If you’ve read any of my previous posts, you’ll know that I set out to be more intentional with my money so that I could achieve my long-term financial goals. Saving money didn’t always come naturally to me because, well, I didn’t have much to save. I had part-time jobs and paid internships all through high school and college but I never made enough money to really focus on saving it. It wasn’t until I got my first full-time job when I realized I was working too damn hard to watch my money slip away. It’s also worth noting that I was making 35k a year at my first job…with a college degree…in NYC….yes, the real world gave me a rude awakening with that one. A college degree does not guarantee you a high-paying job right off the bat.
While I wasn’t making a whole lot of money, I knew that I still wanted to save money and prepare for my future. My frugal lifestyle has made saving money easy for me, if this is something you struggle with you can read my blog post on saving money for some tips!
I eventually moved on to a higher-paying job and my expenses remained the same, so I was able to increase my savings rate drastically. During my first 2 years of working a salaried job, I only contributed 6% of my paycheck to a 401k and the rest of my money sat comfortably in a savings account that yielded 0.01% interest. I was always taught to save save save, but never how to properly save. A wise man once told me “If you’re letting all of your money sit in a savings account, you’re actually losing money”. This is because of the rate of inflation. By not investing your money you are actually losing money over time. This didn’t sit right with me…you’re telling me I worked hard to save all this money and I would slowly lose some of it over time?!
The scary part was that I had no idea know where to begin. I didn’t know anything about investing, how my 401k really worked, or that there were savings accounts available that offered a much higher interest rate, a whopping 1% compared to the 0.01% I was getting.
After help from Jason, I decided to max out my 401k contribution, move some money into a Roth IRA, open up a savings account at a 1% interest rate, and open a brokerage account. If all of the things I just mentioned are completely new concepts to you, don’t worry – they were new to me too! I’m here to tell you that they’re really not all that complex to understand and will help you get your money to a place where it’s working for you. I was also looking for passive ways to invest money that are low risk. The ways I chose to invest are all low risk and I’m in it for the long run but the upside is that I will yield an average of 7-8% on this money as opposed to just 1% in a savings account.
Ok, let’s start simple with the savings account. I moved some money into a savings account with Capital One because they offer 1% interest and this is probably the most you’ll recieve with any traditional savings account.
Next, I chose to max out my 401k contribution and open a Roth IRA to maximize my contribution to tax-advantaged investment accounts. My company does not match my contribution until I have worked there for a certain amount of time but if they did, my first step would have been to contribute at least the maximum they will match. You should always select the maxiumum that your company will match because if you don’t then you are leaving free money on the table. You can then work your way up from there over time. I was in a position to contribute more so I did because I wanted to maximize all of my tax advantaged accounts up to their yearly limits. By contributing more to your 401k, you are lowering your taxable income = more money for you in the long run.
The money you contribute to a Roth IRA is post tax – meaning, this comes out of your paycheck after taxes are deducted. The upside is since you already paid taxes on the money you put into your Roth IRA, so when you begin to withdraw that money it will be tax free. The opposite goes for a 401k, you contribute pre-tax and the money will have taxes deducted from it once you begin to withdraw the money.
Lastly, I opened a brokerage account. The money you contribute here will be post-tax and you will have taxes deducted from the gains. I chose to open an account because I didn’t want too much of my money sitting in a savings account earning 1% when it could be earning 7-8% yearly.
The bottom line here is that you want a better chance to grow your money passively so that it can for you if. There are many ways to grow your money but these were the easiest that worked for me and didn’t require much work on my part!