So, you made it to the end of the month without overspending. In fact, you have some extra cash left in your budget. Congrats! Now – should you finally try that trenta iced, nitro, adaptogenic, keto, glitter matcha latte for $8.50? Or should you stash that sh*t away in your savings account?
The pull between current joy and future payout is very real – especially in society’s “instant gratification” mentality. Paying off debt and investing in your future is important, but so is enjoying life (and caffeine!) along the way.
We’re here to help you navigate the nuances of savings: understanding WHY saving is so important, and tips on HOW to evaluate your options.
The Why Factor
We all know we should save our money, but it’s important that you know what you’re saving for. Let’s call this your “personal why.” Just as you’d put together a different training plan for running a marathon versus completing a triathlon, your savings plan needs to be tailored to your personal why.
Are you saving to buy a condo? Are you planning a wedding? Are you looking to become a dog owner? Maybe you don’t have a short-term savings goal—that’s perfectly fine too. That may naturally lead you to shift your focus to more long-term goals like retirement.
Once you find your “why,” it makes it easier to factor savings right into your monthly budget. In last week’s article, we shared a simple budget template. If you completed it, congrats! If it’s still on your to-do list, no worries—here’s a quick refresher:
Our budget template was divided into three categories: needs, wants, and savings/debt payoff. General guidelines for these categories are 50 percent, 30 percent, and 20 percent of your post tax income, respectively. You should think of your savings as your first stop on your journey to financial freedom.
To help us sort through savings, we chatted with Joe Stock, a Certified Financial Planner and Managing Director at Lake Street Financial. Stock emphasized that savings should be viewed as a “fixed expense.” For example, if you take home $5,000 a month and you want to budget 20 percent towards savings, this comes to $1,000 a month. Joe recommends making that $1,000 a non-negotiable amount. If that latte is going to prohibit you from reaching your savings goal, then it’s a no for you, dawg.
We know it can be hard to prioritize saving over buying another pair of [unnamed brand involving lemons] leggings. But unlike those leggings, your money gets better with time. That’s thanks to two words: compounding interest.
Check out this visual:
Something worth noting—the three individuals didn’t just put their money under a mattress. They intentionally placed it in a savings vehicle. This is where Stock’s second piece of advice comes in: “put your money to work for you.” How can you do that, you say? We’re so glad you asked.
The How Factor
Let’s break down saving and debt pay-off into the following key categories: Emergency Fund, High Interest Debt, Retirement Savings, and Investments.
1. Emergency Fund
Consider this to be your “if sh*t hits the fan” stash. Having readily available cash to cover 3-6 months worth of expenses is a good general rule of thumb for saving your money.
2. High-Interest Debt
If you have any debt that is accruing a “high” interest rate, focus on paying that off. Examples are credit card and student loan debt. Remember that compounding interest visual? Well when you have debt, compounding is working against you. Focus on whittling this down.
3. Retirement Savings
Retirement planning can be complicated – consider consulting a certified financial planner (CFP) to come up with a plan that is tailored to your situation. We’re going to give you a high-level breakdown in this article, just to wet your beak.
Employer-Sponsored Retirement Plan
Ask if your employer offers one! This is a great place to start because:
- They often have a match option (whatever the match % is, contribute AT LEAST that much because #freemoney)
- Contribution levels are higher (you can sock more $ away)
- Investment options are simplified (many plans have target funds based on the year you want to retire – they do the work of finding a perfect asset mix for you)
Keep in mind that there are different types (Roth, Traditional, etc.) that have different tax benefits, eligibility criteria, and maximum contribution amounts.
Individual Retirement Account (IRA)
If you don’t have an employer plan or if you want to increase your retirement savings, an IRA is a great option for the following reasons:
- If you are eligible, your contribution can be partially or completely tax deductible
- They allow you to save additional money on top of your employer plan
- They generally have more investment options for your savings
A quick note – there are several other types of retirement savings accounts and also potential tax deductions you can take if your Adjusted Gross Income (AGI) falls within certain ranges. Again – this is where a CFP might come in handy (cough *Joe* cough).
An investment is anything that is purchased today to create future wealth (sorry instant gratification!). When investing, there are two important considerations: time horizon (as Stock said, you can’t pay your electricity bill with Apple Stock) and risk tolerance (the amount of uncertainty you’re okay with). These considerations will be driven by your age, your stage in life, and your personal why. The major investment categories ranked from highest risk to lowest risk include:
- Stocks: ownership of a company
- Bonds: loan to a company or the government for which you generally receive interest
- Cash: aside from dollar bills, this can include interest bearing options like certificates of deposit, treasury bills, and money market accounts, but can be anything that is liquid
This is another area where a CFP can help you determine what mix of investments best meets your needs. Until then, there are online resources like this Vanguard quiz that can help you get started.
Key takeaways about saving your money
We know, we know, you might really need that latte now, but here are the key takeaways about saving your money:
- Start by figuring out your “why”: what is your personal reason for saving? This will help set your goal and guide your decisions.
- Compounding interest is powerful. Start saving early and often, even if it’s less than your ultimate goal.
- Retirement planning is a key piece of the savings puzzle. There are a ton of options, but be sure to examine the tax benefits and eligibility criteria.
- There are many investment vehicles that will put your money to work for you – take your long- and short-term goals into consideration, along with your risk tolerance. Do your research and consult a professional.
As always, feel free to drop a comment with any questions below – or DM us at @theWellStreet. Our mission is to help you save that dough AND savor the moment, because, yes, we can have it all. Next week we will talk about how we crush our fitness goals without crushing our financial dreams.
Disclaimer: Anna and SJ of WellStreet are inactive CPAs, not professional financial advisors. This budget is a guideline based on their own experience, research, and advice from others. At the end of the day, you know your financial situation better than anyone.