Basic Step #7
Save For Your Future
Pay Yourself First
Saving money is not easy, but it is essential to achieving financial well-being and securing your future. One of the best and easiest ways to save money and start a strong retirement income planning program is to pay yourself first. Every time you receive a paycheck, save a certain percentage of your income before spending money on anything else. You may choose to have your bank automatically transfer a certain amount of money from your account to your savings each month. This way, the money never hits your pocket, so you don't miss it.
You also can make saving easier by putting raises, bonuses and tax refunds in savings rather than spending them right away.
The Time Value of Money
The earlier you start saving and retirement income planning, the better. No matter where you are in life, begin saving today and you'll be that much further ahead tomorrow. When you put money into a savings account or investment vehicle, the amount you originally save is called the principal. The principal amount earns interest, which then is added to the original principal. This amount then earns interest, and so on. This process is called compounding. Use this retirement financial calculator to help you assess your retirement savings.
Here is an example of how compound interest works in your favor:
Saving Versus Investing
You should think about the money you save as falling into three categories: money for an emergency fund, money for short-term purchases, and money for long-term goals. Money for an emergency fund and short-term purchases should be kept in an easily accessible savings or money market account. You also may consider keeping this money in a Certificate of Deposit (CD), which may earn more interest than a savings or money market account. CDs require you to leave the money there for a certain period of time, and money market deposit accounts typically require you to maintain a high minimum balance. Money for long-term goals can be invested in assets such as stocks, bonds or mutual funds. These assets possess more risk than traditional saving vehicles, but they have the potential to earn more. For more information on investing, see SAM’s Investing Basics course.
Saving for an Emergency
Setting aside emergency savings with enough money to cover your basic living expenses for three to six months should be a primary savings goal. This money should be kept in an easily accessible savings or money market account, not in a long-term investment asset. Only use the money in the event of an emergency, such as unexpected medical bills or losing your job.
Once you've established an emergency fund, you can begin saving money to reach other goals, such as buying a new car, funding your child's education, or establishing a retirement fund.
Get started with SAM’s free Emergency Fund Plan course.