No matter how much (if any—trust me, if I can find it, you can too) extra money you have coming in every month, you need to find ways to save that will help you actually do it, and to make your money work for you. I have a few ideas on the top five ways that I save, and I am hoping it will help you.
#1) Company 401k
The first way that I save out of every paycheck is to have a percentage (right now 7%) of my gross income put directly into my 401k through work. This is a very easy and straightforward way to save for retirement. The money that you put into your 401k is tax deductible, so you will reduce your income taxes out of every check. That alone should make it a no brainer, but their can also be other advantages. Quite a lot of employers who offer a 401k at work, also offer a company match. My company matches 25 cents on the dollar for the first 4% of your income that you contribute into the 401k. What this means is that if I put in 4%, the company puts in another 1%. That is an immediate 25% return on my investment. If you leave the company for any reason, you can always take your contributions, with interest. The company match, however, usually has to be vested, which simply means, you need to be with the company for a set amount of time before their contributions are officially yours. At my company you start to become vested at 2 years (20% vested) and are fully vested (100%) at 5 years. This is the simplest way, in my mind, to save.
#2) Roth/Traditional IRA
The second way that I save is to have a set amount ($50) taken out of my checking account on a set day every month, and put into my Roth IRA. I talk about Roth and Traditional IRA’s in my earlier post What is an IRA (Individual Retirement Account)?, but IRA’s are similar to 401k’s, they are just independent of your employer. My Roth IRA (as well as my wife’s) is through T. Rowe Price, and I have been very happy with them for the last 8 years. This second way of saving is also for retirement, but I think that should be the backbone of your saving strength, because, if you aren’t planning for retirement, then what the heck is the point.
#3) Separate Savings Account
The third way that I save every month is to have a $50 automatic payment taken out of my checking account every other Friday (payday), and put into my ING Direct online account. The reason I have this account separated from my checking and savings is that it is harder to get to. It normally takes a few business days to withdrawal money (deposited directly into my checking account). So, I use this account to build my emergency fund, and right now it has a 1.10% interest rate, which isn’t huge, but it is better than my regular savings account. With the account being so far removed from my day to day savings and checking, I sometimes forget that it is there, which is a good thing.
#4) Linked Savings
The fourth way that I save every month is to directly transfer (manually) money every payday into my linked savings account (by linked I mean linked to my checking account). The reason I do this manually is because my paychecks vary depending on how much or how little overtime I get. I know how much I need to pay bills, and anything beyond that will be transferred into savings. Usually it isn’t that much after all of the deductions from above, but I still transfer it and it is only used when absolutely needed. Reasons for using it is if I get a smaller paycheck than expected and need to cover bills, or an unforeseen bill comes up. My linked savings account is like my first line of defense, which I will deplete before even thinking about touching my Emergency Fund.
#5) Certificates of Deposit
The last type of saving that I will talk about today is Certificates of Deposit (CD’s). I have used these in the past, and I’m working on using them again. A CD is basically a “locked” savings for a set amount of time (usually 3 months to 5 years) that gains a higher interest rate than a regular savings account. In exchange for the higher interest rate, you cannot withdrawal your money until the term is up. If you do need to get your money before the term is up, you will have to pay a penalty, which is usually the interest that you would have earned. You can research interest rates for CD’s online at BankRate
The way that I am setting out to buy CD’s is to use them as another safety measure for my Emergency fund. What I will do is for every $2000 I put into my emergency fund, I will purchase a $1000 CD. Once I get enough (at least $5000) money into my CD’s, I can start a CD ladder. A CD ladder is when you have the term lengths for your CD’s set so that you have a portion of your funds available every 3 months or so. An easy way to do this is to have a 3, 6, 9 and 12 month CD and when they mature, you can roll them over into a 12 month CD. That way you will get the better 12 month interest rate, and you will have 25% of your CD savings available (if needed) every 3 months. The key here is careful planning.
I hope my ideas help at least one of you into thinking more about how to save, and if any of you have ideas that you think could help me or your fellow readers, I would love to hear them!