If you aren’t living paycheck-to-paycheck, you might think you have your budget all figured out. However, if you aren’t saving for your future, there’s still some work to do. Budgeting may feel overwhelming, especially when you’re thinking about the future. You may not know how much to save or where to invest. Here’s a simple plan to get you started on your path to financial wellness.
A Simple Budgeting Guide
So how do you know where to start? Here’s a simple guide:
- Pay off any high interest debt. Credit card interest only depletes the earnings on any investment and is usually much higher than you’d earn on even the best investments.
- Save a $1,000 emergency fund in a high yield savings account.
- Save three to six months of expenses in a high yield savings account.
- Split any remaining funds and invest in a taxable investment account and retirement account.
- If your employer matches any contributions in your 401K, prioritize those investments first, so you get the free money from your employer.
Save a $1,000 Emergency Fund First
If you don’t have a fund for emergencies, create a $1,000 savings fund. This will get you through most basic emergencies without sacrifice.
I like to start with a $1,000 emergency account because it doesn’t feel as overwhelming as saving three to six months of monthly expenses, which most emergency funds should have.
Save your funds in an online high-yield savings account. You’ll get the highest APY, and the funds won’t be easily accessed.
Save a Full Emergency Fund
Once you have a $1,000 emergency fund saved, budget to save three to six months of expenses. This emergency fund should be set aside to cover major emergencies, such as losing your job or being unable to work for other unavoidable reasons.
For example, if your monthly expenses are $3,000, you should save $9,000 – $18,000. This will obviously take time but budget a portion of your income for this fund to set yourself up for any worst-case scenarios.
Your emergency fund should also be in an online high yield savings account to keep it growing and out of the way of easy use.
Open a Taxable Brokerage Account
Once you’ve saved an emergency fund, you can start investing in riskier investments, such as stocks, bonds, and commodities. This is money you can afford to lose, you just never know how the market will move so never invest more than you can afford to lose.
You’ll need a taxable brokerage account to do this. A robo-advisor can be a place to start if you’re new to investing, platforms like Wealthfront and Betterment are platforms for beginners.
Betterment doesn’t require a minimum opening balance, and Wealthfront requires just $500 to invest. The nice thing about these platforms is they do the investing for you. Your only job is to answer a few questions about your risk tolerance, financial goals, and timeline. The robo-advisor then does the rest, allocating your portfolio to help you achieve your financial goals.
Remember that any earnings you make in your taxable account becomes a tax liability when you cash out. For example, if you sell a stock for more than you paid, you pay taxes on the capital gains. How much you pay depends on if you held the investment for less than one year or more than one year.
Open a Retirement Account
Even if you’re young, you should be thinking about retirement. The earlier you save for it, the more money you’ll have when you stop working.
Traditional retirement accounts are tax-deferred, so you get a tax deduction when you contribute the funds. The funds also grow tax-deferred until you withdraw them in retirement.
When you withdraw the funds, you pay taxes on only the money withdrawn each month, based on your current tax rate. When they retire, most people are in a lower tax bracket, so they save money on taxes.
You can also invest in Roth retirement accounts. Contributions to these accounts are post-tax, but your earnings grow tax-free. In addition, if you have had the Roth account for at least five years and you’re over 59 ½, your withdrawals from a Roth account are tax-free.
Final Thoughts
Saving and investing should be a regular part of your budget, even if it’s only a small amount. Investing today is always better than putting it off until tomorrow.
Life is short, and emergencies happen when we least expect them. The more prepared you are to handle anything that comes your way, the easier it is to stay out of debt and keep your budget on track.
The key is to start small and work your way up to larger investments. If you can’t work with a professional, at least consult a robo-advisor to get professional help with your investments to secure your financial future. This post was written by Kim Pinnelli on Fiverr, we hire Fiver writers proficient in these topics so that we can all learn more. Subscribe for more business, sales and investing posts. Have a lovely day.
