A famous economist named Eugene Fama once said that money is like a bar of soap – the more you handle it, the less you’ll have. But saving money is hard, especially if you’re living paycheck to paycheck. I’ll outline some of my favorite methods of saving money and tell where I put extra money to make it work for me.
The first goal that I’d work for if I was starting with no savings is to establish an emergency fund. You never know what life is going to throw your way, and you don’t want to be tapping into your rent money to pay for new tires or a new roof. Your emergency fund should be something with no risk, so a high-yield savings account is a great option. You still have access to your funds, but they’re not as accessible as they are in your checking account. High-yield savings accounts also pay you interest, so you’re going to earn money on your savings for doing nothing.
There are a lot of providers to choose from, but I’d search for a bank that offers at least a 0.5 APY, doesn’t charge any fees, and doesn’t require a minimum balance. I’m personally a big fan of Ally, but your mileage may vary. Rates are low right now, but free money is free money!
Once you’ve got your account set up, it’s time to start contributing. You should aim to contribute as much as you can without impacting your necessities for the month. Reaching a significant number may seem like a big hill to climb, but you’ll likely get there sooner than you think. The key is to keep contributing consistently, even if it’s only a little bit. Did you decide against getting that new outfit? Take what that would have cost you and put it into savings. Skip out on a few coffees this week? Drop a few bucks into your savings.
After you have your emergency fund set up and have reached whatever amount you’re comfortable with, what do you do with your future savings? Well, if you have a low risk tolerance, you can continue to contribute to that savings account and grow your extra money. This will give you a lot of peace of mind since that money is protected by the government – you never have to worry about it disappearing or anything like that. If you’d like to take a bit more risk for a potentially larger reward, then I would suggest using dividend-paying stocks to really take advantage of the eighth wonder of the world – compound interest.
A dividend is money that a company pays its shareholders for, well, owning shares. Companies will pay a percentage of their current price per share each year to shareholders. Any dividend that pays 5 percent of more per year is what I would consider to be a high-paying dividend stock.
Let’s look at an example. You’ve purchased a share of a company that pays a 5 percent annual dividend. Shares of that company are worth $30 each. That means that you’re going to receive $1.50 every year by doing nothing other than owning that stock. Pretty neat, right? Well, it gets better. You can reinvest those dividends into the same stock. Rather than the $1.50 going into your pocket, you can choose to automatically reinvest it. When next year rolls around, your principal amount will be higher; you’ll own a larger percentage of the company. That means that your dividend payment will be higher. This creates a snowball effect and compounds on itself. Before you know it, you’re going to be making money hand over fist.
Okay, so it’s going to be a bit longer than “before you know it.” Unless you have hundreds of thousands of dollars to invest in stocks, it’s going to take you a pretty good while to get that snowball rolling in any significant manner. You’re still effectively getting a 5 percent return on your savings, so what’s the catch? Well, it’s a much riskier choice than the government-backed savings account.
That stock price could, theoretically, drop to zero. The company could go bankrupt, and then not only are you not receiving a dividend anymore, you’re also out your initial investment. Companies can also change their dividends – or get rid of them completely – so it is extremely important for you to do your own research on companies before investing. I would suggest using your favorite search engine to learn about “dividend aristocrats.” These are companies that have consistently grown their dividend payment, and it’s not very likely that they’re going out of business anytime soon.
Investing in the stock market may sound complicated. Personally, I think a lot of rich people have went out of their way to make it seem more complicated than it is so that you don’t play with their toys. Gone are the days when you have to call a broker to make all your stock trades for you. You can buy and sell stocks right from your phone in the comfort of your home. If I can figure it out, I’m sure you can. We live in a society where the answer to almost any question you have is at your fingertips thanks to the internet. Do as much research as you feel like you need to, then do some more.
Regardless of how you choose to save your money, if you’re not spending it, you’re doing well. You could make much worse financial decisions than sticking your money under your mattress. Keep your bar of soap looking new and stop touching as much of your money as you can.
This article is for entertainment purposes only. The author is not a financial advisor, and information presented should not be considered financial advice. Consult a financial professional for information tailored to your financial situation.