Make Your Investing Resolutions Reality in 2018

2018 Investing Resolutions

These six New Year’s resolutions will give your investment portfolio a boost in 2018, deliver long-lasting rewards and require neither spandex nor excessive amounts of kale.

It’ll be nearly impossible to find an open treadmill at your local gym come January. By March? Everything’s back to normal again.

Welcome to the season of good intentions. Many people will start 2018 with a New Year’s resolution like exercising more or losing weight, only to abandon it within weeks.

Sound familiar? Even if you haven’t succeeded in the past, 2018 can be different. (No, really!) If you’re unsure where to begin and would like to start with some quick wins, how about your investment portfolio?

Investing resolutions can reap long-lasting rewards and require neither spandex nor excessive amounts of kale. Pick and choose from the following investing resolutions, or go ahead and tackle the entire list.

Save more (and invest it)

Spending less and saving more is a noble resolution, but here’s some bad news: Saving money won’t adequately prepare you for retirement unless you invest it.

First, some ground rules. Don’t invest in the market unless you’ve established a rainy-day fund with enough money to cover three to six months of expenses. Generally speaking, you shouldn’t invest money you’ll need within the next three years.

Once you have some short-term savings accumulated, work toward contributing 15% of your income to your retirement accounts. Everyone can make (and keep) this resolution, whether your nest egg has cracked the six-figure mark or it looks more like, well, an egg. Even an extra $20 each week will add up to nearly $40,000 in 30 years, thanks to compounding interest.

Exercise more (than just your 401(k))

Think of saving for retirement like exercising. A routine workout may get the job done, but your body (or nest egg) won’t radically transform until you switch things up.

If you’ve been contributing to your 401(k) — congratulations, by the way, as it’s an important first step — resolve to open an IRA in 2018. These accounts carry a maximum contribution of $5,500 for people under age 50 ($6,500 for those 50 and up) and offer a broader array of assets that often have lower fees than employer-sponsored plans.

First, decide whether you prefer the Roth or traditional variety. (The difference comes down to when you’ll be taxed, now with a Roth or later with a traditional when you take distributions.) Once that’s settled, you can open an IRA in a matter of minutes. You may not burn a lot of calories in the process, but you’ll appreciate this move someday — maybe even as soon as tax season if you open a traditional IRA.

Lose weight (from excess fees)

The U.S. stock market has had a tremendous year, but if your portfolio’s performance is a bit sluggish, it’s time to take action. Costly fees may be weighing down your portfolio and hampering its future potential. A NerdWallet study found that a millennial paying 1% more in investment fees than his peers will sacrifice nearly $600,000 in returns over 40 years.

Don’t be that person. Here’s how to trim the fat: Take note of the expense ratios for each investment in your portfolio and then research whether less costly alternatives will let you achieve the same goal. Have an account with an online broker or robo-advisor? Many of these providers offer access to financial advisors who can assist with this process. Or you can consult with one directly.

Eat healthier (in your portfolio)

This time of year, it’s easy to overindulge on sweets, whether at the dessert table or within your portfolio.

With U.S. stocks up about 20% in 2017, your once-healthy portfolio probably has gotten out of whack. It’s time to restore your intended allocations to stocks and bonds. Experts recommend at least 5% to 10% of your portfolio be allocated to bonds, but your strategy may vary depending on your risk tolerance or age.

In 2018, resolve to rebalance your portfolio and set up automatic rebalancing, a feature offered by many providers or inherent to target-date funds you may have in your 401(k). Sometimes that’s as simple as a click of a button.

Get (your accounts) organized

So you’ve packed up old clothes and donated them to charity. But that 401(k) from your first job? Somehow it’s still hanging around.

Let 2018 be the year you finally roll over your old 401(k) into an IRA. Why? You’ll most likely pay lower fees than with that old employer’s plan, plus you’ll gain access to a broader selection of investments and possibly more guidance from your new broker.

A rollover will require you to fill out some paperwork and funnel money into new investments, but it’s time well-spent. Lower fees, greater flexibility and more money at retirement? You can probably spare a couple of afternoons for that.

Learn a new (investing) skill

While your friends learn French, Parlez-vous investing? If you answered no, your burgeoning interest is calling. (We know it’s there; you’re reading this list.)

It’s easy, and often wise, to take the set-it-and-forget-it approach to investing. But that may not be enough to satisfy a curious mind. Becoming “invested” will make you more engaged in the lifelong pursuit of managing your finances. Gravitate to what interests you, be it reading an investing book, researching how options work (hint: they’re not as difficult as they seem) or trying your hand at trading stocks.

Just be sure to keep your newfound hobby in check. Reading a few books does not the next Warren Buffett make, nor should you overhaul your portfolio to chase the latest investment du jour.

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9 money mistakes to avoid in your 40s

Your 20s were all about setting up your financial foundation and establishing good habits. Your 30s were about life changes like getting married, having kids, and building your career.

In your 40s, everything is amplified even more. You’ve got growing kids and aging parents — and what you don’t have is a ton of spare time.

There’s a lot you can do in your 40s to protect your money and care for your family before you begin thinking about retirement in your 50s or 60s. Here’s what you should avoid:

1. Buying more house than you can afford

With your growing family, that starter home in a bad school district isn’t meeting your family’s needs anymore. Suddenly, you want more space for your kids to run around, and you want them to grow up in a neighborhood with lots of friends their age.

It’s tempting to opt for more square footage, a larger yard, and an upscale neighborhood. But this means a bigger home loan, increased maintenance costs, and high property taxes.

After spending the first two decades of adulthood in rental apartments or condos (possibly with roommates!), it’s natural to want a big, beautiful home to hopefully live in for the rest of your life. But beware of buying more home than you can handle. Houses aren’t great investments, so you should be realistic about your budget and avoid tying up all your savings in your home.

2. Not having the right mortgage

Mortgage rates remain quite low (often under 4%, depending on your credit score, loan terms, and other factors). Consider refinancing if you intend to remain in your home for at least a few more years.

I’m a fan of refinancing to a 15-year mortgage. While a 30-year mortgage offers a lower monthly payment, it means you’ll have a mortgage well into your 60s or 70s, which isn’t helpful in retirement. Plus, you’ll pay a lot more in interest.

How much more? Let’s say you have a $250,000 loan. You can get a 15-year mortgage with a 3.14% interest rate and a monthly payment of $1,743. A 30-year mortgage would have a 3.81% rate and a $1,166 monthly payment. Spending nearly $600 less per month is appealing, but you’ll actually spend $106,073 more on interest payments over the life of the 30-year loan!

As your cash flow situation changes, make sure you have the right mortgage for you. You can compare 15- and 30-year mortgages side by side using this calculator.

3. Overspending on your kids

A big way to keep up with the Joneses in your 40s is to pour your resources into your kids: tutors, travel sports teams, competitive dance troupes, private school tuition, summer camp … the list is endless!

It hard to say no to everything your kids’ heart’s desire and you really do want to provide those things — not just because you love your kids, but because their friends’ parents are your friends and neighbors, and there’s pressure for you to fit in.

This is a good time to reassess your money values and teach your kids about creating their own value system. That way, the whole family is spending money and time on what really matters to each of you, instead of what your neighbors are doing.

4. Not saving for retirement because you’re saving for college

Many parents I work with want to prioritize funding their kids’ college savings accounts. It’s natural to put your kids first, before yourself. That’s good parenting!

However, I get concerned when parents forgo saving for their own retirement in favor of contributing to a college savings account for their kids. The reality is that your kids can borrow money for college, but you can’t borrow money for retirement. You’re setting your kids up to have to support you in your old age, right when they have young children of their own.

This can become a huge burden for them in the future. A true gift to your kids is to prepare adequately for your own retirement first, and then save for their college educations second.

Once you’re in a financial position to contribute to college savings, consider a 529 Plan, which offers multiple tax benefits. Some plans give you a state tax deduction or credit, your contributions will grow tax-free in the account, and withdrawals for qualified educational expenses are also tax-free.

If your state of residence doesn’t offer a tax deduction or credit, you can choose a plan from a state that does. You can research different 529 Plans available at savingforcollege.com.

5. Not having a big enough emergency fund

That $1,000 you stashed away at 22 might have cut it when you were only supporting yourself, but now you’ve got a family. The potential for unexpected expenses is high.

The stakes are higher, too. For example, when you’re young and lose your job, you can float by for a few months by breaking your lease and moving back home. Imagine losing your job when you have a $3,500 monthly mortgage payment, two car payments, grad school debt, a stay-at-home spouse, and three kids!

Give yourself peace of mind. Keep 3-6 months of living expenses in your emergency fund and invest the excess in a taxable brokerage account which you could pull from if you were out of work for an extended period of time.

6. Not maximizing credit card rewards

If you use credit responsibly (meaning you have an excellent credit score and pay your credit card bills in full and on time every month), you’re missing out if you have a no-frills credit card that doesn’t come with rewards.

A bigger family comes with increased spending, so make that spending work in your favor. Rewards cards can earn you cash back or points that you can use for free or discounted travel. Some cards even include perks like statement credits for airline purchases or the fee for Global Entry.

7. Not doing estate planning

I’ve witnessed friends have to wade through their parents’ complicated estates while grieving their loss. It’s essential to create a plan for supporting your family if you pass away or are incapacitated and can no longer works.

Doing the work now will spare your spouse and children a lot of pain. Work with an estate attorney to create a will, and consider the best ways to leave money to your heirs or charitable organizations to minimize the tax burden on your estate. A financial planner is a great ally to have on your side as you worked through this.

8. Not protecting your money in the event of divorce

Unfortunately, divorce is a reality for many families, and it can be financially devastating, especially for women. This is why I think it’s important for both spouses to be active participants in their family’s financial planning. Too often, one spouse handles all the money — and the other spouse is in for some nasty surprises if the marriage ends.

If your marriage is at risk, keep a detailed inventory of your family’s assets and hire a lawyer to help you understand how state laws can affect which assets you’d be entitled to.

There are financial planners out there who specialize in working with clients who are going through a divorce, such as CDFAs (Certified Divorce Financial Analysts). They can help you navigate through this tricky time.

9. Not talking with your parents about their finances

Just like it’s important for you to set up your estate for the benefit of your children, it’s essential to talk to your parents about their own estate.

The elderly are vulnerable to financial scams because they have the confidence of having managed their money for years, but don’t necessarily understand modern money management. They also might be experiencing some cognitive decline, so it helps to have you on their side as they make financial choices.

Some parents tell their adult children too late that they don’t have enough saved for retirement, or that they expect their kids to support them. I work with a number of clients who help their parents financially, but it takes some planning and budgeting to be able to do this without sacrificing your own goals.

The only way to save money has always been the same — and you can’t do it without making a key distinction

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While a bad economy or an especially low-paying job can make saving money infinitely harder, the formula for saving has always been the same. To save money, you need to spend less than you earn.

Obviously, this task becomes a lot easier when you earn more than average – or if you live in a low-cost area. If you have a six-figure income and live in Arkansas, for example, you should absolutely be socking some money away. On the flip side, someone living on the same salary in an expensive city like New York City, Boston, or San Francisco might not have much if anything left over after covering basic expenses like housing, food, and childcare.

But, no matter your income or where you live, you have to find a way to spend less than you earn if you hope to save money to retire, have some fun, and avoid debt. You can get a side hustle or a part-time job if you want, but if you don’t spend less than you bring home, you’re always going to struggle.

That’s why it’s important to determine the difference between your “wants” and “needs” — and to understand why that differentiation matters. Without a grasp on why these terms matter, it’s significantly harder to get on the right side of your financial ledger.

Wants vs. needs

What is a “want?” And what is a “need?” While everyone’s wants and needs can vary, there’s a big difference between these two terms when it comes to how you spend your money.

Generally speaking, a “need” is something you absolutely cannot live without. You need a roof over your head, for example. You need food and health insurance and transportation to get to work.

You need electricity in your house, you need food to eat, and you need a telephone. In this day and age, you probably even need internet access for your job or so your kids can do homework.

A “want,” on the other hand, is something you’d like, but could probably live without if push comes to shove. You want to go out to dinner tonight so you don’t have to cook. You want a shiny new iPhone X, even if you’re existing phone works just fine.

You want concert tickets and an annual beach vacation, but you wouldn’t die if you couldn’t have these things.

A want is something you very well may be able to afford, but don’t actually need to get by.

When needs are actually wants

But, what happens when something you consider a need is actually a want? This happens all the time, and it really throws people off. Worse, it tricks people into justifying purchases they wouldn’t make it they really thought it through.

For example, you need to eat, it’s true. But, do you need to dine out at your favorite pub tonight? If you have food to eat at home, the answer is no. But if you’re in the mood to justify the purchase, you could tell yourself you need to eat and do it anyway.

You also need a cellphone because it’s 2017 and hardly anyone has just a landline anymore. But, you don’t need to upgrade to the new $1,000 iPhone, and you may not even need a smartphone. Heck, you may not even need a data plan — but since you know you need a phone, you can convince yourself you need the best possible phone with the priciest talk, data, and text package money can buy.

New cars are another area where it’s easy to confuse what you want with what you need. You may need a car to get to work. You probably don’t need a brand-new car financed for 72 months with a $500 monthly payment. But, since you know you need to get to work, you can talk yourself into buying what you want on the premise that your shiny new ride is a need.

Well, guess what. It’s not.

In all these instances, you absolutely need the item in question — food, phone, transportation — but you’re choosing to spend more than you have to. In these cases, it’s important to be honest with yourself about what you need, what you want, and the difference between the two.

Three steps to help you separate wants from needs

There’s nothing wrong with spending money on wants. I would even argue that paying for wants is an important part of life. If life were only about working and paying bills, then it wouldn’t be much fun.

The problem arises when people conflate their wants with their needs to the point where their spending stands in the way of their financial goals. When we spend money on wants without determining if they’re really a priority, we often shortchange ourselves in the areas of our lives that really matter – things like saving money for college, emergencies, retirement savings, and vacations.

If you’re struggling to separate wants from needs, here are three steps to help.

Step 1: Decide which wants truly add value to your life.

If you’re spending more than you should and having trouble separating wants from needs, it’s smart to take a step back and look at what you’re actually buying. Do your wants add real value to your life, or are they made out of convenience? Are you making discretionary purchases because they’re important to you, or simply out of habit?

While spending on wants is an important part of life, some wants are more important to us than others – and if you stop to examine you’re spending, you may find that many of the splurges you’re making aren’t really worth it. By deciding which wants add real value to your life, you can determine which ones to keep and which wants you can live without.

Step 2: Trade away some of your wants for a better deal.

Depending on the “want” in question, you may be able to come up with an alternative action that lets you save your money instead. This is a good strategy to try when you’re spending on something out of habit or out of convenience.

For example:

  • If you dine out a few times per week more out of convenience than pleasure, you may find you can cut your spending and still eat conveniently with some simple planning. If you can get in the habit of meal planning or using your crock pot to make easy dinners a few nights per week, for example, you may be able to avoid hasty, unfulfilling dinners out and pocket that money instead.
  • If you have an expensive cable package out of habit but never watch all the channels, you may be able to choose a cheaper package and save money without really noticing. Heck, you may even be able to cancel your cable subscription together.
  • If you’re signed up for multiple subscriptions for magazines or any of those subscription boxes like FabFitFun but you rarely have time to enjoy what you receive, you might be able to cancel without any real impact to your happiness or fulfillment.

It’s important to have wants in your life, but you should only splurge when you’re truly benefiting. If a want isn’t really making you happy, you’ll get more out of your hard-earned dollars once you cut the fat and reallocate those dollars to make them count.

Step 3: Figure out how to afford what you really want.

Let’s say you have a handful of wants that are really important to you. You love having a new car because you drive an hour to work each way, or you’re a huge tech geek who can’t wait to get your hands on every new phone or game console that comes out. Maybe you’re a foodie who loves dining out so much you’re willing to sacrifice elsewhere to be able to try all your favorite restaurants.

Working those wants into your budget is obviously important, but you need to make sure you can afford it. If you’re not saving money already – or if you’re spending all you earn and going into debt – then you probably need to analyze your spending in its entirety to find other places to cut.

The best way to determine whether you can afford everything you want – in addition to everything you need, of course – is to use a monthly budget and track your spending. While tracking your purchases can prevent you from spending more than you want, a monthly budget can help you prioritize your monthly obligations and your wants without sacrificing your savings goals.

My favorite type of budget is the zero-sum budget because all it takes is a pen and paper to get started. Zero-sum budgeting also makes prioritizing easy since it forces you to “spend” all your money on paper and “give each dollar a job.”

In addition, zero-sum budgeting forces you to pay your savings and investments as if they were regular bills, then learn to live off the rest. In that sense, it may force you to reevaluate your wants and needs since you’ll have less discretionary money over all.

The bottom line

If you’re struggling with money and can’t earn more of it right now, your best step is maximizing the money you have. Very often, the best way to do this is to take a close look at your monthly spending to see how much you’re splurging. From there, you can decide if those “want” are truly worth it, or if you’d be better off taking a different approach.

At the end of the day, the best way to make sure you can afford what you want is to think ahead, be intentional with your spending, and most importantly, and be honest with yourself. We all want things in life, but those who get the most of what they want are the ones who plan.

10 Habits to Develop for Financial Stability and Success

10 Habits to Develop for Financial Stability and Success

Just like any goal, getting your finances stable and becoming financially successful requires the development of good financial habits.

I’ve been researching this topic extensively in the last few years in my quest to eliminate debt, increase my savings and increase financial security for my family.

I’ll talk more about these habits individually, but wanted to list them in a summary (I know, but I’m a compulsive list-maker).

Here they are, in no particular order:

1. Make savings automagical

This should be your top priority, especially if you don’t have a solid emergency fund yet. Make it the first bill you pay each payday, by having a set amount automatically transferred from your checking account to your savings (try an online savings account). Don’t even think about this transaction — just make sure it happens, each and every payday.

2. Control your impulse spending

The biggest problem for many of us. Impulse spending, on eating out and shopping and online purchases, is a big drain on our finances, the biggest budget breaker for many, and a sure way to be in dire financial straits. See Monitor Your Impulse Spending for more tips.

3. Evaluate your expenses, and live frugally

If you’ve never tracked your expenses, try the One Month Challenge. Then evaluate how you’re spending your money, and see what you can cut out or reduce. Decide if each expense is absolutely necessary, and then eliminate the unnecessary. See How I Save Money for more. Also read 30 ways to save $1 a day.

4. Invest in your future

If you’re young, you probably don’t think about retirement much. But it’s important. Even if you think you can always plan for retirement later, do it now. The growth of your investments over time will be amazing if you start in your 20s. Start by increasing your 401(k) to the maximum of your company’s match, if that’s available to you. After that, the best bet is probably a Roth IRA. Do a little research, but whatever you do, start now!

5. Keep your family secure

The first step is to save for an emergency fund, so that if anything happens, you’ve got the money. If you have a spouse and/or dependents, you should definitely get life insurance and make a will — as soon as possible! Also research other insurance, such as homeowner’s or renter’s insurance.

6. Eliminate and avoid debt

If you’ve got credit cards, personal loans, or other such debt, you need to start a debt elimination plan. List out your debts and arrange them in order from smallest balance at the top two largest at the bottom. Then focus on the debt at the top, putting as much as you can into it, even if it’s just $40-50 extra (more would be better). When that amount is paid off, celebrate! Then take the total amount you were paying (say $70 minimum payment plus the $50 extra for a total of $120) and add that to the minimum payment of the next largest debt. Continue this process, with your extra amount snowballing as you go along, until you pay off all your debts. This could take several years, but it’s a very rewarding process, and very necessary.

7. Use the envelope system

This is a simple system to keep track of how much money you have for spending. Let’s say you set aside three amounts in your budget each payday — one for gas, one for groceries, one for eating out. Withdraw those amounts on payday, and put them in three separate envelopes. That way, you can easily track how much you have left for each of these expenses, and when you run out of money, you know it immediately. You don’t overspend in these categories. If you regularly run out too fast, you may need to rethink your budget.

8. Pay bills immediately, or automagical

One good habit is to pay bills as soon as they come in. Also, as much as possible, try to get your bills to be paid through automatic deduction. For those that can’t, use your banks online check system to make regular automatic payments. This way, all of your regular expenses in your budget are taken care of.

9. Read about personal finances

The more you educate yourself, the better your finances will be.

10. Look to grow your net worth

Do whatever you can to improve your net worth, either by reducing your debt, increasing your savings, or increasing your income, or all of the above. Look for new ways to make money, or to get paid more for what you do. Over the course of months, if you calculate your net worth each month, you’ll see it grow. And that feels great.

How to save for retirement on a tight budget

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To the average American, saving money is a mythical topic. In a recent CareerBuilder report, 78% percent of full-time workers said they live paycheck to paycheck, up from 75% in 2016.

Retirement savings can seem unnecessary when you’re barely getting by. That said, you and your spouse will need about $1 million to live comfortably during your golden years, and waiting for a financial windfall isn’t the best use of your time.

Take these steps to prioritize savings with the resources you have.

Trim your spending

It’s not easy or fun, but cutting unnecessary spending is the most effective way to take control of your finances. The good news: According to a study by Hloom, 8 out of 10 Americans admit to wasting money, so there’s a decent chance that you’re not as broke as you feel. Start small by eliminating things that aren’t overly painful, and work your way up to making significant cuts across the board. An efficient budget will help you form better savings habits.

Change your spending perspective

The opportunity to save money is vast if you know where to look. For example, suppose you have a $5,000 credit card balance with a 22% interest rate. If your credit score is decent, your bank may be willing to lower the rate, which will help you repay the debt more quickly. This is just one example of how a frugal mindset can change your lifestyle, and you’ll be surprised by how easy it is to negotiate savings. For instance, while you probably wouldn’t think to haggle at big box stores like Home Depot, most are willing to price match their competitors. The same goes for internet and phone providers, office supply stores, baby stores, and even online retailers like Amazon. Prioritize savings by finding discounts in every corner of your budget.

Find a side gig

The idea of working after work probably sounds awful, but there are plenty of ways to earn extra income without feeling burnt out. If you’re a homeowner, consider renting out a room on the weekends via Airbnb or another rental site. If you’re artistic, use your talents to sell goods through Etsy. Or, if your day job skills are in high demand, consider selling yourself as a part-time consultant who commands a high fee. There are 44 million people working side gigs in the U.S. alone, and even modest savings can add up. For example, at a 7% return, investing $500 a month will yield nearly $592,000 in 30 years. Take stock of your passions and financial goals to find the perfect fit.

Control your debt

One of the biggest roadblocks to retirement savings is lingering debt. Whether you’re paying off student loans, credit cards, an auto loan, or a mortgage, controlling your cash means making deliberate choices. For example, paying off credit balances with variable, high interest is usually the best choice. That said, it might not make sense to make accelerated payments on fixed loans with low interest, especially if it prevents you from investing in retirement. Review your finances and strike a balance between long-term savings and immediate expenses.

Use your employee benefits

Saving for retirement is easier with the support of your employer, but the sad truth is that only about one-third of Americans are taking advantage of their 401(k)s or other tax-deferred retirement plans. If you haven’t already, redirect your savings as soon as possible, and be sure to ask whether your company matches a portion of your contributions. There’s nothing quite as satisfying as free money, and your employer’s 401(k) matching offer is exactly what you need to supercharge your efforts.

While you’re at it, don’t forget to learn about the other ways your employer can help you save money. If your company offers a health savings account (HSA), your out-of-pocket medical expenses are tax-free, which frees up a portion of your income to save for retirement. The same goes for flexible spending, which can include expenses like child care, home improvement supplies, and more.

Open your own savings vehicle

There are ways to save for retirement even if you don’t have access to an employer-sponsored plan. The value of compound interest means that your money has the power to grow until the day you retire, and it’s important to take advantage of the time you have between now and then. Consider opening an individual retirement account (IRA), which allows you to contribute up to $5,500 a year or $6,500 a year if you’re over age 50.

There are 3 things to understand about investing if you want to make money in the stock market

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Investing is anyone’s game. And putting money in the stock market while you’re young is one of the best — and easiest — ways you can set yourself up for a comfortable retirement.

But the reality is many people don’t invest — especially younger Americans, who keep as much as 70% of their portfolio in cash, according to a recent BlackRock survey.

In a recent blog post, ESI Money, a blogger who retired at 52 with a $3 million net worth, said “waiting to invest” is one of the “worst money moves anyone can make.”

After all, investing your savings in the stock market, rather than stashing it in a traditional savings account, could amount to a difference of up to $3.3 million over 4o years.

Luckily, investing isn’t as complicated as it seems. According to ESI Money, there are three factors that determine how well your investments will perform:

1. Your timeline

ESI Money crunched the numbers and found that time is the most important factor in how well your investments perform. “[T]he longer you wait to save and invest, the more you’re costing yourself,” he said.

In other words, it’s all about maximizing the benefit of compound interest.

Take a look at the chart below, which illustrates the difference in savings for a 15-year-old who puts $1,000 of their summer job earnings into a Roth IRA — a retirement account where your savings grow tax-free — for four years and then stops, and a 25-year-old who puts away $1,000 until age 28 and stops.

Assuming a 7% annual rate of return, the early saver will have nearly twice as much money saved by age 65 as the late saver, with no extra effort whatsoever. Even if the late saver continued putting away that same amount until age 30, they’d still come up short.

The best way to maximize earnings is to keep saving and investing consistently, but the idea remains: The more time your money has to grow, the more you’ll end up with.

2. How much you invest

How much money you earn will be based partially on how much you invest. The good news is that you don’t have to invest a ton of money to earn a lot over time. You can easily start by contributing 15%, 10%, or even 5% of your pre-tax income to a retirement account, like a 401(k) or IRA.

If you’re worried about investing too much money for fear of losing it, don’t be. Stock market investors had over a 99% chance of maintaining at least their initial investment — the same as a traditional savings account, according to a recent NerdWallet analysis of 40-years of historical returns.

3. The return rate

The NerdWallet analysis also found that investors had a 95% chance of earning nearly three times their initial investment, while traditional savers had less than a 3% chance of tripling their investment.

Still, the rate at which your money grows is completely out of your control. That’s the nature of the stock market — not even legendary investor Warren Buffett can guarantee big returns.

Ultimately, you’re doing well if your investment outpaces inflation, which won’t happen if your money is shored up in a bank account with super low interest rates. To minimize risk, diversifying your investments across different types of companies, industries and countries is key.

You can start by investing in a low-cost index fund that does the diversification for you — like the Vanguard Total Stock Market Index Fund. Another increasingly popular tool for novice investors are robo-advisors, which use an algorithm to build and manage your portfolio for a small annual fee. Or, you can follow Buffett’s advice to stick with a simple S&P 500 index fund, which invests in the 500 largest US companies.

These are commonly called “set it and forget it” investments that grow over time, regardless of short-term performance. Just make sure you’re not paying annual fees higher than 0.5% or it’ll eat into your returns.

ESI Money sums up the winning formula best: “Save early, save often, and save more as time goes by.”

Should I invest my emergency savings in the stock market?

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How much of your emergency savings should be held in a savings account instead of the stock market or other account that has higher returns with various risks?—Mary

There’s no question you should always have some money tucked away for emergencies.

Most financial advisers recommend keeping three to six months’ worth of expenses for emergencies, but where’s the best place to keep the money? Experts usually recommend a plain-vanilla savings account. But in a low interest environment, it can be frustrating to watch your money earning nothing. Here are some ways you can get a better return on your money without taking on too much risk.

Online savings accounts

If you’re a super saver, you may not be satisfied with the .01% interest your local bank offers you. Instead, consider an FDIC-insured online bank, says Tammy Wener, a financial adviser from Illinois.

“They generally pay higher interest rates than local banks and can be easily linked to a checking account,” Wener says.

For example, Ally Bank and Discover have online consumer accounts that have no transaction fees and no minimum balance, and offer approximately 1.2% in annual interest. This still may not seem like a large return, but having access to the money when you need it allows it to serve its purpose, according to Wener.

“While holding the funds in a savings account provides very limited growth potential, the peace of mind is more than worth it,” Wener says.

Money Market Accounts

If you’re open to performing savings transactions with a bank that may be a great distance away, a money market account may be another safe bet for your emergency fund. Money market accounts typically offer similar interest rates to online savings accounts, but some also come with additional liquidity by allowing you write checks from the account — like Sallie Mae, which offers 1.30% APY, with no minimum balance or maintenance fees.

Because access to your funds in times of emergency is the primary function of emergency savings, Oklahoma-based certified financial adviser David Bize suggests keeping all of your money in a secure and liquid account.

“100% of emergency savings should be in checking, savings, money market account,” Bize says. “These are 100% liquid and never decrease in value.”

Mutual funds

If you’re still worried about having such a large chunk of your money sitting in an account, there are times when it may be appropriate to consider a balanced mutual fund that could provide better opportunities for savings, says New York-based financial adviser Byrke Sestok.

In order to determine which fund to use, he recommends looking at how a fund performed during the Great Recession, one of the greatest stock market declines.

“If you could tolerate a loss of a similar percentage to your emergency fund that occurred in that period then you may have a good fund to use,” he says.

Stock market dangers

In theory, you could keep part of your emergency savings in the stock market. However, Arizona-based financial adviser Dana Anspach notes that market declines often go hand-in-hand with layoffs and recessions.

“That means at exactly the time a big stock market decline occurs, you could be out of a job,” she says. “If your money is invested in the market, which could mean it is worth 40-50% less at the time you need it most.”

Investing your emergency savings in the stock market exposes it to risk, and makes it less accessible to you. For that reason, most advisers recommend keeping your emergency fund out of the market.

“Doesn’t put money in riskier investments until you have an adequate emergency fund tucked away somewhere safe and sound,” Anspach says. “You want to know what your emergency fund will be worth should an emergency occur.”