Money Girl's 5 simple principles of building wealth and achieving financial success.
Principle #2: Save Money for the Short-Term
Though we tend to use the terms saving and investing interchangeably, they’re really not the same thing. Savings is the cash you keep on hand for short-term planned purchases and unexpected emergencies.
For instance, if you’re saving money for a down payment on a house that you plan to buy within the next year or two, keep it 100% safe in a high-yield bank account that’s FDIC-insured.
Your savings should never be invested because the value could drop at the exact moment you really need all the money.
If you don’t have an emergency fund that’s equal to at least 3 to 6 months’ worth of your living expenses, make accumulating one a top financial priority. Set aside 10% of your gross pay until you have a healthy cash cushion to land on if you lose your job or can’t work for an extended period of time.
Principle #3: Invest for the Long-Term
Investments are the opposite of savings because they’re for your distant future, like retirement. If you’re relying on being healthy enough to work until the day you die, or on living off of Social Security as a sole source of income, that’s extremely risky.
Over time, a diversified stock portfolio has historically earned an average of 10%. But even if you only get a7% return on your investments, you’ll have over $1 million to spend during retirement if you put aside $400 a month for 40 years.
So start investing a minimum of 10% of your gross income for retirement. Yes, that’s 10% in addition to the 10% for savings that I previously mentioned. Consider these amounts monthly obligations to yourself—no different than any bill with a due date.
If you think that’s more saving and investing than you can afford, start tracking your spending carefully and categorizing it. I promise that when you see exactly how you’re spending money, you’ll find opportunities to save it. Then divert those amounts to savings or investments instead.
Related Content: 5 Clever Ways to Save More Money
After you build up enough total emergency savings to keep you safe, continue putting aside 20% of your income. You could invest the full amount or invest 15% and save 5% for something else, like a new car or a vacation.