Save Money So You Can Start Investing With These 5 Tips
By Neda Jafarzadeh, a financial analyst with NerdWallet Investing. NerdWallet Investing helps investors compare total costs to find the best broker.
Before you get started with investing, it is important to have some money saved up so you have a pool of cash that you can use as a resource. Having this money will ensure that you have both starting capital and backup funds in case things go sour with a poor or risky investment. Building enough savings to finance a solid investment for the future takes discipline, and here are just a few tips to help get you started:
Tip 1: Remove Your Debt
Getting out of debt should be a high priority before you consider entering into any investments. Credit card debt should be paid off in full so that a solid base of savings can be created that won’t be needed to stymie off looming credit card bills with growing interest. Other forms of debt, such as student loans, auto loans, or home mortgages should also be squared away in order to be able to build some solid savings.
Tip 2: Start a Savings Account
Once you have collected money that you are ready to store away, consider placing the funds in a savings account. This will help grow your savings in an account that has interest returns, while keeping it out of your checking account where you would be tempted to spend it. Furthermore, setting up an automatic transfer from your checking to your savings account each month will keep you on track to keep saving a percentage of your money every month. For an account with higher interest returns, you can also consider opening a money markets account or CD both of which yield higher interest rates than a regular savings account. However be sure to familiarize yourself with the restrictions on these accounts as they may require you to hold a minimum initial balance and have penalty fees if you need to withdraw your money early.
Tip 3: Budget and Analyze
Get out a piece of paper and write down all of your lines of income and all of the expenditures you need to make each month. Use banking statements to list what you’ve spent money on over the last few months. As an itemized list begins to form, you will be able to identify what you can squeeze from a seemingly routine economic behavior to instead save more money each month. Form a budget and stick to it and you might be surprised how much more money adds up each month that can be placed in your savings account or used to pay off debts.
Tip 4: Find Ways To Make Some Extra Cash
If you feel that no matter how hard you try, you just don’t have enough money to put aside in savings, try finding a part-time gig to make some extra cash. Those working full time jobs can often find 8-10 additional hours in the week to work as a contractor to earn more money in their spare time. In addition, if you have a lot of items around the house that you aren’t using, try selling them to generate some extra cash.
Tip 5: Use 401(K) Employer Matching
If you job offers a 401(K) plan you should definitely consider opening an account so that you can start saving for retirement. In addition, if your employer matches your contribution, you should be taking advantage of this opportunity to get free money from your job that you can store away for retirement. Currently for 2013, the maximum annual contribution to a 401(K) account is $17500. If your job doesn’t offer a 401(k) account you can also consider opening an IRA account.
Next Step: Getting Ready to Start Investing
Once you have enough money saved up and are ready to start investing, you will want to think about opening a brokerage account since you won’t be able to use your checking and savings account. Some brokers require that you put down a minimum initial account balance that can start at $10,000. If you don’t have $10,000 to put down, you can certainly find a broker with a $0 minimum requirement, just make sure when you’re searching between brokers that you find the top broker that fits your needs.