Saving and Investing Smarts

We all want to save money…but how do we know the best way to save? In this article, our credit experts explain the best ways to invest and save money for the short term and long term. Start saving today!

Step 1: Calculate your budget

Start by taking a quick look at your monthly spending plan. You can use our free cash flow calculator or this free budget worksheet to crunch the numbers. How much money do you have left after you have paid all your bills and covered your expenses each month? If you are married, calculate this figure together with your spouse.

Step 2: Evaluate your goals

Your next step is to consider the different reasons why you want to save money. Pretty much everyone will have more than one goal for their future savings. Use the following checklist to assign a percentage value to each type of savings goal. The goals that are most important should get the largest percentage and the goals that are least important should get the smallest percentage.

Write down the total amount of money you’ll need next to each savings goal. If you are not sure how much you will need to save, you can click on the “Calculate” link for more information.

Step 3: Calculate your savings plan

You now have a clear picture of your savings priorities and goals. Next, you should use our goal-based savings calculator to figure out how much you’ll actually need to put away each month. Write down how much you need to save each month for each of the major goals that you specified in Step 2, For example, in order to save $10,000 over the next 10 years, you would need to put away $137 a month (at an 8% annual return). Complete the checklist below:

If this final amount is more than the amount you calculated you could afford to save in Step 1, you may need to reevaluate your budget and goals. If possible, cut back on some expenses each month in order to stay on track.

Step 4: Choose your accounts

Your next step is to choose the right kind of savings programs for each of your goals. Here’s our guide to the type of savings accounts that work best for different savings needs. You should speak with a financial advisor about your options and how best to balance these different kinds of accounts:

• Retirement – 401(k) programs are probably the most common option for retirement savings. These funds allow you to save pre-tax income through your employer. Traditional IRA accounts are also a good choice for pre-tax retirement savings. Talk to your Human Resources office or financial planner about your retirement options.
• College - 529 college savings plans make planning for your child’s education easier. With these plans you don’t have to pay taxes on the account’s earnings, you always retain control of the account, and there are no income limitations. Education Savings Accounts (a type of IRA) are another option, but they come with limitations and are less flexible.
• Short term savings (vacations, medical procedures, furniture, monetary support for family members, car down payments, home remodeling, dental/orthodontics, wedding, and emergencies) – With each of these savings goals you will need to use the money fairly soon and will need to be able to access the funds when you like. In this situation, a high-yield savings account is probably the best choice. High-yield savings accounts can be found online with companies such as ING and Emigrant Direct. These accounts have a much higher savings rate than most bank savings accounts. You may also want to consider a money market fund with check-writing privileges.
• Mid-term savings (mortgage down payment, having children, starting a business) – If you know that you are going to buy a home, have children, or start a business in 1 to 5 years, you may want to choose a type of savings program that rewards you for your planning and patience. Consider investing in a money market fund, I-Bond, CD, or consumer security. These funds aren’t as flexible, but they have a fixed interest rate that is usually higher than a high-yield savings account. You can only cash out your money after a certain period of time. You may also want to look into investing your money directly into the stock market.

Step 5: Track the results

Now that you've determined your savings goals and set up the right kinds of accounts for each goal, it's time to track your progress each month. Fancy financial management software such as Quicken and Microsoft Money can help you stay on budget. A simple paper chart on the refrigerator works as a low tech alternative. Here is a sample chart that you can reproduce to track your savings goals and accomplishments for three months:

At the end of three months, take a look at how you've done so far. Were you able to meet all of your monthly savings goals? Are you done saving for a short term expense? Do you need to reevaluate your budget? Adjust your savings plan according to what you've learned during the first three months. You may also want to speak with a financial planner again at this point to see how you are doing.

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