Read to learn about the worst & best thing to do with your money!!
Hopefully you’ve finished reading the last blog post on how to save your money! And you might be wondering… so now what? What do I do once I start saving money?
But first, here are some very important disclaimers:
I am not a financial advisor. Everything I say on finance in these series are MY OWN personal experiences and thoughts, NOT advice for you and your own situation. For advice, please reach out to a financial advisor!
My situation is not the same as yours. There are certain circumstances that are unique to my own situation. I’ll try my best to ID all of these beforehand so you can better figure out how to apply what I’m talking about to your own unique situation.
OKAY LET’S DTDT (DO THE DAMN THING).
So what’s the worst thing you can do with your saved money?
Answer: Putting the money in a checking account.
Unfortunately, inflation rates hit 2% in April 2019 and the average savings account is just a measly 0.06% APY (annual percentage yield, or interest).
AKA… the prices of things are increasing at a faster rate than your money is growing.
Where should you put your money instead?
There are a LOOOOOT of different ways to invest your money.
Well, first things first. You gotta take care of BIZ. You know, lay down the foundation and safety net, then build up from there on retirement and investments.
So take a look at the “Savings Pyramid”, which shows you the ORDER in which you should save for:
Essentially, you need to make sure you cover the base of the pyramid first, before you start building up. Here’s a little more info on each section:
General best practice is to have around 3-6 months of living expenses. Now, I know for many, this can feel impossible. But saving up a little month by month WILL help. If you do have 3 months of living expenses saved up, put it in a high-yield savings account so you can earn interest. High-yield bank accounts are a type of savings account, complete with FDIC protection (v important!), which earn a higher interest rate than a standard savings account. Sometimes they do require a larger initial deposit, or restrict the number of times you can withdraw money in a year. But this is your emergency fund, after all. You should mostly be contributing and withdrawing only in times of emergency! Many of these are online, but you’ll also need to set up transfer connections to another bank to deposit/withdraw funds from this HYSA.
Here’s a great article about the different HYSA you can choose from. Personally, my stuff is in a Marcus by Goldman Sachs account (2.25% annual interest rate, no monthly service fees!)
Keep adding to this emergency fund until the balance is high enough where you feel like you can weather any financial surprises or storms that life sends your way (i.e. getting laid off, taking time off work, medical leave, etc).
Alright, raise your hand if you have high-interest debt (i.e. credit card debt, student loans, etc). You need to pay off this before you go any further up the savings pyramid.
If you want to know more about the math explanation:
“Historically, U.S. stocks have delivered an average annualized total return of about 9.8%. That means for every dollar you invest, you’d likely be making a return on investment (ROI) of 9.8% or less over time.
On the flipside, the average interest rate on a credit card is more than 16%. So every dollar you put towards paying off your balance is generating around a 16% return because you no longer have to pay that interest to your card issuer. That’s a much higher return than what you’d get from investing.”
— Dani Pascarella
Make this a priority, OVER vacations or new clothes or even your rent. The longer you wait to pay this debt off, the worse off you’ll be in the long run.
OMG yay Retirement Fund! SO EXCITING, RIGHT.
I know, I know, not the most exciting thing to think about. But if you read this other article I wrote, the earlier you start saving more retirement, the better off you’ll be in the long run.
I’ll do a follow up post on which retirement accounts (i.e. 401(k), RothIRA, traditional IRA, etc) soon, promise. But the main thing is that each type of retirement account has a maximum (set by the IRS). If you can aim to hit the max, or get as close to it as possible, you’re well on your way!
Take care of future you. She/he/they will reeeeeeally love you.
With retirement accounts, you can’t really withdraw those funds until you reach retirement age. Otherwise, you’ll have to pay some hefty fees and pay lots of taxes. Oof.
Instead, other folks use taxable investment accounts to save up for things they want from now until retirement. Think along the lines of buying a home or starting a business. These aren’t right for everyone, but if you’re interested in learning more, check out this article. The main benefit is that with a taxable investment account, you can take out (liquidate) your investments and use them for whatever you want, whenever you want.
I admit, I personally don’t f*** around with this stuff too much. Mostly because I don’t know a ton about it, and mostly because I’m lazy. Maybe future me will get less lazy and figure this part out more :P #keepingitreal
Now let’s say you’re a total baller and you still have monies leftover!! Here is where you can start to play around with speculative investments (if this fits your fancy).
These are things like: investing in a startup, buying bitcoin/cryptocurrency, day-trading options, high risk/high reward stuffs.
Personally, I reeeeally don’t f*** around with this. 99% because I don’t have these kind of funds that I am comfortable parting with in case I bet on something that is a losing bet. 1% because… how would you even know where to start??
Anyhoo, too much risk for me, personally. But at the end of the day, personal finance is all about what YOU want, what YOUR goals are, and HOW MUCH risk you’re willing to take.
Well, that’s generally it!
Let me know if you have any questions. You got this!
Happy Saving! <3