2814: How to Save Money and Still Invest by Christine Sato with JenHayes on Financial Advice

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[00:00:59] This is Optimal Finance Daily. How to save money and still invest. By Christine Sato with JenHayes.me. And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:12] This is a show where I read to you from some of the best personal finance blogs on the planet, sometimes a little too enthusiastically.

[00:01:20] For now, let's get right to it and continue optimizing your life.

[00:01:28] How to save money and still invest. By Christine Sato with JenHayes.me.

[00:01:35] Is it best to save your money or to invest it instead?

[00:01:39] It's possible and also advisable to do both, even if you're on a low income, since you save or invest for different purposes.

[00:01:49] Saving versus investing.

[00:01:51] Your savings are generally built up for short-term needs, while your investments are long-term.

[00:01:58] For example, you may put aside a small amount of money every month to save up to pay for a specific goal like a holiday, a new car, or to cover emergencies that might crop up.

[00:02:08] Saving usually means putting your money into a savings account in a bank for easy access.

[00:02:14] Investing, on the other hand, is putting money aside in order to make it grow.

[00:02:19] You invest by buying what you think will increase in value over time.

[00:02:23] And this can be anything from stocks to property, artwork to shares in a fund, and most things in between.

[00:02:30] Most people invest for their retirement or for long-term goals, such as their child's college tuition or wedding.

[00:02:37] Saving ground rules.

[00:02:39] A general and often cited rule for how much to save is to have a minimum of three months worth of living expenses saved up in an easy access savings account.

[00:02:49] The savings should cover rent, food, bills, educational fees, and other monthly expenses to give you financial security if you lose your job or something else goes wrong.

[00:03:00] Once you have your three months worth of living expenses set aside, you can start saving up for your short-term goals.

[00:03:06] Another often cited suggestion is to keep saving 10% of your monthly earnings.

[00:03:13] Investments and long-term planning.

[00:03:15] The biggest reason to invest for your long-term goals is that inflation can seriously diminish the value of your cash savings over the course of the years.

[00:03:24] The stock market, on the other hand, while unpredictable in the short term, generally does better than cash over long periods of time and generates greater returns on your money.

[00:03:33] It's advised to lower the level of risk by investing in a diverse portfolio so that your money is spread across different types of investments.

[00:03:42] A stock-heavy portfolio may be more volatile than a less aggressive approach, which will be a safer payoff in the long run.

[00:03:51] Therefore, 70% stocks to 30% bonds is about as aggressive as you want in order to maximize your money's growth for retirement.

[00:03:59] So let's say your job is an entry-level position without much extra financial room for saving and investments.

[00:04:06] How do you manage to save money and still invest?

[00:04:09] Strategy

[00:04:10] A sound strategy is to set up automatic transfers from your paycheck or checking account to a savings account.

[00:04:17] Your bank will gladly assist you, and it's a decision you'll only have to make once.

[00:04:21] If you start by setting aside as little as $25 each month, you won't notice much difference in your disposable earnings, but you have a nice buffer of a few hundred dollars by the end of the year.

[00:04:33] However, the real opportunity to save comes when it's time for a raise, and that will most likely happen very quickly when you're in the beginning of your career.

[00:04:42] If you make a commitment to yourself to allocate a portion, maybe half the amount of your new raise you get in the future, to saving, you won't notice it at all since you have more spending money than before the raise.

[00:04:55] This way, you'll be able to save more and more as your income increases.

[00:05:00] Other investment options

[00:05:01] As far as investments go, the best option for young adults is an employer's 401k retirement plan.

[00:05:08] Often, the employer will match a percentage of the employee's contributions, which essentially is free money.

[00:05:14] Take advantage of it.

[00:05:16] You also have the option to invest in a Roth Individual Retirement Account, or IRA.

[00:05:21] This type of account can substitute as an emergency fund while offering tax deductions at the same time if you make a lower salary.

[00:05:29] As long as you meet the income requirements, you'll receive a tax credit of 50%, 20%, or 10% of up to $2,000 worth of any retirement plan or IRA contributions you make during a calendar year.

[00:05:44] If you're married and filing jointly, your family will receive this credit on up to $4,000 worth of contributions.

[00:05:51] Don't forget that your greatest return on investment comes from starting to set aside money when you are still young.

[00:05:57] Putting aside $25 a week and an IRA, assuming an average return on your investment dollars of 8% over 40 years, will result in investments worth about $350,000 when it's time to retire.

[00:06:11] So get started with your savings and investments now and see how quickly they'll grow without you noticing much difference in your paycheck.

[00:06:23] You just listened to the post titled, How to Save Money and Still Invest by Christine Sato with JenHayes.me.

[00:06:31] And I'll be right back with my commentary.

[00:06:33] What I've found personally is that having a well-funded savings account allows me to invest with more confidence.

[00:06:42] It's important to note that how much you hold in cash or an emergency fund is a very personal choice.

[00:06:49] Three to six months is the standard recommendation, but I'll tell you that I have closer to a year for many reasons that I won't bore you with here.

[00:06:59] Similarly, a 70% stocks, 30% bond portfolio is recommended in this article.

[00:07:05] But keep in mind that this also is a personal preference that should take into account your age, financial goals, and risk tolerance.

[00:07:14] I personally am in 100% stocks because I have a high risk tolerance and my well-funded savings account allows me to feel more comfortable with the volatility that comes with an all-stock portfolio.

[00:07:27] I look at the money I'm investing as gone out of the picture because I'm not going to touch it in the foreseeable future.

[00:07:35] After you get your cash savings to the level that feels comfortable to you, then you can throw all that surplus at investments.

[00:07:42] But what if you're still building up that savings account and wanting to invest simultaneously?

[00:07:48] I think a great place to start is to prioritize the match your employer offers on a 401k or other retirement vehicle as that is free money.

[00:07:58] Then whatever surplus you have after that, divide it between contributions to your savings and investments in a way that prioritizes the savings fund.

[00:08:09] So for example, let's assume you're out of debt and you're contributing 5% to your 401k to get the employer match.

[00:08:16] And let's say the gap between your income and expenses is $1,000 per month and you want an emergency fund of $10,000.

[00:08:26] In theory, you could save for 10 months and then start investing.

[00:08:30] Or you can put $900 per month into savings and $100 per month into investments.

[00:08:37] It will only take you about 5 weeks longer to hit your savings goal and in that time, you've invested over $1,100.

[00:08:45] Potentially reduced your taxable income if you're investing within a retirement vehicle and benefited from compound interest.

[00:08:52] All that being said, when it comes to investing while you're working on savings, I'd encourage you to do both.

[00:09:00] And that should do it for today.

[00:09:02] Have a happy rest of your day and I'll see you on the Thursday show tomorrow where your optimal life awaits.