If you’re looking to save for retirement, savings accounts won’t earn you much money, due to their low interest rates. They’re essentially as good as saving your money under your mattress. However, savings accounts are great practice for younger students who haven’t set up an IRA or 401K yet and they’re a good place to store an emergency fund (for unexpected expenses) so that you don’t unknowingly dwindle it down. Having money separated into a different account often deters you from withdrawing.
Set up an automatic payment from checking to savings each month to build up a safety net for emergencies and to practice budgeting for reallocation of funds. This will be useful when you decide to open an IRA, 401K, or Mutual Fund and begin making regular payments.
It’s important to have an emergency fund set aside for unexpected costs like car repairs, medical bills, home repairs, and more. Think about the cost of a potential non-budgeted expense and begin setting aside money in case of emergency (e.g. New car tires can run you anywhere from $400-$700). Start small and work your way up to an amount with which you feel comfortable.
Mutual Funds or Balanced Funds:
Think of this as a big-kid savings account. Not only does the money you invest in a mutual fund have a higher rate of return, but also it remains liquid (in other words, you can access it and withdraw it whenever you need). This is a great option if you are saving for a large expense such as a house or children. Mutual funds are often managed by CPA’s, since they involve investing in stocks/bonds/money market/etc., but you can buy them directly from a bank or mutual fund company and there are many options of where and with whom to actually invest your money. Take your time to research what option works best for you. There are “load” funds, meaning you will pay a commission, and “no load” funds, meaning you do not pay a commission, but even if you choose to buy mutual funds without going through a CPA, there are still often fees included in the purchase and internal running of the fund.
IRA & 401K:
These are two of your retirement saving options. IRA’s are available as Roth (you are taxed on the money when it is contributed) or Traditional (you are taxed on the money when it is with withdrawn). Depending when you begin investing in an IRA, you may be more drawn to one over the other. If you start investing in your 20’s or during your first full-time job, a Roth IRA will probably serve you better, because you will be paying a lower tax rate on your contributions. If you start later in life, your tax bracket may actually be higher than you expect it to be in retirement, in which case, a Traditional IRA will allow you to pay lower taxes on your money when it is withdrawn.
401K’s are employer-provided retirement savings plans. They often include some amount of matching (e.g. 100% of the first 6%), which is simply free money for you if you are able to contribute. If you’re able to contribute to a 401K plan and your employer offers matching, it is advantageous of you to contribute the maximum matching amount. Be sure to read the fine print; some funds require a minimum balance to keep a 401K open and some require minimum monthly contributions to avoid fees.
If you have children and are already stressing about how you’ll pay for college, this is an educational savings plan in which you can contribute money to meet the costs of nationwide colleges. While each state is allowed to offer unique benefits of their plan, you are not required to open a plan in the state in which you reside (for example: you can live in Virginia, open a 529 in New York, and send your child to school in California). Click here to read more about each specific 529 Plan by state.
529 plans are offered as Savings Plans or Pre-Paid plans. Savings Plans are like a mutual fund; you pick specific investment options and your account will fluctuate with the changing market. Prepaid Plans, however, allow you to contribute to the costs of an in-state college education. This can later be converted to a Private College 529 Plan if your child decides to apply for private schools.
It is best to begin these plans as early as possible; some choose to start a 529 when their new child is born or even before! Click here to read more about the benefits and options of 529 Plans.