When you begin saving, you want to save with specific goals in mind. You do not want to begin aimlessly saving or you will eventually lose your motivation to save. As you lose sight of your goals, you will become more careless with your saving. Therefore, I am going to share with you a simple blueprint to follow so that you have targets to motivate you to continue saving. The Blueprint is as follows:
1) Establish an emergency fund:
Your emergency fund will serve as your safety net. Every now and then you will stumble across an unexpected expense that has the potential to cripple you financially if you’re not prepared. However, because you will follow this blueprint, you’ll be prepared for that rainy day. Your emergency fund should be about 3 to 9 months of your monthly expenses. My advice is to build this fund FIRST before you save for anything else because you never know when that rainy day will come. However, I would only save 3 months worth initially so that you can begin to invest as soon as possible. Investing as soon as you can is crucial so that you can take advantage of compound interest. After you have three months saved, you can begin investing while simultaneously gradually building your emergency to 6 to 9 months worth our your expenses. I personally keep 6 months worth in my emergency fund in a high-interest savings account such as ally.com.
2) Start a Roth IRA:
After you’ve established your emergency fund, it is time to begin saving for your retirement. And no, it is never too early to begin saving for retirement. The earlier you start, the better the impact of compound interest. Compound interest will allow you to retire with exponentially more money. Simply put, a Roth IRA (Individual Retirement Account) allows you to contribute $5,500/year tax-free until you are 50 years old. After 50, you are able to contribute $6,500/year. It is IMPERATIVE that you max your Roth IRA out each year if you are able to. If you aren’t able to then you should contribute as much as you possibly can. I would advise you to divide the $5,500 into 12 months and contribute $458.33 each month. You can open a Roth IRA in several places but to make it easy, I would suggest opening an account with Betterment.com.* Betterment will actively manage your investments according to your goals with minimal effort on your part.
*The Betterment.com link is a referral from my mom’s account that gives you 90 days free with Betterment while she gets 30 days free when you sign up.
3) Growth Investing and/or Specific-Purpose Saving:
After you’ve established your emergency fund and have made your monthly Roth contribution, you have some flexibility. My advice would be to invest your extra savings in the stock market for even more growth. However, you can also save or invest in order to spend on a specific item in the near future such as a down payment on a house, car, or whatever else you may decide.
The Blueprint is fairly simple to follow and will allow you to begin your path to financial freedom today! Thank you for taking the time to read this post and please pass it on and share if you liked it! Also, don’t hesitate to post any of your lingering questions in the comments.