Saving and Investing Part II: Next Steps
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The ideas below are practical steps you can take to start saving and investing (you can read part one on mindset and approach here). If you are not currently saving or investing, work through these steps over time, knocking out one at a time (or educate yourself on other approaches and figure out a plan that works best for you). Start slowly by eliminating a fun activity/pleasure purchase here or there if you currently live above or below your means and make a conscious decision to save that money. As you save and gain momentum, you will want to save more and more. If you already save and invest, hopefully these tips help you save and invest more than you already do.
Tips for Saving and Investing
Save or invest in what allows you to sleep at night. Some people want no risk and are happy to save or invest in cash only. Other people want aggressive growth and do not mind the potential risk of loss of investment. I cannot tell you which approach allows you to sleep at night and worry less; all I can suggest is that you do what makes you comfortable. If you are married, you need to discuss with your spouse what approach allows you both to sleep well at night and meet your goals. But the more simply you live in terms of spending and the more money you have saved or invested, you will sleep better at night.
Some companies allow your paycheck to be deposited into two or more accounts; you could request a portion of your paycheck be deposited directly into a dedicated savings account and the rest in your normal checking account for spending. Do not keep checks for your dedicated savings account; make yourself physically go to a bank or financial institution to withdraw any funds if needed to deter yourself from using it for monthly spending or fun expenses.
Log what your cash or savings balances are every month; if the balance does not increase by the same amount you budgeted or goes backwards in any month, investigate why, change spending habits if necessary, and cut back fun spending in future months to save the difference.
Windfalls
A windfall is typically a one-time payment that is outside of your normal salary or hourly pay.1 Bonuses, gifts, tax refunds from the government, side consulting work or seasonal work, or unexpected overtime pay are examples of windfalls. Try to save or invest at least 50% of all windfalls. Since you do not normally expect to receive this cash, you should not be using it to live on a month to month basis. Another method is to set an allocation percentage for each category you contribute to when you receive a windfall. For example: 10% tithe, 5% offering, 15% retirement, 30% savings, 20% kids’ college fund, and 20% fun expenses/spending.
Inheritances also qualify for windfall treatment. In these instances, a loved one left you money or property for your own benefit if you need it. With inheritances, tithe and give an offering on it, then save and invest the rest (or use for other goals like paying off debt, allowing you to save and invest from your paycheck sooner). Someone cared enough about you to leave you something if you need it; you should treat this gift as something you can keep for an emergency, but plan to pass it down to your heirs as well.
Retirement Saving
The only way to guarantee you will never retire is to never save for retirement. If your employer matches a percentage of your pay, invest in the retirement plan the minimum amount needed to get the maximum match from your employer (example below). Typically retirement plans are so complex in the rules and options of the plan that it overwhelms the participants who then fail to participate in it.2 Meet with your company’s HR department for education or talk to other employees who do participate to get a better understanding of how it works.
Retirement plans are tough to get money out of and typically the penalties the government charges for withdrawing early are expensive. But if you stay disciplined with your budget and spending, you most likely will not need to withdraw these savings until you are allowed to without penalty. But if you do not contribute, you pass up free money if your employer matches a portion.
As an example, an employee has a salary of $50,000 a year with an employer match of 50% of 6% of the salary. Let us assume the employee contributes 6% of their salary to the retirement plan. Here is what the amounts contributed look like:
- Employee Contribution:$3,000 ($50,000 x 6%)
- Employer Contribution: $1,500 ($50,000 x 6% x 50%)
At the end of the year, the employee has a total of $4,500 contributed to his retirement account even though he contributed only $3,000 out of his paycheck. He got a free 50% return on what he contributed, which will compound overtime until he withdraws during retirement. The $50,000 is a round number used for ease of math, but the 50% return percentage is the same regardless of how much money the employee makes in this example.
Practical resources
- You can visit any bank or credit union to set up a savings account or any other investment vehicle.
- If you want to invest in the stock market, there are several large financial institutions that allow you to trade investments, such as Vanguard, Fidelity, Charles Schwab, or Scottrade. Many offer broad funds you can invest in that allows your money to follow the market up or down at very inexpensive prices.
- http://www.feedthepig.org/ is the website the AICPA set up as a resource for personal spending and wealth management.
Melvin graduated from LSU with a BA in Latin and a BS and MS in Accounting. After working for an accounting firm and earning the CPA designation, he now works as the controller (financial reporting and accounting function) for a privately-held company in Slidell. When not listening to red dirt music, attending Mardi Gras parades, tailgating, or watching football in Tiger Stadium, he serves on the Vintage Connect Team and is a third-generation Lakeview resident.
1“Windfall,” Merriam-Webster, accessed June 10, 2015, http://www.merriam-webster.com/dictionary/windfall.
2Trent Hamm, “How to Face Your Fear of Starting a 401(K),” September 20, 2013, accessed June 10, 2015, http://lifehacker.com/how-to-face-your-fear-of-starting-a-401-k-1354884919.