Finances can be tricky to manage, and overwhelming due to the sheer amount of information and advice that is floating around in cyberspace. Often it’s hard to know where to start or how to prioritize, but there’s one finance move you can make that will pay dividends for decades (sometimes literally).
Automating your savings is arguably the best move you can make to build your wealth over time. Just like taxes and social security come out of your paycheck every month, if you automate your investments, by the time your paycheck makes it to you, the hard part of “sacrificing” that money has already happened. These regular investments can save you in the event of an emergency cost or have a major impact over the health of your long term savings. By putting just $3 a day away in an investment account such as a mutual fund (or rather $90 at the beginning of each month) with a 5% average rate of return, you could make over $1,000 in interest in six years and over $15,000 in twenty years.
HOW SHOULD YOU START TO AUTOMATE YOUR INVESTMENTS?
First you should have an immediate emergency fund of at least $1,000 dollars. This should be somewhere very safe and easily available should an emergency arise. A savings account should do the trick. Next, see if your employer will match your retirement contributions to your 401(k) or IRA, and max out your contributions up to the amount of the match offered. Lastly, anything left over can be automated through a service like Betterment. Betterment is a fairly new online investment vehicle that has minimal options, but allows its users to choose what percentage of their portfolio should be invested in stocks and bonds. Stocks are considered more risky, so you’d want to have a lower percentage of stocks if you have an account intended for emergency savings. If you are investing for the long term, a helpful rule of thumb is 100 minus your age will tell you how much of your portfolio should be stocks. For example, if you’re 30, 70% of your portfolio should be invested in stocks.
Now you can set it, forget it, and watch your money grow! You’ll be shocked what a difference the magic of compound interest can make.
Just one word of caution: Before you can automate your savings deposits, you must understand your budget. Make sure that you will have enough income to cover your expenses, debt payments, and your automatic investments. The last thing you want is to suffer overdraft charges in the name of saving. For help establishing a budget, click here to learn how to start.
Written by: Lindsay Dell Cook
Lindsay Dell Cook is an accountant, turned writer and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.