Every time a new story comes about that money-savvy millennial who retired at the age of 30, you may feel envious, guilty for not being able to save more and inadequate with your money skills.
Although the FIRE (financial independence retire early) movement is an inspiring way to take control of your finances, most of us probably won't retire by 30 (or even 40, for that matter). However, if you aren't even doing the basics, like establishing long- and short-term savings goals, there's room to improve your savings strategy.
If you don't have any savings right now, don't panic. The first step is to educate yourself and then build the habit of saving. The following are five financial savings mistakes you may be making, and solutions for how you can start fixing them.
Give your money a purpose to help you achieve something in your life.
Figure out the “why am I doing this" because it sets the intention and gives you a connection to your money. Having clear goals may help drive your motivation and it gives you something to look forward to.
Fill in the blank: I want to save for _______ because I want _______. For example, I want to save for an emergency fund because I want reassurance, stability and a safety net for unforeseen incidents.
How to fix it: Write down three to five goals you'd like to accomplish with your money and why. These can fall into long-term or short-term buckets. A long-term goal can be to save for a house or your child's college fund while a shorter-term goal can be to save for next year's vacation.
Tip: If you use an online bank, you can easily create sub-accounts and label them with your goal in mind so you never lose sight of why you're saving.
Sometimes, unexpected events happen. Karin, an avid skier, injured her knee while skiing, and didn't have health insurance. Her surgery cost $55,000 and she was in debt for years, even after she managed to land a higher-paying job. At the time of her injury, she was 36 and didn't have an emergency fund.
Her story is a common one and according to a study from Harvard University, is the main reason why people claim bankruptcy in the U.S. Also, unlike Karin, 78 percent in the study actually had health insurance.
An emergency fund isn't just for medical bills. It can also serve as your “courage" to give you more choices in life. Take Sarah, for instance. She hated her job. Like many of us who stay in jobs we hate, she was afraid to quit because she had bills to pay and what if she couldn't find another job quickly? But unlike many people, Sarah and her husband had been automating a portion of their paychecks into a joint savings account for years.
Sarah recalled, “We just set it and forget it." She reiterates that she really did forget it. She hardly ever looked at the account and when she finally did, “I realized we had a huge emergency fund. As in, we had enough money to cover our expenses for the next 18 months!"
She added, “I wish I could describe the feeling when I saw that number. The pressure, anxiety and worry just melted away. I was so thankful I didn't have to scramble to pay the bills right after I quit."
How to fix it: Set up an emergency fund (which should be housed in an online savings account at an online bank that offers interest on your money) and start contributing 10 percent or more of your income each month. Not sure how to save money? Here are five ways to save right now.
The thought of going broke probably scares you. What about being broke and old? It's not a pleasant thought, but people aren't saving as they should be. A GoBankingRates survey revealed that 34 percent had nothing in their retirement savings.
If your employer offers a 401(k) plan, you should sign up. You don't need to be an expert to start contributing but at least understand the basics. In a nutshell, a 401(k) plan benefits you in the following ways:
You can contribute up to $19,000 in 2019 into your 401(k) plan if you're under the age of 50. If you're over 50, you can contribute up to $25,000.
Here's a helpful chart from Financial Samurai that shows you how much you need to save in your 401(k), based on your age.
How to fix it: Start with a small contribution, like 3 percent, and make it a goal to max out contributions. Work your way up incrementally each quarter. With each pay raise, throw that extra money into your 401(k).
Alternative option: If your company doesn't offer a 401k plan, contribute to an IRA, or an individual retirement plan. You can contribute up to $6,000 a year in 2019 if you're under the age of 50. For those who are age 50 and older, you can contribute up to $7,000.
Mary is a retired nurse who paid off her house and put three kids through college. Even though money was tight over the years, she managed to save every single month, even if it was less than what she had aimed for. Because she was able to consistently save, she paid off her mortgage early and had the funds to pay for her kids' college education.
While putting aside some money each month isn't rocket science, Mary had two powerful saving strategies: time and consistency. You need time to beef up your emergency fund, your 401(k) and other savings accounts that will serve as your financial cushion.
Also, you may not be saving enough. If you've been putting away the same $25 for the last three years, it may take you a really long time to reach your goals.
How to fix it: Create a sense of urgency and start saving now. Put away what you can, and just like your 401(k), incrementally bump up your savings with each pay raise, tax refund or bonus you may receive.
If you're pulling money from your savings account consistently, it's going to be harder to build up your savings. From a psychological point of view, you're basically telling yourself it's OK to treat your savings like a checking account.
Not only that, you may face penalties from your bank. Since a savings account is meant for money to come in (rather than out), if you withdraw or transfer money more than six times in a month, you could get charged a fee. The official name for it is Regulation D.
How to fix it: Maybe you're simply putting too much into your savings each month and you're not being realistic about how much you can actually save.
Or maybe it makes sense for you to let your money sit in your checking for a few extra days until you've paid your bills. Then, when you've paid your bills, throw the rest into savings.
Make adjustments accordingly, and once the money reaches your savings, don't withdraw or transfer it.
No one likes to think they're making mistakes with their money. But if your gut is telling you to save more, spend less and think about retirement, it's probably a sign to tighten up your finances.
There's no perfect way to save money, but it won't magically happen either. You need to make sure you're putting enough away in the various savings buckets and set your goals to help get you there.
Do you have an idea for a topic you’d like to learn more about?