Does this sound familiar?
“I can’t save any money.”
“I won’t be able to retire.”
“I don’t make enough money.”
“Investing is too hard.”
As a financial advisor, I’ve heard all these statements before and, I’ll admit, I’ve even caught myself saying them on occasion. (I mean, who hasn’t?) Most of us have negative stories we tell ourselves about money, and excuses for why we can’t succeed financially, especially when a lot of the money advice we hear seems impossible or inapplicable.
Funding an emergency account and saving 10-20 percent annually in retirement accounts isn’t easy if you’re living paycheck to paycheck or struggling to pay off debt. In fact, it can seem impossible. If you have money to invest, but no idea where to start, the range of investing options can seem overwhelming. Inexperience and negative messaging can paralyze you from financial progress and even perpetuate unhealthy money behavior.
Whatever your situation may be, letting go of old excuses that enable bad habits and adopting a new, more positive money mindset is the first step in achieving your financial goals. The next steps all depend on your own circumstances, but here are basic tips for saving and growing money for three different financial situations:
- You’re digging your way out of debt.
- You’re breaking even.
- You have extra money but you’re not sure what to do with it. (And, yes, some tips may overlap.)
It’s hard to think about saving anything when you’re in debt and just trying to climb out of the hole. If you’re like me, you might not have another good night’s sleep until you are totally rid of your IOUs. In that case, eliminating them should be your priority for peace of mind. Many financial advisors recommend paying off high-interest debt first before addressing any other financial goals, simply because of the math. They have a good point if you think about saving money in an account paying one percent instead of paying down a credit card balance being charged 16 percent interest. You are essentially losing 15 percent!
So, how do you get rid of bad debt for good? First, hide your cards so you don’t rack up more debt. Then, try calling your creditors to negotiate lower rates and repeat those calls periodically. In the meantime, use this calculator to organize your debts and create a clear payoff plan. Debt consolidation programs are tempting, but typically come with upfront and ongoing fees and the application process can be a time-consuming headache. You can save yourself time and money by managing your debts yourself.
Additionally, you should track your income and expenses so you can identify areas of overspending to cut back on in order to increase your debt repayments and eliminate them sooner, rather than later. If you are not an Excel or write everything down person, companies like Mint, Personal Capital and HelloWallet offer tech-friendly money management software that can help.
Some financial advisors say you should definitely make saving the priority if you have no emergency fund (to prevent going into further debt if an unexpected expense arises) and if you work for a company who offers a contribution match in their retirement plan (so you can take advantage of the retirement savings boost). In that case, make saving $500 in an emergency fund your primary goal before paying off more debt. Either transfer as much as you can immediately from your checking account to a savings account (local credit unions often offer better rates than big banks or you can shop rates here) or set up a monthly automatic transfer of at least $25 from one to the other.
Additionally, set up paycheck deductions through your employer for their retirement plan (if you haven’t already). You will have to start small, but at least commit to increasing your contribution amount every year.
Many experts claim — and I agree — that trying to save and reduce debt simultaneously is ideal, because it’s the best way to change your negative money habits and retrain yourself to be financially responsible.
Now that you have finally gotten yourself out of debt (high five!), it’s time to shift your saving goals into high gear. First, you should redirect your former debt payments to focus on building up your emergency fund. Aim to have six months of your typical expenses saved in a safe, interest-bearing account, like a money market or savings account. Set up or increase a monthly transfer from your checking account. This is critical to prevent yourself from falling into another hole.
Once you have a cushion built, you should then clarify what you want your money to do for you in the short, mid and long-term. This may include buying a home, starting a business, paying for college or retiring before you die. For a fee, it can be helpful working with a professional who can ask you certain questions that are often neglected to help prioritize your goals and create a personalized plan. If you are willing to be a DIY-er or looking to save time and money, you can use companies like Mint, Personal Capital and HelloWallet to do some basic financial goal setting or try Voyant for more advanced, insightful planning for free.
You should focus the majority of your extra income on saving for your shortest-term goal. If you are seeking a better return than what bank CDs offer and are willing to take on a little more risk, you can open a brokerage account and invest in fixed-income investments like bond mutual or exchange-traded funds (make sure to stay away from riskier high-yield and foreign bonds!). Discount brokerages like Fidelity, Schwab and TD Ameritrade offer low fees and investment minimums and a plethora of investment options.
If retirement is important to you — and it should be, given the state of Social Security, increasing longevity and inflation — you should also try to contribute at least what your employer matches in your company retirement plan, if applicable, or make monthly automatic contributions to an IRA to maximize compounding, tax-advantaged growth over the long term.
You’ve Saved the Money, but You Need a Plan.
Congratulations! You have more money than you know what to do with. After taking a little time to savor your good fortune — and good saving habits — you should put that money to work ASAP. First, park it in a safe, interest-bearing account, like a money market or savings account, while you figure out your long-term plan.
Next, prioritize your financial goals. Since you have some money to spare, you might be more willing — and it might be more worthwhile — to pay for the guidance of a fee-based professional financial planner who can recommend suitable investment strategies based on your risk tolerance, performance expectations and time horizon. You should also review your insurance needs and make sure you have the appropriate amount of coverages and types of policies for your situation and goals.
Whatever financial planning process you choose, you will want to focus on maximizing savings in tax-advantaged vehicles like 401(k)s, IRAs and 529 college savings plans (if that’s a priority for you) — assuming you already have a well-funded emergency fund and no high-interest debt to eliminate first.
For your long-term investments, choosing a balanced blend of no-load, passively-managed stock and bond index mutual funds or exchange-traded funds, if possible, will help you create a well-diversified portfolio and minimize cost. For shorter term goals, you may want the majority of your portfolio dedicated to less risky bond funds. Of course, DIY investing through discount brokerages will save you even more than paying for someone to trade and manage your investments for you.
Remember, these tips can help put you on a more financially secure path, but the motivation to implement them comes from your way of thinking about money. So, the most important advice to get started — and to keep you on track — is to ditch the “I can’t” or “I won’t” excuses and operate from a place of “I can,” and “I will.” Your future self will thank you.