You know you want to save your money and grow your nest egg, but you have no idea where to start. After all, there are many different ways to save to consider. Should you pay off debt before anything else? Should you start investing right off the bat?
In doing my own savings research, I’ve looked everywhere for answers on the subject. I wanted to find the ultimate savings strategy so I could smartly build up my net worth. And I think I’ve got it.
This is the strategy I personally follow. Everyone’s situation is different, but if you follow these simple steps, you will reap the rewards.
Step 1: Emergency Fund
This should equate to 3-6 months worth of expenses, to be used only in case you ever need it. It’s a nice safety net to fall back on, should you need it.
Step 2: Company 401k
If your employer is offering to match your contribution, take it. Do not leave free money on the table. If you can only contribute up the match at this time, that is better than nothing. Your contributions will grow over time thanks to compound interest, so the younger you are when you start, the more your money will grow.
Step 3: Debt
After building an emergency fund and contributing up to the company match in your 401k, then it’s time to pay off any and all debt. It’s important to still take advantage of compound interest and free money matching, but it should be your ultimate goal to pay down debt as quickly as you can. Once it’s paid down, you can reallocate this amount to savings.
Step 4: IRA
An IRA is an independent retirement account, which anyone can open on their own. There are two forms of IRAs: traditional and Roth. The former is not taxed until you withdraw upon retirement and the latter is made up of after-tax income that grows tax free. There are limits and restrictions to IRAs, but it’s a good way to control your investing if you are not satisfied with your 401k plan or simply want to invest your money in your own way. If you do not have a 401k plan or do not receive any company match, consider replacing step 2 with this step.
Step 5: 401k
This time, contribute all the way up to the $18,000 limit, or as close as you can. You’ve already reached the company max, but like I mentioned before, take advantage of the compound interest.
Side note: If you have identified a goal that requires a lot of savings, such as a down-payment for a house, you may want to skip this step for the time being. However, maxing out your 401k is always a good idea.
Step 6: Savings/Investment Accounts
After you’ve satisfied all previous steps, then it’s time to save for your short-term and long-term goals. Do you want to plan an international trip? Are you getting married? Buying a house? Buying a car? Save up for these goals, but don’t sacrifice your retirement savings on the way. You can never time back, and time is all it takes for your retirement savings to grow.
Additionally, if you’re not saving for a specific goal or have too much unallocated money in your savings account, you might want to consider opening a taxable investing account.Taxable accounts provide the added benefit of flexibility, so you can grow your money and withdraw at any point.