Growing up, I was always taught to save my money. My parents helped me open a bank account when I was very young and encouraged me to deposit my money into the account whenever I had the chance. However, no one really told me what to do with my money beyond that and as I grew older questions naturally came up.
- When is it okay to spend my money?
- How much money should I be saving?
- What am I saving it for?
I felt like my savings account was some kind of sacred box where my money entered and never left. Money that I didn’t put into my savings was inevitable spent on things like chocolate from the local convenience store (if you know how much I love chocolate, you will know that this was probably hundreds of dollars of chocolate lol).
So, I decided to write this post for those of you who don’t really know what to do with their savings. If you need help saving money in the first place, I encourage you to check out the following posts:
The Ultimate Guide to Saving Money on a Tight budget
21 Essential Tips to Show You How to Save Money Every Month
20 Easy Ways to Save Money on Your Groceries
14 Best Personal Finance Tips that will Make You Rich
Here are some of the best tips to save and invest your money wisely. It’s one thing to save and invest, but it’s a totally different thing to do it wisely.
How to Save and Invest Your Money Wisely
1. Pay Off Debt
Before you you start saving or invest too much of your money, you need to pay off high-interest credit card debt. You will never save very much money if you only pay the minimum amount on your credit cards. To pay your credit card debt, write down all the balances from smallest to largest. Then start tackling the smallest balance first. As you continue to pay them off, you will gain more motivation to pay off those larger balances.
2. Build an Emergency Fund
Emergency funds are essential to staying out of debt. They are a cash cushion that you can dip into when you have to spend a large amount of money on something important and unexpected.
For example, in college, I needed my car to get to and from work. I lived too far away from my internship to take the bus or a train. So, I had to dip into my emergency fund when my car alternator broke and my car battery died. If I didn’t have this cash available, I probably would have needed to use a credit card or borrow money to fix my car. However, I was able to repair my car without relying on anything else. I didn’t owe any money to anyone! That’s the power of an emergency fund.
3. Set Short Term Goals
Goals are essential when you’re developing ways to save and invest your money wisely. Otherwise, you’re going to end up like me, either spending all my money on chocolate bars or tucking it mindlessly away into my savings account. There’s nothing wrong with spending your money in that way, but if you want to become financially independent, you will benefit from being very intentional with your money.
Set short term goals to help you spend money with intention! Here are some examples of short term goals:
- Weddings
- Holiday gifts and parties
- Vacations
- Birthday gifts
- Home improvement projects and repairs
- Clothing and accessories
- Gadgets
These are all predictable expenses that you can plan and budget your money for! The holidays happen every year, so don’t let those expenses sneak up on you! Decide how much money you would like to spend on these short term goals and set aside money to cover the costs. There is no reason to go into debt to pay for these things.
4. Set Long Term Goals
Long term goals are equally as important as short term goals. Some examples of long term goals are:
- Retiring
- Paying off your mortgage
- Saving college tuition for your children
For each long term goal, pick a date when you hope to achieve your goal. For example, when do you plan to retire? If you plan to retire in 10 years, your strategy will be very different compared to a plan to retire in 30 or 40 years.
5. Tax advantaged accounts
Tax advantaged accounts don’t get enough credit! They are excellent ways to save money over the long term. Check out my post about setting aside money each month to learn more about the importance of tax advantage accounts! My money has grown exponentially after I started putting money into these accounts. I highly recommend them if you are trying to save and invest your money wisely.
6. Understand Your Risk Tolerance
Understanding your own risk tolerance is really important because it will affect how you allocate your investments. There are certain investments that are extremely risky, while there are some investments that are relatively reliable. Also, I want you to understand that nothing comes without risk.
An example of a relatively low risk investment are government issued bonds. Bonds are basically loans that are granted to companies by the government. As an investor, you have the opportunity to invest your money into these bonds so the government can loan out the money. Overtime, the company accepting the loan will pay the money back with interest and you make money passively!
Investing in bonds are excellent for people who plan to retire within the next 5-10 years because bonds don’t respond to large dips in the stock market. They might drop in value during times of recession, but historically, they don’t drop as significantly as stock prices and in some cases, they grow!
Alternatively, maybe you plan to retire in the far future and therefore you have a higher risk tolerance because you can ride out recessions. In this case, you may benefit from investing in the stock market. Once you put your money in the stock market it will grow with compounding interest! The longer you keep your money in the market, the more you will make. When there are times of recession or drops in market values, you are comfortable because it means that you can buy more stock with the same amount of money.
I currently invest in the stock market (specifically index funds) because I have a high risk tolerance. While I would love to stop working a W2 job as soon as possible, I don’t plan to retire for a long time. XD
7. Understand What You Plan to Invest In
This is vital. If you want to put large sums of money into an investment, you better know how it works, when you can take your money out, and what kinds of fees are associated with the investment. Do not invest in something just because it’s trending on Reddit!
Maybe you remember the recent fiasco between Wall Street and Redditors and Game Stop stock prices. While it was an interesting example of what group mind can do to a company, ultimately the Game Stop shares became extremely overvalued and a lot of people lost a lot of money. Be careful of what you invest in and if you don’t understand something, take a moment to learn more!
For anyone who wants to learn more about how to save and invest your money wisely, I highly recommend the Stock Series on JL Collins’ blog or his book The Simple Path to Wealth.
8. Avoid Fees
Many brokerages and hedge funds apply significant fees to your investments. In some cases, the fees are so drastic that people don’t make any money despite using these companies to invest large sums of money into the stock market over a long period. The companies make commission off shares they find for you, and these decisions aren’t always made with your best interest in mind. Use a company like Vanguard or Fidelity to avoid fees. There are also other low fee companies that you can use too!
9. Only Use Fee Based Certified Financial Assistants
Certified financial assistants (CFA) basically review your finances and make recommendations about how to best allocate your money given your goals.
There are two kinds of CFA’s:
- Commission-based
- Fee-based
Commission-based CFA’s don’t charge you anything upfront when they give you advice. However, they make money by selling you a product like mutual funds or life-insurance. Since they are so eager to sell you their product, they might sell you something without your best interest in mind, which may cause you to lose thousands of dollars in the long run.
Meanwhile, fee-based CFA’s make their money by providing you advice in exchange for your money. They may charge something like $500 for an annual review, and I know this sounds like a lot of money, but this is a one time fee. And, if the CFA is really good, the recommendations from the review will make you a lot of money. The service is completed with your best interest in mind because the CFA wants to leave a good impression and gain a repeat customer.
10. Invest in Education
Education is powerful! Between undergraduate and graduate school, I was studying for 8 years beyond high school. The skills I gained from my education are invaluable and I would not trade it for anything. However, I don’t believe that everyone needs to go to school to be educated. There is a lot of value from learning from books and real-world experiences. So, my advice is don’t be stingy on educational materials, like books and courses. Of course, I want you to be careful! If you plan to go back to school or enroll in online courses, make sure that the school is legitimate and will provide the skills and knowledge you look for!
But, I need to reiterate that you don’t need school. Reading books and listening to podcasts are great ways to educate yourself. Many bloggers, YouTube channels, and large universities offer free or low-cost online education that you can take advantage of. If you are looking to build your skills, check out what kinds of courses are available to you! You might be very surprised!
11. Start Your Own Business
A common thread between many people who save and invest in money wisely is business. They come up with ideas based on their experience and knowledge and use their money (or other people’s money) to build a business. I caution you though, starting your own business can be a risky approach. It’s important to give yourself the time to learn how to start a business and scale it appropriately. Many business owners confess that they failed many times before coming up with a successful idea. So be careful, but also don’t be discouraged if you fail.
If you’re interested in starting a business, I highly recommend starting a blog! It’s relatively little cost upfront, but has the potential for a large payoff!
Summary
Saving and investing money is complicated and everyone’s financial journey is different. Take some time to reflect on your own financial position and risk tolerance right now! This will help you organize your thoughts to put yourself in the best position to save and invest your money wisely.