- Get a handle on your expenses. When you know where your money goes, you are in control and can be thoughtful about aligning spending with priorities. Use an online money tracking service (like Mint or Quicken) to see all your financial accounts in one place and even create your first budget. Doing this, you will always know where you stand financially. Some of these budget apps give you complete access to your data through a website and your mobile device, and even an eye on your money for you, sending you alerts to remind you to pay your bills or when you go over budget.
- Build your cash reserves, including an emergency fund. This is your #1 savings priority. Why? Unexpected expenses happen all the time, but if you have a cushion of savings, these unexpected expenses don’t have to derail you. Instead of draining your long-term savings account or falling into debt, you can simply use your cushion to stay on track, then rebuild your cushion for next time. How much should you set aside? Your cash reserves should cover six months’ worth of expenses. After you have this six-month cushion, you should also set aside a separate emergency fund, enough to cover 24 months’ of expenses for longer-term situations such as an extended illness. This may sound like a lot of work, but the small spending sacrifices you make as you build your cash reserves will be well worth what you gain in peace of mind.
- Bite the bullet and start maxing out your company 401(k) or other retirement fund. Don’t delay saving for retirement because you’re unsure which accounts you need, which funds to buy, or how much to contribute. Instead of overthinking it, get help. Your benefits administrator and reputable fund companies like Vanguard and Fidelity can answer those very questions without requiring you to get a finance major in retirement accounts along the way. Nervous about committing yourself to the maximum contribution for a full year? Start as close as you can to the maximum, then bump up your contribution at the next enrollment date (usually quarterly) after you understand your expenses more clearly. And whatever you do, be disciplined about never borrowing from your 401(k). Over the years, emergencies will come up and you will need to cover unexpected expenses. Find other ways to cover these expenses. Your 401(k) is for one thing only: funding your retirement.
- Save 10% of your income every year. If you develop the habit of saving 10%, no matter how much you earn, you will always have the confidence of knowing you are living within your means. This step is also what makes many other key steps possible: for example, saving the down payment for a house, setting aside a college fund for the kids or saving for retirement. Think of saving 10% as the way you ensure that you will be able to make ongoing investments in your financial health, year after year.
- Save your bonus, overtime pay, or promotion pay. It is tempting to treat your year-end bonus or other unusual income as play money. Don’t do it! Instead, sock away these lump sum amounts immediately, then leave them alone. Before you know it, you will discover that you are most of the way to where you need to be for retirement.
- Use extra savings that you won’t need in the next five years to start your first investment portfolio (after you’ve maxed out contributions to your retirement accounts). Select a low cost index mutual fund or ETF with one of the high quality, low cost players like Vanguard, Fidelity or T. Rowe Price—they will help you choose the right one. You will need a minimum of $3,000-$5,000 to start, and should build it up to $25,000 before looking to establish your next investment goal. Taking these goals one at a time makes them simple and doable.
Unexpected expenses happen all the time, but if you have a cushion of savings, these unexpected expenses don’t have to derail you.