The thought of the future and retirement can be daunting when you’re just starting out in the professional world. It is important to realize that your future income isn’t secure, and saving as much as you can as early as possible is the best way to protect yourself from unforeseeable circumstances — as well as foreseeable ones, like retirement.
Business Insider asked Peter Faust, a financial planner with Tanglewood Total Wealth Management, to help answer some of the most common questions about saving money.
- When should I start saving money?
Short answer: Now.
Even if it’s $20 a month, it’s good practice to start putting away a percentage of your earnings now rather than later. If you’re not sure what you should be saving for, start with an emergency fund. If an emergency happens, you’ll need something to help you pay for it. “Putting it on a credit card is not always the wisest decision,” Faust said.
Depending on your card limit and possible existing debt, only having a credit card to pay off an emergency isn’t the safest bet — especially because emergencies don’t have spending limits.
- How much do I have to save?
Short answer: As much as you can.
At least 10% of your income, if you can afford it, is a good place to start. For an emergency fund, that translates to saving at least three months of expenses.
To successfully save money, your best bet is to create a budget or track your spending. If you’re just starting out, don’t stress over your first month’s budget. The amount you spent may feel overwhelming, but looking at your past purchases will help you see where you can cut back.
- What kind of savings account do I need?
Short answer: A regular savings account is best for emergency savings.
If you don’t have a savings account, the best time to start one is right now. If you’re looking to create an emergency fund, Faust suggests a “plain old vanilla savings account,” meaning one that earns you interest and does not have fees or minimum balances.
If you’re saving for a big purchase or expense — like a house or a wedding — you may consider a high-yield savings account. It offers higher interest rates than a regular savings account but can have different requirements and restrictions, like minimum balances and deposit amounts
- How do I build credit and why do I need it?
Short answer: Open a credit card and pay your balance in full every month.
Having a credit card is how you start building credit. To have good credit, you want to pay your monthly balance in full — if you only pay the minimum, the interest will snowball and you’ll end up owing more money over time.
Credit is what banks look at to determine your trustworthiness for paying back a loan, like one you take out for a mortgage on a house. Your credit score can also be used to determine insurance rates, and if you don’t pay your bill on time or in full, your credit score will reflect that.
- What’s the difference between saving and investing?
Short answer: You save money in order to invest it.
While high-yield savings accounts can earn you interest, you’re going to get the best returns when you invest. Once you have saved up an emergency fund, you can start investing any excess savings.
When you invest money, your money will likely earn a greater return than the interest rate it earns in a savings account. If you can afford some risk and wait out the reward, investing in the stock market — most financial planners recommend low-cost index funds for the inexperienced — will almost always have long-term benefits. While there will be ups and downs, you’ll walk away with more money than you had at the start.
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