Saving Money - Where Do I Start?

I get quite a bit of readers asking how they should best start saving their hard earned dollars. There really is no right or wrong answer for this and it really depends on your current financial situation. Here are my thoughts on this: 

• 401k - If your company offers a 401k match. Start the saving here. Contribute up to max that will get you the full company match. People, this is free money so take it. So if your company matches you up to a 6% contribution then try as hard as you can to have that 6% contribution rate to get all the free money from the match as possible. This year you can contribute up to $15,500 of your salary to a 401k, but stop at the max that will get you the full company match.
• Roth IRA - If you are eligible to contribute to a Roth IRA then max this out next. This year you can contribute $5,000 to a Roth IRA. The reason that a Roth IRA is attractive is that you put in after tax money, but then when to withdraw from it at retirement time you do not pay taxes on the gains, unlike a 401k that works opposite to this.
• Emergency Fund - This is important. An Emergency Fundis that cushion of money that you are going to have available for unexpected expenses, job loss, etc. Be sure to set enough money aside based on your current financial situation to allow you to live comfortably during a hardship. See my post for thoughts on how much you should save.
• Debt - Ok, so you’ve gotten your all the company match in your 401k as well a decent amount of your own money going into the 401k weekly. You also are going to have $5000 in that Roth IRA this year as well as an emergency fund. Now my advice is to tackle your debt. When I say debt, I mean credit card bills. Pay those off, there is no reason to be paying interest to the credit card companies when you could be saving that money and earning interest on it in a High Yield Savings Account or putting more toward retirement.
• 401k - If you have no credit card debt, now take that extra money and try to max out your 401k. Like I said you can contribute up to $15,500 this year, and over time this is only gonna grow with the market
• Savings - And the last thing would be to start building up the savings that you can use for big purchases. At this point, you can’t feel guilty about spending money since you have really set a side a lot of money in savings and requirement as well as built up that emergency fund.

Again, this really depends on your financial situation. If you are in sever credit card debt, then I would say that you forego the ROTH IRA and start tacking the credit card debt there until it is manageable and then add the ROTH back in. And if you have kids you may think about squeezing in a 529 college savings plan in there as well.

 So I just wanted to lay out the options and ideas that are available and now it is up to you to determine the best way to start saving. I know it isn’t easy to save a lot of money with all your current expenses, but you’d be surprised at over time how much a little savings here and can turn into.