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Imagine putting together a dresser from scratch, but instead of following the instruction manual step by step, you skip from page 1 to page 25. Your creation probably wouldn’t be sturdy enough to hold even a pair of socks! Useless, right? Yet many well-meaning investors fall prey to the same type of mistake, jumping head-first into stocks and bonds without establishing a strong liquid savings foundation—easily accessible in case of emergencies—and laddering up from there.
Yep, you read that right: The first step to investing is simply learning to save—and the most fundamental type of savings one can have is an emergency fund, or financial confidence account (FCA). How much you should have saved up largely depends upon your own life circumstances (such as your age, living situation and whether you have kids).
For example, someone in a regular 9-to-5 job should save three months of living expenses. But if you’re freelancing, work on commission or own your own business, you probably don’t have as predictable an income. So your goal for your FCA may be higher. Whatever it is, approaching it in small increments will make it feel much more doable.
Challenge: Calculate what you would need for three months of living expenses and make that the goal for your FCA.
Savings accounts are simple, reliable and are not typically vulnerable to outside factors like market volatility, which can put your assets at risk. Having a dedicated savings account squared away can give you a real sense of security and lay the groundwork for more complex investing decisions.
Next step? Long-term goals ahead.
It’s important to make sure you’re getting the most out of your retirement savings accounts (think 401(k)s and IRAs, or individual retirement accounts). If your employer offers a 401(k) match, you should be maxing out your contribution to take advantage of this generous benefit, otherwise you’re leaving free money on the table.
Challenge: If your company fully matches up to 4 percent, for example, there really is no reason you should contribute any less than that from each paycheck. It’s a no brainer—an employer match is essentially a 100 percent return on 4 percent of your investment!
If you don’t have a 401(k) through your employer (or even if you do), check out what an IRA can do for you. Anyone who earns a taxable income and is younger than 70½ can contribute to a traditional IRA.1 While the choices in 401(k) accounts are usually limited to mutual funds (and determined by the broker your company opts to work with), an IRA is a little more flexible, allowing you to buy stocks, bonds, exchange-traded funds and more. The earlier you start, the more easily (and quickly) you’ll reach your retirement goals.
For 401(k)s and IRAs (both traditional and Roth) there are certain stipulations, like yearly contribution limits. And both are designed for the long-term (i.e., retirement), so you’ll pay penalties and could face tax-related consequences if you try to cash out before retirement age.
Always be saving
Next time you get a windfall—whether it be a bonus check, an income tax return or a higher-than-usual check from your side hustle—consider putting some (or all) of it into your savings. It’ll give your account an immediate boost and help you reach your goals even faster. Getting into this mindset goes a long way toward achieving confidence. Once you have a clear savings strategy in place—backed up by a financial confidence account and at least one dedicated retirement account—you’ll be ready to start learning to be a rock star investor.
- Have a dedicated savings plan in place before jumping into the world of investing.
- The first step toward saving is an emergency account (or financial confidence account).
- Take advantage of the employer 401(k) match if it’s offered at your company, and consider the potential benefits of an IRA.
Once your savings are in a good place, it’s time to start learning more about investing. Keep reading to learn about some of your options.
1 “Traditional and Roth IRAs,” Jan. 30, 2017, IRSThis content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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