How to start saving and where to start?
Growing up as an Asian millennial, I’ve always been taught by my parents to start saving early. I remembered being given a piggy bank for Christmas as a kid and was pretty much excited to fill it up w
My guess is that most of us already know that it’s important to save money especially if we want to buy certain things. For example the latest gadgets, concert tickets, the new pair of shoes or handbag, vacations, wedding or a house. But how does one know where to save it (definitely not a piggy bank) and where to start?
TIP #1: Find your timeline
Before you learn how to save, it’s more crucial that you identify first, what are you saving for? Everyone has different choices and is at different stages of their lives that they are saving for. For example, my current journey to hit 100k in my investments would be to save to fund my Financial Freedom portfolio by the end of 2023 for my retirement. That’s my biggest goal but it might be different for you. Remember that everyone’s timeline is individual and you are not bound to anybody else’s life choices and you can decide which path you want to take on.
TIP #2: Find your “wants” or goals
Most of us started out learning and managing our finances on our own after graduating from college. The majority would also tend to spend their first paycheck on something that they like, like brand new shoes, clothes, or the latest gadget only to find out that there are bills and expenses to pay at the end of the month. By then, most would start to notice how much of their paycheck is being spent on rent and they start to wonder if purchasing a home would be a better option? or if they are actually wasting money on rent? Or if one is already in a long-term relationship, should they be saving for a wedding instead? or a downpayment for a car or a vacation?
With social media displaying ways to attract millennials in “keeping up with the Joneses” most Millenials are likely to feel that they are lacking in some way and most of the time, don’t interrogate those thoughts too much and tend to “go with the flow” rather than figuring out what it is that they want and not what society thinks they should have.
So the crucial question to ask yourself is this: What do you REALLY want? Do you really want to spend $60k on a wedding? or do you feel that you have to invite everyone you and your parents have ever met just because that it’s expected? Do you really want a brand new car? or is it just self-sufficient to have a second-hand well maintained car or take public transport?
Do understand that it’s TOTALLY OK to say yes to these questions. Just remember that this is your one precious life, and you get to decide what actually matters to you.
A quick tip that I would always ask myself to find out if those are really my wants or goals, is to ask myself first if it’s a need or a want? Is it a priority or how can I afford it later on (without digging into my emergency savings)? (After imagining fulfilling them) Will I regret my decision to save for that want? If the answer to these questions is a sure yes, then go ahead!
Tip #3: Put your savings based on the timeline you have decided.
So now that you have started off in learning how to save by identifying your goals and the timeline it takes, the next question — where should you keep that cash?
Timeline: 0–2 years
If you anticipate the need to use your savings anytime in the next 3 years (this includes an emergency fund), a good recommendation would be to place the cash in a High Yield Savings Account (HYSA) or a cash management account (aka money market funds). The advantages? There are no penalties for withdrawing (unless you’re withdrawing it several times a month) and your money is able to grow at a much faster rate compared to a regular savings account (almost 50x the interest compared to a regular bank savings account).
Timeline: 1–7 years
If you’re planning for a vacation, saving for a downpayment, or other crucial life events that will occur sometime down the road in the next 1–7 years, you may want to look at placing a CD (known as certificate of deposit). These accounts are offered by most banks and have a much higher interest rate in exchange for the requirement to leave your deposits with them for a certain period of time. Do take note that these are NOT the best accounts to use for emergency funds as you’ll need to access these funds quickly and without any penalty. Make sure you’ve read the full terms and be sure that you’re able to keep that cash in place during the duration of the set term.
Timeline: 7+ years
If you’re planning to save for something that is at least 7 years out, you might consider investing it instead. No HYSA or cash management is able to provide you the rate of returns that the stock market can give you, especially over the long term. A traditional brokerage account (excluding retirement) is a great place to start!
However, if you’re saving for retirement then you’ll DEFINITELY need to consider getting a retirement account like an IRA. Do caution that there will be a penalty for withdrawing your money before 60 from retirement accounts like IRA and 401K.
Should you be saving or investing?
If you’ve been growing up with a super saver mindset like my childhood years (not now), you might feel uncomfortable and apprehensive about placing some of your savings and investing your hard-earned money. It’s totally normal to feel nervous about investing in the beginning — but keeping all of your savings in an HYSA or CD for decades will prevent you from building long-term wealth.
Some FYI for you to take note of if you’re unsure:-
The stock market has averaged 10% returns for almost 100 years.
The earlier you invest, the more you can take advantage of the compounding effect and will be able to weather any market crash.
The most common regret according to CNBC is that the majority of people are not saving for retirement earlier and not investing in stocks sooner.
You don’t have to start with a lot or become a professional hedge fund manager to start investing. You can always start with $50 over the course of 30 years and at a 7% return, you’ll have a whopping $58,000 altogether ($18k contribution + $40k interest). Note that the interest gained is double the contribution given. That’s the power of compounding!
Key takeaways
Overall it’s important that you start baby steps first, by finding your wants or goals, truly asking yourself if these are what you really want (you can ask the 3 questions I have used myself) or what you think you want, finding how long will it take to save that certain sum of money and placing your cash in different tools and products suggested based on the timeline of your goal. There you go! Hope this helps you in finding your ground to start building wealth and be on your way to pursuing your goals and dreams without being financially withheld.