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%
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.
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.
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.
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%