Your future awaits
Statistics say 1 in 3 Americans have 0% saved up for retirement, and 47% would have trouble finding $400 to cover an emergency. Few of us know anything about saving money. Most of us, obviously, live from payday to payday, with no thought for our future. Or if we do think of the future, it’s with a hope and a prayer, and a thought of winning the lottery.
By the way, just FYI, winning the lottery is not a great retirement plan.
We all know we need to save money for a rainy day. And maybe even invest some for the future. But all the different ways to save and invest are confusing, and maybe even a little scary. Besides, if all you can scrounge up for savings is $5 or $10 (or just $1 here and there.. ) how in the world can you think of saving?
First Step: Saving regularly
Even on the lowest income, there are things you can do to save money. Don’t be ashamed if you can’t sock away $100 a week. If all you can manage is $5 a month, start there! For ideas on how to find money to save, check out this Forbes article, or this MoneySense one, or even this blog post for encouragement.
Getting in the habit of saving is easier than you think, but once you start doing it, what do you do with the money you’re saving?
Saving option #1
A simple savings account is the first step. When you’re starting out with saving, shop around for a savings account that will at least pay you a modicum of interest. Even half a percent is better than no interest at all. Link it to your regular bank account, or set up automatic transfers, so that your savings habit can really take off.
Saving option #2
The next step is to set up a savings account that isn’t quite so easy to access. In Canada, we have tax free savings accounts. In the US, it would be a Roth IRA or something similar, while in the UK, a similar option would be an ISA. You’ll need to talk to your bank about the specifics of setting one up.
Once you have something like this set up, contribute to it regularly. Most people like to put something in it around tax time — for the tax benefits. Personally, as my savings account reaches over a certain amount, I put half into my TFSA. Usually these accounts require notice to be able to cash in, so you can’t just impulsively spend that money on a vacation. But you can still access it in case of a true emergency.
Savings option #3
Your savings are adding up! Now it’s time to start putting your money to work for you, so that its not all on you to save up for future plans. The first step is to talk to someone who knows how to invest. Your bank can probably help with this, or you can talk to a financial planner.
Most of the registered savings accounts in option #2 allow you to invest inside them. Or you can look at opening a more restricted savings account, such as an RRSP (in Canada) or an IRA (in the US). Again, your investment adviser can help you decide what is the best solution for you.
Second Step: Invest it
When you are a beginner investor, start with secure investments. Buy investments that are secure and won’t affect your principle. Principle, by the way, means the money that you start out investing with. Interest or gain refers to the money that your principle earns.
One option for these secure investments would be something like a term deposit (in the US, known as a certificate of deposit – CD, and in Canada, its called a Guaranteed Investment Certificate – GIC). These are investments that you purchase for a certain amount of time, and they guarantee you a certain amount of interest, if you leave the money there for the full time period.
Another option would be to buy bonds or stocks with the idea that you will look for dividends or redemption value. A bond is where you buy a portion of a company or government’s debt, and they promise to pay you back with interest, after a certain amount of time. A stock is a portion of a company’s value — in essence you own a small part of the company — and the dividend is the portion of the company’s profits they pay to all the owners.
If you are ready to invest and risk a little more, start small. Don’t put all your savings into investments. When you invest into things like mutual funds, or even directly into the stock market, its a bit of a gamble. There’s no guarantee you’ll make any money on the investment, and there’s a risk you could lose the money you did invest.
When you start investing into riskier options, start with things you already know. You know how we joke that we buy so much from certain stores we should buy stock in them? Now’s the time to turn that joke into reality. The brands you always buy at the grocery store are the ones you should start investing in. If you always buy your coffee at one specific chain, buy their stock too.
When you get more comfortable with the world of investing, then its time to start branching out. The old saying “don’t put all your eggs in one basket” applies most of all to investing. You can explore mutual funds, exchange-traded-funds (ETFs), real-estate-investment-trusts (REITs), and many other options.
Learn how to manage your money
As much as there are so many experts and managers who would love to manage your money for you — for a fee — its your money. It’s on you to decide what to do with it. Do yourself a favor and learn more about managing your money.
Ask your bank or financial planner if there are classes or lectures they offer on the basics of investing. Check out your local library and see if they offer workshops on financial literacy. While you’re there, borrow a book or two on investing. The best thing you can do for yourself is to educate yourself.
Money management: It’s your job
Good money management is really up to you. It’s your money, it’s your future, and it’s your job to take care of it. You can keep ignoring it, of course. You can spend it as fast as you get it. Or you can keep track of your money, set a budget, save and invest, and take charge of your money management. It’s your future, and your choice.