Saving for retirement has, and always will be, an excellent goal. I do think that can be a great motivator for many individuals and is a good reason to save. Even though it’s a long ways in the future, you want to start early and build your wealth. The earlier you start, the better.
However, I think the era of Covid has also revealed to many individuals that the need for an emergency fund is more important than ever. An emergency fund is where individuals can put money for a ‘rainy day’, like losing a job, having money for an unexpected expense, etc. The government stimulus payments have been helpful for many without a job, but in a period of rising inflation, $1400 doesn’t go as far as it used to. Therefore, I recommend to each one of my readers that they have 6 mo. – 1 year worth of cash that they can tap into in case a surprise event happens like an unexpected bill, losing a job, etc.
This also helps individuals have more control over their lives. No longer do they live paycheck to paycheck but they also have a cushion needed to take a chance on starting up that business, changing jobs, etc.
How Can Young People Overcome the Money Barriers Brought on By COVID
I am always a solution oriented thinker and I advocate for others do the same. That means that the first step in this process is to identify barriers and have a plan to overcome them. Is the barrier too many expenses and not enough income? If so, how you can you reduce expenses or increase income? Is the barrier not having a job? If so, are there any skills sets you can capitalize on to get a job, or perhaps start a business?
Once these barriers are identified, they can then be overcome. The next step then is to start putting yourself in a position to achieve a target savings rate. Then the solution steps are to develop a budget, figure out a target savings rate, and to start putting money away. It may seem challenging first, especially when it seems like you’re only putting a small amount away, but as we’ve seen, stocks and other investment vehicles compound over time and the benefit is to start small, especially if you are younger!
Where Should People Be Saving and How Often Each Month
I suggest the following advice:
1. Always get a company match on your 401k (if available). I.e. if they offer 3% match, then make sure to do 3% into your 401k for sure. Otherwise you’re giving away free money.
2. Target Date savings funds are a great place to put money for many individuals. If you are saving for retirement, put a certain % in from your paycheck, ignore market fluctuations, and let compounding returns do its thing.
3. If you are investing in a 401k (ideally maxing it out to get tax benefits), then consider opening up an IRA to invest on your own. There are also many other vehicles for earning passive income, which I write about extensively at MoneyByRamey.com.
Markets will go up, markets will go down. Ignore the news, stay long great companies, and you will benefit.