No matter your occupation or salary, there are some basic best practices and financial goals you should set for yourself. It all starts with creating a budget, and identifying what you spend, and where. Look at tools like Mint, that make budgeting and tracking easy and convenient.
Once you have your budget, take the first step towards maximizing your savings—cut your expenses. Is there a sports car you really want, a new entertainment system you’ve been eyeing? Have you been eating out more than you need to? Eliminate those ‘want-to-have’ expenditures, save that money and put it to work in your portfolio. These extra savings will bring in larger returns, and you’ll get better value down the road.
Contribute to Your 401K
If your employer offers a 401K plan, make sure that you are enrolled. Even better, your employer may match up to a certain percentage of your contributions. Contribute at least enough to meet this threshold—it’s free money!
Ideally, you should be contributing 15% of your salary to your 401K, and up to 25% if you can afford to. This money will be your retirement nest egg, and will grow exponentially over the course of your life. The earlier you begin to contribute to your 401K, the better. If your employer does not offer a 401K plan, open an IRA or Roth IRA account with your bank.
Strategic Debt Payment
Don’t ever take out any high-interest loans, such as borrowing against a credit card or taking a payday ‘cash advance’. This is inadvisable no matter the circumstances—take out a bank loan instead.
If you already have high-interest debt, prioritize paying it down. Eliminating it is crucial to saving money. This type of debt will drain your savings quickly, and can become insurmountable if it accumulates. You should at least make minimum debt payments to avoid defaulting.
Your Rainy Day Fund
Emergencies happen—whether it’s a car repair or a medical issue, life can become expensive quickly. Building a rainy-day fund is far from exciting, but it is a necessary life planning step. Put away 5% of your paycheck, until your emergency fund is large enough to cover eight months of basic expenses. You may not ever need it, but the peace of mind alone will make this a worthwhile investment.
Saving for Larger Purchases
You’ve covered the critical savings goals and habits needed to lead a fulfilling and wealthy life. Now you can focus on the fun stuff: saving for large purchases. Whether it is a house, a car or a hobby item, be realistic about the cost. How much will you pay in taxes once you complete the purchase? Are there ancillary costs to take into consideration (insurance, for example)?
Once you are comfortable with your estimate, come up with a savings timeline. Set aside a percentage of your monthly pay, and funnel this into a separate savings account until you’ve reached your goal.