By Neda Jafarzadeh, a financial analyst with NerdWallet Investing, which helps investors compare total costs to find the best stockbroker.
Face it— In today’s unstable economy, protecting your financial future should be a main priority. As the fate of Social Security remains unknown, so many people are looking for ways to save and invest their money for the future. With this in mind, there is no better time than now to start saving or investing for your future. It doesn’t matter how old you are, life’s unexpected financial emergencies or opportunities are always around the corner. Listed below are five tips to help you save money and start investing today.
Tip #1: Set Some Goals
Those looking to save money and start investing should first take a good, hard look at where their money is going. Keep monthly records of your expenses, bills, utilities, groceries and other living expenses to identify your bottom line.
Create savings goals and make a budget. Ask yourself how much can you afford to set aside every month.
Tip #2: Eliminate Credit Card Debt
The first step to saving your money is eliminating your debt. Create a budget to pay off credit cards, starting with cards holding the highest interest rate and try to always pay more than the minimum amount due. Reducing your credit card debt will improve your credit score and secure better lending options if you ever buy a house or start a business. This may take some time, depending on how much you owe, but keep paying until your balance is paid in full.
Next, you should move to paying off other debts like mortgage payments and student loans while saving and investing in other ways.
Tip #2: Take Advantage of 401k Contributions and Employer Matching
Many companies offer 401(k) plans to their employees. A 401(k) allows employees to have a portion of their income deducted from each paycheck and saved aside. This money is tax-deferred, meaning you do not pay income tax on it until the money is withdrawn.
Each company’s 401(k) plan may vary slightly, and some employers even offer an option to match part of your contribution, which in a way it’s like getting “free” money from your work so you should take advantage of such opportunity.
If you leave your business for new employment, remember to take the money you’ve saved and apply it toward a new account to avoid paying taxes on your savings.
Tip #4: Setup Automatic Withdrawal from Your Paycheck to go Directly to Savings
Create a safety net for yourself by opening a savings account with your bank. Try to open a savings account and set aside at least three months total of your normal income.
Money deposited into a savings account is insured (up to $100,000 by the Federal Deposit Insurance Corporation or FDIC) meaning if the bank goes out of business you are still guaranteed to get your money.
Tip #5: Open a Money Market Account or CD
Investing your money in money market accounts or Certificates of Deposit (CDs) can also help you get some safe returns on your money. Money market accounts yield higher interest rates, but they have higher minimum balance requirements and have restrictions on the number of withdrawals you can make a year.
If you have some money saved that you don’t foresee needing for a while, CDs are also a good option. They offer higher interest rates as well but you need to leave your money in your account until it reaches a maturity date. To withdraw your money early, you may be subject to penalty fees.
Next Step: Investing
Once you are ready to start investing your money, you won’t be able to use your savings or checking account. You will need to open a brokerage account but you should be aware that some accounts require that you put down a minimum deposit for your account. It is possible to find accounts with $0 minimum deposits, but be sure to do your research to find the right online broker for your needs.