If you swore to make better money management decisions in the new year, you’re not alone. Paying off debt ranks as the number one New Year’s financial resolution for many people. (The biggest lament: not saving enough money from the previous year.) So get your financial house in order—and learn what you should really be saving from your paycheck—with these money-smart tips from Tetley Investments, a boutique investment firm in Chicago, IL.
How much should people save from their paychecks?
A good rule of thumb to follow is to save 15% of every dollar you make. Also, if an individual’s employer offers a 401k plan, they should max out their contribution to the plan as that money is contributed on a pre-tax basis and some employers will match contributions up to a certain amount.
What should people do with the money?
First, build a cushion in a savings account. You won’t earn much of a return, if any, by putting the funds in a savings account, but the point is to first build up a six month to one year reserve of funds to cover living expenses should an emergency arise or you lose your job.
Second, after establishing this safety net, then look to invest the money in a traditional brokerage account. The younger you are the more weight or the more money you should invest in stocks versus bonds, which offer more stability but lower returns. It’s also important to keep this money invested in something that is liquid: in other words, in an investment that can be easily sold should you need to raise cash for an emergency. This is one reason why we recommend thinking of a home purchase not as an investment but as a quality of life decision for you and your family.
What is the ideal amount needed to stay afloat?
There is no magic number, but you should build a cushion in savings to cover six months to one year of living expenses. If you do lose your job we also recommend cutting all unnecessary expenses. You can also call your credit card companies to try to negotiate a lower monthly fee. Importantly, do not ignore any bills. Always call and see if it’s possible to renegotiate terms or set up a payment plan. Once you do get back up on your feet, you really don’t want a missed payment to haunt you down the road. Also, while the job market is improving, if you have trouble finding a job in your field or full-time employment, always look for an alternative such as part-time or flexible work.