“How to Save (Even If You Don’t Have Much Cash to Spare)
It’s something that is easier said than done. Saving money is obviously beneficial, but it can be daunting, or unrealistic (we tell ourselves), especially in the face of constant expenses. But Torabi has a way of breaking it down so it’s less so. Just listen to her aptly named podcast, So Money, where she broaches any stale, stressful money issue—i.e., credit, spousal income disparity, the stock market—with such brio that it makes these topics fun and a lot less overwhelming.
Torabi maps out the goals to set, the practices to put in place (even when you don’t have much wiggle room), and—best of all—the ways to make saving money actually compelling.
A Q&A with Farnoosh Torabi
How much of your salary or wages should you put toward saving?
Do the best you can. If you can save 10 percent of your salary or wages each month, that’s great. If you can save more, then you’re a rock star. Ideally you want to arrive at a place where you have somewhere between six and nine months of your living expenses saved in a bank account. But if that’s too far-fetched, then try to work your way up to at least $1,000 saved in a bank account. I often see that when we are able to hit that mark or milestone, we’re encouraged to continue saving even more.
Committing to a consistent savings pattern is helpful to ensure that you never fall off the wagon. But if you receive a lump sum from a tax refund or a birthday gift, then certainly putting a chunk of that toward savings can help to accelerate your savings goals.
What are some healthy overall financial goals to set in your twenties? Thirties? Forties?
In your twenties, my advice is to really focus on laying the foundation for your financial life. You want to get your debt under control, establish a budget, boost savings so that you have a nice rainy-day cushion, and also begin to automatically save for retirement (with a 401(k) or another retirement savings vehicle). Create as many automations and systems around your finances as possible now so that the work is more or less done as you mature. I have a new money course in partnership with Investopedia that tackles all of this and more for recent grads who want to get a better handle on their money. (Use the code Farnoosh20 for a 20 percent discount.)
In your thirties, it’s time to build on the groundwork you established in your twenties. Maybe you’re excited about achieving milestones, like getting married, having children, starting a business, or buying a home—or all of the above. At this stage, saving money is imperative, as all of these goals carry big price tags.
Then in your forties, you want to get more serious about retirement, even though it’s still a couple decades or more away. Check in with your retirement savings. Are you behind? Can you play some catch-up now that you’re (hopefully) earning more? There are a lot of online calculators that can offer some insights into how much you “need” for retirement.
How do you prioritize a 401(k) versus a Roth IRA versus a basic savings account in case you need access to quick cash (for example, if you’re laid off from your job)? Where do you see saving for a kid’s college fitting in?
Your basic savings is THE MOST important savings bucket. Prioritize this above all else.
When it comes to retirement, you may have a number of savings vehicles from which to choose. If your workplace 401(k) or 403(b) offers a match, say $1 for every $1 you put in, up to 5 percent of your income, then I’d start there. That’s free money that you just can’t pass up. Invest at least enough to earn the company match. If you want to save more (and I recommend putting at least 10 to 15 percent of your income toward retirement savings), you can choose to continue investing in your workplace retirement account if you like the investment options. You can also choose to invest in an individual retirement account (IRA)—a Roth or traditional—which you can open up at pretty much any bank.
“Get specific about your savings goals and let that be the motivation that keeps you on track.”
I don’t recommend sacrificing retirement savings to save for college. Students can find ways to make college more affordable by picking schools with great value, going part-time, earning grants and scholarships, working, etc. The money you need for retirement is more substantial and doesn’t really come with any financial aid, as college might.
Should you simultaneously save while paying off student loans and other debt—or should one take precedence over the other?
Saving money should always be a part of your financial diet. If you have absolutely no savings, I would be worried that if you fell into a surprise expense you’d be stuck and forced to fall into more debt. Save what you can while you’re addressing your debt. If you need help, I would recommend trying to consolidate your debt and get a lower interest rate to reduce your monthly payments. Or consider transferring your balance to a card with a lower interest rate. (I’m the financial ambassador for Chase Slate, a card that offers a 0 percent introductory APR for the first 15 months, which could help you pay off your debt faster.) And any money you save on interest could go back in your bank account.
If you’re still struggling and need more help, seek out a credit counselor at a credit counseling agency, who can review your budget, offer some solutions, and enter you into a debt-management program where you can work to alleviate some of the interest burdens or fees on your card balances. Check out the National Foundation for Credit Counseling and Money Management International.
What are some of the most common mistakes you see when it comes to saving?
We don’t save until the end of the month—or when all the bills are already paid. We should prioritize saving and do it automatically out of each paycheck. Why give your money to someone else before you save some for yourself?
“Be your own biggest advocate in your financial life by asking questions, reading the fine print, and staying true to your goals.”
We also fail to share our savings goals with others. It might not cross our minds to share with friends and family that we want to save more money(we may even be embarrassed to admit it), but one study found that sharing your savings goals can lead to saving more money. When we announce that we are on a mission to save, we keep ourselves accountable and along the way we earn the support of the people who want the best for us.
Finally, we don’t save toward specific goals. We need to know exactly what all this hard work is for. Is it so that you can move into your own place one day? Start a business? Travel more? Get specific about your savings goals and let that be the motivation that keeps you on track.
Any favorite saving tools or apps?
I love the following:
When is investing a better option than saving?
When you want to grow your money over a long period of time—more than ten or fifteen years—then investing is a smarter route to take. You take on more risk when you invest, but the more time you give that money to grow, the more time (and chance) you have to ride out the market fluctuations.
For someone who feels overwhelmed by their finances, or the mere idea of saving, what’s your tip for gaining financial literacy?
Tap into free resources, like podcasts, blogs, and books from the library, to help you gain knowledge. A few of my favorite podcasts include No Limits with Rebecca Jarvis, Afford Anything, and Your Millennial Money. For blogs and books, I like Broke Millennial, Wealthy Single Mommy, Making Sense of Cents, and Smart Women Finish Rich. And ignore any and all voices in your head that say you’re not smart enough or capable enough to manage your money wisely. It’s not rocket science; you just need to be determined. Be your own biggest advocate in your financial life by asking questions, reading the fine print, and staying true to your goals.
Farnoosh Torabi is a leading personal finance expert who helps Americans live their richest, happiest lives. She’s reported for Money magazine, hosted a prime-time series on CNBC, and written monthly columns for O, The Oprah Magazine, and Mint.com. Torabi’s award-winning podcast, So Money, made its debut in January 2015. On the show, she interviews leading experts, authors, and influencers, including Tony Robbins, Margaret Cho, and Tim Gunn, about their financial perspectives, money failures, and habits. She also answers listeners’ personal financial questions each week.