Start With an
Emergency Fund
Whether it's an unexpected medical bill, a problem with your car or a busted computer, emergencies happen to everyone and they usually come with a pretty steep cost. But according to Bankrate's latest financial security index survey, only 39 percent of Americans said they'd be able to cover a $1,000 setback using their savings. In a time when so many of us are living without an adequate safety net, they key is to start prioritizing savings by starting small.
Try putting $50 a month or 5 percent of each paycheck (whichever is easier) into an online savings account until you've saved a nest egg of one month's expenses. Then shoot for three months' salary. That gives you some freedom to change jobs or take some risks. Online banks offer higher interest rates than standard banks—for example, $3,000 in your account could earn $150 in interest over five years versus the paltry two bucks you'd get in a typical account. "Build your savings cushion by having a regular direct deposit into a dedicated savings account," says Bankrate's chief financial analyst Greg McBride. "Even when unplanned expenses arise, you're only one paycheck away from beginning to replenish that savings cushion."
You Don't Have to Be Debt-Free to Save or Invest
Although this is generally a sound rule, there are a few justifications for breaking it. First of all, personal finance isn't an all-or-nothing practice. And secondly, managing debt is simply a fact of modern life. If your debt is relatively low-interest, there are some serious benefits to paying it off more slowly in favor of saving money first (such as putting some away for retirement or major expenses). Remember, compound interest has immense value, and the more money you can invest earlier in life, the more you'll have in the long run and the less money you'll have to invest overall. And while it can be tempting to forego 401(k) contributions when your paycheck is lean, you're essentially leaving money on the table and you'll only have to save more later in life to catch up.
Maximize the Opportunity for Free Money
There's a big difference between needing $500,000 for retirement and depositing half a million bucks into your bank. Even if you have absolutely nothing set aside at age 35, you could start saving $500 a month and earn, on average, six percent in interest or investment returns. Compounded monthly, that would get you about $502,000 by the time you turn 65. Amazingly, a whopping $322,000 of that would be earned from interest. What's more, matching contributions from an employer will help you build your savings even faster. According to a recent Vanguard study, about 20 percent of American workers don't participate in their company's 401(k) plan. But saving enough to get the full match from your employer is the easiest way to bump your percentage without shrinking your take-home pay.
Delay or Defer
Gratification
Instant gratification is a curse to any savings plan. But we're constantly driven towards it, partly because of the ease of online shopping and the common practice of charging it to a credit card and dealing with the consequences later. "More than simple wasteful spending, instant gratification may sometimes include necessary and functional purchases—just at the wrong time," says Paul Sydlansky, founder of Lake Road Advisors. "For example, many people like driving a new car with the latest technology, but do you really need it?." He offers the following ways to defer gratification and put any purchase into perspective.
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