What’s the goal of this step? Make your money work hard on your behalf to give yourself a financial cushion and grow your wealth.
Why is this important? Remember the two big levers to creating wealth? Money in and money out. In this step, we’re going to put the cash from the difference to work.
Women tend to keep 10% more of their savings in cash than men. Millennial women report a lower level of financial comfort - on average, we are less confident in our financial future, and less likely to feel “in control” or “confident” about our financial future. Knowledge is power, so let’s create a smart plan to save and invest your money. This will improve your financial control, confidence, and (most importantly) your results.
When and how do I do it? Start with the basics - do you have an emergency fund?
We talked about this after you did your financial inventory - it is the single most powerful cushion you can create for yourself.
If you don’t have one, start by automatically transferring a set amount into a savings account immediately. Why a savings account? You aren’t looking for amazing growth; this is your safety net. Don’t put your emergency fund at risk. Schedule automatic transfers on pay day. You won’t get to 3 months bare-bones savings immediately, but you’ll never get there if you don’t start now.
Next, let’s talk investing - are you investing in a retirement account? Your employer may offer a tax-advantaged plan like a 401(k), or you may elect to fund an IRA for yourself, which can be tax-free if you’re under a certain income limit.
There are many, many ways to save for retirement. As a general rule, look for one of two things:
Pretax Contributions: Accounts where you can invest pretax dollars - earnings that you have not paid any taxes on. 401(k) and 403(b) plans are common options that allow employees to invest pretax. You will need to pay taxes on these in the future, when you withdrawal.
Tax-free Upon Withdrawal: These accounts allow you to invest money that has already been taxed, and you will not need to pay taxes on these in the future. Roth IRAs are a common type of retirement plan for tax-free future withdrawals in the US.
Many women get paralyzed at this point - which is better? Pretax or tax-free upon withdrawal? The most important step is to invest, and get your money working for you as soon as possible. Educate yourself and make the best decision you can, but don't let analysis paralysis slow you down. I have a post that breaks down investing into four simple steps - explore it if you'd like more detail. And, here's more on the difference between an IRA and 401k - it's pretty simple once you cut through the jargon.
Many employers also match a certain percentage of your retirement investments - that’s free money! If your employer offers a match, I strongly recommend you take advantage of it. Your long-term goal should be to invest the maximum amount allowable into the retirement vehicles that are right for you. We’ll dig in and explore what and how to invest in future posts.
A strong emergency fund and regularly-funded retirement account create a very strong start to your savings and investing strategy. And, if investing is new to you - start exploring what investing in the market really means!
In the next post, we’ll explore more saving and investing techniques to grow wealth. Where do you keep your emergency fund? How are you saving for retirement? I’m curious to hear!
xoxo, Ms. Financier