@ToxikPH wrote:
I've always had this dream of getting my life together and being debt-free, saving a crap ton of money, and being able to follow a budget. How do I get there..? I really want to make a money market my main account but I always have so little money that the interest rates aren't even worth the hassle. I also want to create a CD ladder but don't think I have enough money for that either. Is there like a number I should aim for before going after either of those goals? I'm also assuming I should be debt-free before reaching for those? Again assuming based on the interest rates (26.99 v 2.10). Help?
Saving money is like dieting in that the reason it's so hard for so many is the only two things it requires are two things people aren't willing to give it: discipline and patience.
The first step is discipline, specifically around a budget. If you don't have any money at the end of the month to save with, you're not going to go anywhere. This doesn't need to be a huge amount to start, though bear in mind the more you discipline here the less you have to patience later (depending on your goals). As a starting point, try to get to a point where you can save $300/month, not counting any retirement savings, if you aren't already. Then over time you push that to $500/month, $1000/month, $2000/month, or beyond.
The second step is patience. You have to keep saving ... and saving ... and saving. Growing it into respectable levels of wealth will likely take decades unless you are able to infuse your savings with high levels of income, large bonuses, or other large influxes of cash.
That's the general gist of it. As you point out, there are details that must be dealt with. I'll share my opinions below.
- The first thing you should build, above paying off debt, is an emergency fund. This doesn't have to be large to start, but you really want at least enough to cover a couple months worth of bills. This will become your backstop to keep you from sliding back into debt should an emergency rise.
- Once that's done, pay off all high-interest debt ASAP, specifically credit cards. Anything over 10% APR needs to go. The lower APR stuff becomes a bit more of a gray area, which we'll cover in a bit.
- With the remaining debt, it falls into two buckets: debt with interest below savings/MM APR and debt with interest above it. The stuff below can be minimum payments all the way since you're making more (albeit very little more) saving it than you are paying it down. The other stuff you want to make more than the minimum but it's not destroying you if it takes a couple years to clear like high interest debt does. Split your savings per month by putting some of it toward this debt and some toward growing your savings.
- While you're paying down the moderate interst debt and growing savings, you'll hit a point where you start bucketing your savings into tiers. What the numbers are where you put in one bucket or another is something you have to figure out for yourself, based on your situation and goals. The idea is that you have 3 buckets: emergency savings, which should always be liquid and accessible without penalty; short-term savings (think 3-5 years short-term), which should be liquid but can go into higher interest returning vehicles like CDs because you don't need it immediately so you can avoid any penalties; and long-term, which is where you put money into items that may carry risk (like stocks) but have the highest returns. Cash in this bucket should be stuff you don't need for 10+ years so you can let it ride out downturns and recessions.
In my case, what I find is that these buckets cascade into each other, with the long-term bucket being the largest bucket by far. I set a number for my emergency savings, and once that number is hit, savings in excess of that is moved into short-term, and in turn that excess moves into long-term. The short-term is where I build up cash until I have enough excess to buy a block of stock (in my case, I usually make stock purchases in about $10,000 increments but I'm pretty far along at this point) and then move that to a brokerage and make a purchase.
To put that all into a flowchart, savings should go:
1. If emergency savings is less than X months (TBD by you) expenses, put cash in emergency savings (savings account only). Done.
2. If emergency savings is X months expenses, put cash into short-term savings (savings/CD/MM/etc). Continue.
3. If short-term savings is less than $Y (TBD by you), done.
4. If short-term savings is more than $Y but less than $Y + $Z (long-term threshold, TBD by you), done.
5. If short-term savings is more than $Y + $Z, move $Z into long-term brokerage and purchase equities. Done.
The value of X, Y, and Z are going to be based on your career, your expenses, and what you think your short-term needs are. One note is that with short-term savings, you should always keep around $Z worth in MM or savings, so you can pull it to long-term when you're ready. The remaining $(Y-Z) can go into CD ladders.
