Most people have good intentions about saving money and investing for the future. It’s easy to think that you will begin to save and invest when you reach a more comfortable income level, but the longer you put it off, the harder it will be to accumulate the amount you may need for an emergency fund or retirement. The sooner you start, the better your chances of living and retiring comfortably.
Saving builds a foundation – To secure a strong financial foundation start with these four basic steps:
Create a “rainy day” reserve:
Set aside enough cash to get you through an unexpected period of illness or unemployment – three to six months’ worth of living expenses is generally recommended. Because you may need to use these funds unexpectedly, you’ll generally want to put the cash in a low-risk, liquid investment. Liquidity refers to how quickly you can convert investments into cash. Real estate, for example, is not very liquid and can take a long time to sell. Money markets and mutual funds, on the other hand, tend to be fairly liquid.
Pay off your debts:
It may make more sense to pay off high interest rate debt (for example, credit card debt) before making investments that may have a lower or more uncertain return.
There is no better way to put your extra cash to work for you than by having adequate insurance. It’s your best protection against financial loss, so review your home, auto, health, disability, life, and other policies, and increase your coverage, if needed. If you have questions about insurance coverage or would like a free, no-obligation quote, call Michigan First Insurance Agency at 844.788.0818 or visit MichiganFirst.com.
Max out any tax-deferred retirement plans, such as 401(k)s and IRAs:
Putting money in these accounts defers income taxes, which means you’ll have more money to save. Employer- sponsored retirement plan investment earnings have the potential to compound, or generate earnings from previous earnings, year after year and aren’t taxable as long as they remain in the plan. Many employers will match all or part of your contributions; make sure you contribute as much as necessary to get the maximum matching contribution from your employer. This is essentially free money that can help you reach your retirement goals that much sooner. Take full advantage if a matching program is available to you.
To try to fight inflation
When people say, “I’m not an investor,” it’s often because they worry about the potential for market losses. It’s true that investing involves risk as well as reward, and investing is no guarantee that you’ll beat inflation or even come out ahead. However, there’s also another type of loss to be aware of: the loss of purchasing power over time. During periods of inflation, each dollar you’ve saved will buy less and less as time goes on.
To take advantage of compound interest
Choose an account that pays compound interest, where the funds in your savings account earn interest, and that interest is added to your account balance. The next time interest is calculated, it’s based on the increased value of your account. In effect, you earn interest on your interest. Many people, however, don’t fully appreciate the impact that compounded earnings can have, especially over a long period of time.
Compounding has a “snowball” effect. The more money that is added to the account, the greater its benefit. Also, the more frequently interest is compounded – for example, monthly instead of annually – the more quickly your savings build. The sooner you start saving or investing, the more time and potential your investments have for growth. In effect, compounding helps you provide for your financial future by doing some of the work for you. For more information about securing a strong financial foundation, contact Scott Brady at 248.443.4234.
Advisory Services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. Michigan First Credit Union is not affiliated with Capital Asset Advisory Services, LLC.