MONEY

Ready to start saving money? Here's how to do it right

When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth.

  • Saving trumps investing savvy

    New savers face a lot of complex decisions all at once. Even if you know the choices in your 401(k) — this fund buys stocks, this one bonds — you have to decide how much risk to carry. You may worry about what would happen if you make a mistake. The options can be paralyzing.

    Fortunately, investment choices don’t matter much yet. In the early phase, the amount you put into the market is small compared with how much you’ll invest over the decades.

    So if you feel nervous about buying stocks before you’ve learned the ropes, fine. That’s the thinking behind a new retirement plan in the U.K. It bucks conventional financial wisdom by putting young investors in safe assets at first, with the goal of transitioning them to stock-centric portfolios with more growth potential.

    In the U.S., default investments in 401(k)s often put young people almost entirely in equities. That can work too. According to Morningstar Investment Management, about 20% of your true total wealth, including future pay, is likely to be in financial assets at age 35. So even if you lose 30% in your 401(k), that’s an overall hit of less than 7%.

    You can recover. Get started, and give yourself a year or two to learn to be an investor.

    Don’t take just our word for it..
    .
    In a recent poll, Money readers over 50 said the most effective way to build wealth is
    :
    Consistent saving: 74
    %
    Savvy investing: 10%

  • Boost your savings

    Spend less to enjoy it more

    Pumping up your savings doesn’t have to mean forgoing all the fun stuff you can do with money. Focus on using your dollars in the way most likely to make you happy.

    A study in the Journal of Consumer Research found that when you are faced with a choice between the basic and deluxe versions of a product — that coffeemaker with the milk-frothing thingy and the one without — you are more likely to feel buyer’s remorse when you go high-end.

    One reason: You’ll soon feel annoyed by the effort required to learn to use the extra bells and whistles.

    Save as a team

    You’ll build savings faster if you do so with your spouse. Good news: Research from the University of Missouri finds when one partner starts saving, the mate almost always gets on track too.

    It helps, says San Francisco planner James Frazin, to match up sacrifices. If one partner gives up HBO, the other waits to upgrade that smartphone.

    Monitor your credit score

    A good one can save you thousands of dollars on a mortgage. Myfico.com charges $19.95 for a score from one credit agency. You can also get it free with Barclaycard Arrival World MasterCard, on MONEY’s best credit card list.

  • Invest wisely

    When you’re young, go Roth

    Vanguard reports that more than half of 401(k) retirement plans it administers now offer a Roth option. Instead of getting a tax break when you put the money aside, as in most 401(k)s, savers in Roth plans get totally tax-free withdrawals in retirement.

    “If you’re not yet in a high income tax bracket, the value of the upfront tax break isn’t as important,” says financial planner Michael Kitces. “Use those years to build tax-free retirement funds.”

    Don’t miss out by default

    Many employers make it easy to start 401(k) saving by signing up employees automatically. Yet according to Vanguard, a large administrator of 401(k)s, 88% their clients’ plans set the default below the 6% you usually need to get the largest company match.

    In other words, if you go with the flow, you may be leaving free money on the table.

    Invest your windfalls

    Put a $5,000 bonus (or a tax refund or gift) in a fund that earns a 7% return and you’ll have $9,800 in 10 years.

    Ignore this one habit of the young and rich

    A Fidelity survey of Gen X and Gen Y millionaires found they made an average of 30 investment trades a month. They must have money to burn.

    Jason Goepfert of Sundial Capital Research notes that trading costs alone can add up to $2,800 a year at that rate. And one classic study of retail stock traders found the most active ones earned 7% less per year than the ones who tended to stand pat.

  • Think index funds

    Build around three cheap funds

    Planner Harold Evensky and finance prof Shaun Pfeiffer find that fund managers on average lost investors 1% per year after fees, relative to a cheap index fund.

    Here’s a basic portfolio you can build on index funds like MONEY 50 picks Schwab Total Stock Market SCHWAB CAPITAL TST MK INDEX SELCT SWTSX 1.2325% , Fidelity Spartan International FIDELITY CONCORD SP EX MKT INV FSIIX 1.5685% , and Vanguard Total Bond Market VANGUARD BD IDX FD COM NPV VBMFX -0.092% .

  • Bank online

    Generally, aim to have an emergency fund equal to six months of expenses. It can cover you if you lose your job or have surprise costs like a big car repair. Online banks may be a bit less convenient than your local one, but for money you don’t tap every day they’re a better deal.

    If you want checking

    Ally Interest Checking pays a 0.25% yield on accounts under $15,000 and 0.65% for anything above that. (Some other savings accounts pay as little as .01%.)

    For just savings

    Barclays Online Savings pays 0.9%. No monthly fees or minimum.

    For the medium term

    High earners often need more than six months to replace a lost job. If you have cash for expenses beyond a year, GE Capital Retail Bank 12-month CD pays 1.05%

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