resource dedicated to helping professionals pass all four sections the CPA Exam on their first try. Christine provides reviews of the top cpa resources and gives expert CPA advice to ease the process of becoming a CPA.
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