We all know we should be saving money, but why don’t we actually do it?
Back in the day, your grandma saved her money in a coffee can and put it on a shelf in the kitchen—or some variation of that method. It gave her quick access in an emergency, but it was stored away from the regular cash so it wouldn’t get spent on a whim.
Nowadays, most people don’t save their money in a coffee can. The sad part is, most Americans aren’t saving at all. Only 41% of us could use our savings to pay for an emergency.(1) Sure, life is a little more complicated than it was back in the day, but we should all be able to set aside a little cash to cover a basic emergency.
So how do you build up your savings account—and your future? Here’s a quick rundown:
1. Build your emergency fund first.
2. Put away savings before you spend.
3. Plan for big expenses and trips.
4. Don’t touch your retirement savings.
5. Keep savings separate from checking.
If you follow these five suggestions, you’ll not only be able to pay for that emergency trip to the vet, but you’ll also be able to save money for your retirement. Let’s get to it!
Build Your Emergency Fund First
Before you save money for anything, whether it’s a down payment for a home or a trip to Alaska, you need to get an emergency fund in place. If you still have debt, start by saving $1,000 as quickly as you can. Then, pay off any outstanding debt. When those two things are taken care of, you can start building your emergency savings.
Now, I’m not talking about having $500 in the bank to cover a busted water heater. You need to save at least three to six months of expenses in your emergency fund. Why so much money? Because I want you to be prepared in case something happens to you and you can’t work for several months. Or in case you lose your job unexpectedly. That fund will allow you to keep the household running, the mortgage payment up to date, and the lights on.
I know you might be thinking, That’s not going to happen to me. My job is secure, and my health is great. I don’t need to save that much. But let me tell you, I’ve sat across from a lot of people who thought the same thing. And now they’re trying to dig out from a mound of bills and payments. They can’t save up money for their retirement years because they’re trying to get back on solid financial ground.
Meet John and Cindy. He’s a police officer, and she’s a hair stylist. They have two kids, ages 16 and 13. They still owe a mortgage on their house, but otherwise they’re on track for retirement. Things were rocking along without a hitch, but then John was injured while waterskiing with friends. He was unable to work for four months, and Cindy’s salary couldn’t cover their expenses even though she took on more clients. As a result, the two of them got behind on their mortgage payments. Now they’re in a financial hole and they have to stop investing in order to get caught up on their bills.
Imagine how differently John and Cindy would feel if they had put that emergency fund in place. Or, to bring it closer to home, imagine how much better you’d sleep at night if you knew you could lose your job tomorrow but still provide for your family.
Now you know why having an emergency fund stocked with three to six months of expenses is important. If you haven’t completed this step, then it’s your first goal.
Put Away Savings Before You Spend
If you’re serious about winning with money, you have to make saving a priority—not the last thing you do when everything else is paid for. In order to do that, you need to create a monthly budget that includes a line item for savings. Now, if you’ve created a monthly budget and you don’t have savings included in it, then you need to cut back on some extras so you can save for future expenses (like vacation, furniture, car replacement, etc.). If you don’t prioritize and budget for savings, you’ll never have anything in savings—and that’s not good.
In addition to saving for future expenses, you need to put away money for retirement. Once you’re debt-free except for the mortgage and have that emergency fund in place, you need to put away 15% of your income in an investment account—most likely a 401(k) through your employer. If that’s not an option, you can put it in an IRA (traditional or Roth).
You may be thinking, Hogan, I don’t even know where to start when it comes to investing! I get it. There are lots of banks and paperwork and financial jargon that can make you feel clueless. If you’re feeling that way, I would encourage you to find someone you trust who will sit down with you and coach you on your finances. If you don’t have anyone in mind, I would highly recommend finding a SmartVestor Pro in your area. These are financial advisors who believe in the same investing principles as me.
Plan for Big Expenses and Trips
Saving for the future while also living in the present moment is a juggling act. You want to enjoy your life now and save for later. So how can you do those things on your bucket list now without hurting your retirement fund? You save up for them.
Let’s say you want to take a trip to Ireland. You’ve done your research and have created this budget:
Car Rental: $500
$3,500 divide by 10 = $350/month
$3,500 divided by 18 = $200/month
Now, let’s look at your timeline. If you want to take that trip a year from now, you divide that $3,500 by 12 and put that amount away each month—roughly $300. If that $300 would sabotage your regular monthly budget, you have three options: you can trim the trip budget; you can work extra jobs; or you can lengthen the amount of time you’ll save. For instance, if you decide you want to go on your trip in 18 months instead, you’d need to put away about $200 a month.
See, you can go on that trip you’ve always dreamed about! It just takes patience and focus. Will you be able to travel the world at the drop of a hat? No—but neither can 99% of the population. The media and credit card companies just make it look like everybody can! They make you worry about missing out so you’ll take out that plastic card and enslave yourself to debt. Don’t fall for their trap!
What if you want to save for a wedding? Or a motorcycle? Or an addition to your home? Follow the same principles. Estimate your cost and divide that amount up by the number of months you have until the purchase. The process is easy. It’s being patient that’s hard.
Don’t Touch Your Retirement Savings
Once you start saving for retirement, you’ll be tempted to take money out of your investments to pay for big items. Believe me, I speak from experience. When I was just starting out, I opened a 401(k) because my boss told me it was important. Over time, I built up some money in that account. Fast-forward a few years. My wife and I were moving, and we decided we desperately needed some furniture for our new house. We obviously didn’t have enough cash for such a big expense, so I went to the one place I knew I could get some money quick: my 401(k). Ouch.
I withdrew $20,000 from that account, and it promptly became $10,000 after paying penalties and taxes. Yeah, that’s right. I threw away $10,000 in order to use the other $10,000. I still cringe when I think about it. If I had left that $20,000 alone until age 65, it could have grown to over $560,000. And I can’t even remember what that stupid furniture looked like!
The lesson: Leave your investments alone until it’s time to retire. If you take money out before then, you’ll not only be hit with huge taxes and penalties, but you’ll also rob your future self of money you may need.
Keep Savings Separate From Checking
One question people often ask is: Where do I put the money I’m saving? Great question. For your emergency fund, I recommend opening a simple money market account that offers basic privileges like check-writing and ATM access. Yes, I know this kind of account won’t pay a great interest rate. That’s okay. You’re looking for easy access to money in an emergency. If you have the money in a CD (certificate of deposit), you may have to wait a few days to get the money—paperwork and all that junk. Plus, you’d have to pay a fee for cashing in the CD early.
Hopefully this article helped you understand what you need to do to sock away some money in the bank. In short, the only way to build wealth is to spend less than you earn and to save or invest the rest for the future. I’ve created a free retirement calculator to help you know how much you need to save for your golden years. It’s called the R:IQ. Put in your specifics, let the program do its work, and get your number.
Get your R:IQ!
Know the amount you’ll need to save so you can enjoy the retirement of your dreams!