The sooner you start saving, the more money you will have later in life. The act of saving money is as much psychological as it is fiscal. Those who find themselves in their "future" stage of life often wish they would have invested more and spent less. There are several ways to save. Everything from cash to complex investment strategies can get you where you want and need to be in the future. Consider these tips when developing your savings plan.
Emergency Funds
An emergency fund provides a financial safety net should you find yourself in a tough position. Try to save at least 10%-20% of every paycheck for your emergency fund, and build up enough for three to six months worth of living expenses. You can keep this in the form of cash, in a bank account, or even invest it in a savings or money market account to earn interest.
Retirement Funds and Savings
If the emergency fund meets your living standard, the next step to consider would be funding a retirement account. The common way to do this is to open either a traditional or a Roth IRA at a local investment firm. Here you can contribute money that will grow either tax-deferred in a traditional IRA, or tax-free in a Roth. With the Traditional IRA you will take a tax deduction on your return and pay the taxes at a later date, whereas with a Roth you will pay the taxes in the year you contribute without the deduction. Both IRAs allow you to invest the money directly into stocks, bonds, and other investment types that will grow over the life of the IRA.
If your place of employment offers a 401(k) or 403(b) plan, you should contribute the maximum amount that you can. Most companies will match up to a certain percentage, which means you put in pretax money and your employer will put in the same amount. Like an IRA, you have the ability to invest in various security types to grow your money tax-deferred. You can opt to do this before you establish your emergency fund; however you will have less money per paycheck if you decide to do this.
These plans are a less risky way grow your money and lessen your tax burden. Assuming the market performs well over your lifetime, the returns should be highly favorable, providing you with enough income to supplement, or even pay for, your living expenses when you decide to retire.
