Strong work - you’re putting your money to work for you! A healthy emergency fund and retirement account are crucial to step 4 of the Five Fabulous Steps to Financial Freedom. Let’s explore a few other ways to save and invest your way to real wealth.
Are you saving for upcoming large expenses? A regularly funded “save-to-spend” account can ease future financial burdens. I have a save-to-spend savings account for travel, home projects, and car maintenance. I estimate the annual costs of these items, and automatically transfer a monthly amount into my save-to-spend savings. This is separate from my emergency fund, which I only touch in the event of a real emergency. No, a Caribbean vacation in the dead of winter does not count as an emergency!
Have you started college savings plans for your kids? You should only begin investing in this once you have secured your own retirement investments. Kids can take loans, work while attending school, start at a lower-cost community college to offset the tuition burden, and pursue scholarships. You cannot do any of those to fund your retirement!
Are you ready to invest outside of retirement? This is where you create additional financial security and flexibility. Investing in a “regular” (non-retirement) account means that you can access the money with ease at any point in time, which is a pathway to powerful financial freedom.
I intentionally shared saving and investing ideas in a specific order. First, get the “basics” nailed down in your emergency fund and retirement account. Then, focus on large expenses, college savings, and other investments. You may choose to split your efforts - for example, if you have $250 extra to save in your monthly budget, put $100 towards a save-to-spend account, $100 towards a college fund, and $50 to an investment account.
To recap, here’s the order I recommend:
1. Emergency Fund Savings Account: Cash savings account that could cover at least 3 months of bare-bones expenses (housing, food, utilities).
2. Retirement Investment Account: Investment account (often available through your employer) where you are investing the maximum amount allowable in low-cost index funds.
3. Save-to-Spend Savings Account: Cash savings account funded automatically for larger expenses like travel, home projects, and car maintenance or replacement.
4. College Savings: Investment account like a 529 plan that is dedicated to funding future higher-education needs for your kids. (For those of you with children.)
5. Investment Account: Investment account that you open and fund with post-tax money where you are creating wealth.
Which savings or investment accounts do you currently have? What's next on your list? Do you agree with the order I’ve suggested? What's next? Go get saving and investing to build wealth, ladies!
xoxo, Ms. Financier