No matter what age you are, it’s important to put money away for retirement or a rainy day. The earlier you save and invest, the more money you’ll have in the future as a result of compound interest. Even if you’re getting a late start, though, saving and investing are the bedrock of personal finance.
How do you get started? No matter what stage in life you’re in, there are steps you can take toward financial security for the future.
Open a Savings Account
Since the Great Recession, savings accounts have offered meager interest rates — less than 0.10% for non-jumbo accounts, according to the FDIC — but having a savings account is important for many people looking to improve their finances and invest. Even if you don’t build much wealth with the interest you earn on your savings, you’re putting money away that you hopefully won’t touch unless there’s an emergency.
Creating an emergency fund is the first step. If you don’t have money in an emergency, you’ve created a second emergency: You not only have a problem, such as a broken car, you also have no money to fix it.
Earning interest on your savings can help build momentum and offer an incentive to continue saving. While interest rates on most savings accounts are, there are some banks that offer a higher-than-average interest rate.
As of January 2020, HSBC Direct (2.05%), Synchrony Bank (1.80%), Citibank and (1.85%) Ally Bank (1.60%) all offer high-yield savings accounts with better-than-average interest rates. Between 1 and 2% interest isn’t much, but it’s far better than the current national average of 0.09% for a savings account.
Setting up automatic deposits can help you save consistently and ensure that money is moving from your checking account to your savings every month. If you’re worried that you might need cash fast, look for a bank that will let you send money from savings to checking on the same day, maybe through a digital payment system like Zelle. Otherwise, just set those regular transfers and watch your savings grow.
A savings account benefits from the miracle of compound interest. Say you put $100 into a savings account that pays 2% interest annually. At the end of one year, you have $102. The next year, you’ll earn 2% on $102, and so on. If you are making automatic deposits, the amount you save and the interest you earn will both increase.
Max Out Company Retirement Plans
Your next saving step is to start a retirement account. Are you working full time for a company with benefits? Do they offer a retirement plan?
“Take advantage of any company 401(k), Simple IRAs, or other matching retirement options,” says Leibel Sternbach, founder of Yields4u.com, a retirement planning website. “Matching employer contributions are like a 100% return on your investment. You aren't going to get those types of returns anywhere else,” Sternbach says.
All retirement plans are different, but if your employer will match the money you put into a 401(k) up to a certain limit, and you’re not contributing the maximum you can, you’re missing out on “free money” that will go toward your retirement. If you can’t put in the maximum, at least invest some money.
If your company doesn’t match contributions, it’s still a good idea to enroll in the retirement plan and contribute. Contributing early provides the advantage of compound interest as you save over time.
Beginning to save in your 20s will pay off handsomely when you reach the end of your working life. As the chart below shows, if you save $10,000 per year between the ages of 25 and 40 (assuming a 6% rate of return), you will have more than $1 million at age 65. If you wait to start saving until you’re 35 and save $10,000 until age 65, you will have only $838,019 at age 65. –
Try an Investing App
Here’s how Acorns works: When you sign up for Acorns Spend, you get an online checking account and an Acorns debit card. Purchases are rounded up to the next dollar and that “spare change” is automatically invested in a portfolio of exchange-traded funds (ETFs) based on risk.
There are three tiers of accounts, ranging in cost from $1 to $3 per month. ATM withdrawals are free or reimbursed if you use an out-of-network ATM. Acorns has also partnered with more than 350 companies, such as Walmart, Sephora, and Barnes & Noble, to offer cash-back rewards on money you spend at those merchants.
Stash is an investing app for beginners. There is no minimum to start investing. However, it charges $1 to $9 a month, depending on which type of account you open, so you want to plan to invest fairly regularly to make it worthwhile.
While these apps encourage you to save and invest, the amount you are saving and investing won’t set you up for retirement. For that, you’ll need to invest in the stock and bond markets.
Choose How You Will Invest
When you decide to become an investor, you have several options for buying and selling investment vehicles. You can work with a full-service broker, an online or discount broker, or a robo-advisor.
A full-service broker, such as Morgan Stanley or Merrill Lynch, charges higher fees, but they offer a credentialed investment manager to guide you through the process, proprietary research on investment vehicles and access to initial public offerings. They can also help you develop a long-term financial plan.
An online or discount brokerage company, such as Charles Schwab or E*Trade, allows you to invest in stocks, bonds or mutual funds and charges lower fees than a full-service broker. These companies offer tools for evaluating stocks, bonds and mutual funds, but you may be doing the research yourself.
A robo-advisor is an automated investing platform that manages your portfolio using algorithms. Popular robo-advisors are Betterment, Wealthfront and SoFi Automated Investing. The major discount brokers also have robo-advisors, including Schwab Intelligent Portfolios, Fidelity Go and E*Trade Core Portfolios. All charge low fees.
Which investment option should you go with? A full-service broker is expensive — the average commission is $150 per trade — but their expertise and guidance may be worth it as you begin to build a portfolio and learn about investing.
An online broker generally does not provide guidance in selecting investments, so you’ll need to do your own homework. You will pay a fee, or commission, when you make a trade, but it’s more likely to average $10.
A robo-advisor will provide you with a list of funds, based on your answers to a questionnaire. An algorithm then manages your portfolio. You pay the fees, called expense ratios, that those funds charge, as well as the annual management fee, which averages 0.25% of assets under management (AUM).
As with all financial decisions, you should comparison shop: Look at each company’s website, make a list of pros and cons, and call the ones you’re interested in to understand what they offer.
Work With a Financial Advisor
A financial advisor wears many hats for a client. They can make stock trades, help balance a portfolio, make a financial plan for your life, advise on tax and insurance issues and much more.
A lot of people think that financial advisors are only for rich people. “Never think you are too small to work with a financial advisor,” Sternbach says. “There are lots of types of financial advisors out there for every step of life.”
Many people “don't know where to start, and they want someone else to help them think through the basic and complicated aspects of their life,” says Kerry Meath-Sinkin, a financial advisor and partner at Meath Wealth Advisors in Minneapolis. “This could mean setting up the right amount in your emergency fund, helping with 401(k) traditional or Roth contributions, or Roth IRA contributions.”
There are two types of financial advisors: fee based and fee only. A fee-based financial planner earns money from you, the client, and also receives commissions and compensation for products you purchase. A fee-only advisor is paid by you. They may recommend stocks and mutual funds, but they are not paid by those fund companies. You can locate a fee-only advisor near you through the National Association of Personal Financial Advisors (NAPFA).
“Find yourself a fee-only advisor and check in with them every few years, have them help guide you through those major life decisions, like setting up your first retirement account, buying your first home, starting your first child’s college fund and so on,” Sternbach says.
As your savings and investments grow, you might want to work with a financial advisor to be sure you’re on track with your retirement savings. Discount brokerages, such as Fidelity, Charles Schwab and Vanguard, also offer financial advisors for their clients. A full-service broker, such as Morgan Stanley or Merrill Lynch, charges higher fees, but you will get one-on-one service from a specific advisor.
Regardless of how you invest, getting started is the most important step. “There are so many different approaches you can take, it can be overwhelming,” Meath-Sinkin says, sympathetic to people who don’t know where to begin. The main point, she stresses, is that you set up a plan and start putting money away for the future.
As your income, assets and family grow, you will change your financial plan to suit your stage of life. But getting started and becoming an engaged investor are the first steps to take.
Geoff Williams is a freelance writer whose work has been published by U.S. News & World Report, CNN Money, Bankrate.com, and many other outlets.