Intro to Saving
TL;DR
Save at least 20% of your paycheck, get rid of expensive debt, take advantage of special retirement accounts.
Bob and Saving
Meet Bob. Bob is a diligent saver. Bob saves all the change from his pocket into his piggy bank at the end of the day, because he knows every penny counts. Bob also stuffs some of his cash under his bed for a rainy day. Bob feels safe.
Bob gets fucked. If Bob had made a budget, Bob would have learned that he spends over 10% of his paycheck paying interest on his credit card. Visa looooves Bob. (Really, Chase Bank, which actually loans him the money, loves Bob).
One day, Bob loses his job. Bob rents out the presidential suite at the Bellagio to throw an unemployment party for all of his friends. Bob slips on a champagne bottle, breaks his fibula, and ends up in the emergency room. Bob no longer has health insurance. Bob develops bowel problems when he sees the cost of the surgery. Hospital debt collectors and credit card debt collectors build a shrine honoring Bob's generosity.
Bob doesn't realize he was only saving 3% of his paycheck in cash, and it wasn't growing. His piggy bank breaks so much it goes kosher. Bob dies penniless in a Vegas dumpster with only a family of racoons and pack of scratched Barry Manilow CDs to keep him company.
Don't be Bob.
How do I save?
There are better and worse ways to save your money. The fact that you're saving money at all is good. In fact, Bob was doing OK just by putting some pennies in the piggy bank.
But there are better ways to save than what Bob did. Here's a rough formula. Some words below may feel like jargon. We'll cover them in the project:
- Pay off all credit card debt.
- Put 6 to 12 months of expenses in a savings account.
- Then pour money into your company's matching (Roth) 401K plan.
- Then pour money into a Roth IRA.
- Then pour money into a brokerage account or other investments.
Think of it like drizzling soft-serve into an ice cream cone. You want to fill up the strong, bottom part of the cone (and stop it from leaking) before you layer on more and more, eventually building a delicate swirl on the top.
Move on
That's it. Move on to the main project. We'll go into more depth soon.