This is the fourth part of a four part series on personal finance basics. Check out parts one, two, and three when you get a chance.
There are a multitude of reasons to save, such as; a down payment on a house, your child’s college tuition, and retirement. Priorities will change over time, but saving is always a prudent idea. The issue arises when you don’t know what you’re saving for, it needs to feel important so give yourself some objectives.
1. Emergency Fund
What happens if you lose your job or are injured and can’t work for 8-12 weeks? Can you support yourself? Recent surveys have indicated that more than 50% of Americans do not have enough in the bank to cover three months’ expenses. This should be your first and most pressing priority.
Experts generally recommend having six months worth of living expenses in your emergency fund, but you should have even more if you are starting a family or have a significant mortgage.
Cut back on all your expenses and tighten the budget until you get this done. Once you’ve put together the 6 months of dough, put it in a separate account that you can’t touch for everyday expenses.
2. Investing in Assets
Assets are the opposite of disposable goods (toilet paper, food, cleaning supplies). They are going to stick around and make a positive impact on your balance sheet. Assets can come in many forms, think stocks, bonds, real estate, etc., and starting to build assets will benefit you years down the road.
3. Opportunity Fund
Are you going to be buying a house, proposing to someone, or paying for a wedding sometime soon? Those are all expensive propositions and you should start setting money aside now.
You might be thinking to yourself, “that’s all well and good, I have an emergency fund and want to start investing, but I have no idea where to start.”
You’re not alone.
Lots of people feel out of their depth since this isn’t something you usually learn in school. Plenty of people dedicate their lives to learning how to invest in stocks and bonds, but the most important thing is that you stick to a plan once you get started.
The biggest investing mistakes are made when investors don’t have a plan and make emotional decisions.
Investing is its own unique language. Roth IRAs, 401ks, brokerage accounts, the list goes on and on. What do you need to know?
There are entire books written on the subject so don’t expect a sufficient education here. To start:
Odds and Ends
It’s best to save at least 10% of your income. Over the years, try to work up to 20% before you get married or have kids.
Take more risks in your 20’s and 30’s as long as you pledge not to sell out of your positions when the market inevitably corrects every 5-7 years.
Life insurance is a must-have for anyone with a family or a co-signer on private loans. Make sure your loved ones are taken care of.
A Random Walk Down Wall Street by Burton Malkiel
A Wealth of Common Sense by Ben Carlson
This has been a four part series on personal finance basics. Check out parts one, two, and three if you missed any of them.
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