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We all have goals for the new year, and if you’re looking to increase your income long-term, one of them should be to save money for investing in 2023. Saving money can be difficult to commit to, however, it shouldn’t be hard to implement into your life with a little dedication and commitment. Here are 5 insightful tips to save money for investing this year, and if you follow these tips, you will be investing your cash in no time.
Eliminate Debt
Working towards eliminating debt is the first step towards saving money for investing.
To save more money and improve your financial stability, it's crucial to tackle your debts head-on. This includes paying off any credit card balances, personal loans, or any other outstanding obligations you might have. Not only will this reduce the amount of interest that accumulates on top of your original debt, but it will also free up a significant portion of your monthly income.
This increased spendable income can then be used to save and invest, helping you to build wealth over time. In addition to freeing up more money for savings and investments, paying off your debts will also have a huge impact on your financial wellbeing.
Eliminating debt will allow you to have more control over your finances and be able to plan for the future with less anxiety. You'll feel a sense of accomplishment and relief knowing that you no longer have any outstanding debts weighing you down. Paying off debt requires discipline and a focused approach. It may not be the most exciting way to spend your money, but it is crucial if you want to achieve financial stability and start building up your savings.
Keep Track of Your Essential Expenses
We all have basic expenses that need to be paid for that come around as often as every week to every year. Rent, mortgage, insurance, phone bills, transportation costs, and grocery bills are just a few of the many expenses we need to cover.
If you want to find out how to cover these necessities, a good rule of thumb for budgeting is to follow the 50/30/20 rule. To follow this rule, divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings or paying off debt. If your essential expenses are lower than the recommended amount, that's great! You'll have about 25% of your income left over for fun expenses, like weekend activities with friends, hobbies, and subscriptions. That also leaves you extra cash to invest in companies you’ve been eyeing for a while.
Transfer Excess Earnings Into an Investing Account
Now that you’ve been following the 50/30/20 rule, you can directly transfer that extra 25% of income into an investing account. If your priority is to start investing your money, then this is a better option than using the extra cash on recreational activities. It is not essential to put all 25% into an investing account; you can put in the amount you see fit that is tailored to your investment goals. Most brokerage apps offer to set up an automatic deposit with each paycheck into a savings account, which is a great way to ensure that the money you are setting aside for investing doesn’t get spent. Remember, the amount you set aside for investing should reflect your long-term plan, so don’t stress about investing large amounts of money; just set aside a realistic amount that you can create a recurring habit out of.
Avoid Over Spending
This one is easier said than done. More often than not, once we start making more money, we start spending more money. It's easy to become enamored with a new shiny car or flashy handbag, especially when you have more disposable income. Keep yourself grounded and continue to follow the golden 50/30/20 rule so you don’t lose sight of your investment goals. The more money you make, the more you will have for both saving and spending, and in the long run, you’ll be thankful you stuck to your investment plan. Another tip is to continue to be frugal, even if you have the means to splurge. Finding good deals on clothes, haircare, groceries, and coffee is the simplest way to avoid overspending and will give you an extra bonus towards your 2023 investments.
Understand Investment costs
All investments have costs, and it is important to understand what they are before deciding what investment avenue you are going to take.
Mutual funds, for example, charge an expense ratio to cover the cost of managing the fund. This fee is shown as a percentage of total assets invested and is taken out of the money invested in the fund, which can lower the amount of money you make. A high expense ratio means a larger portion of the money goes to the management team and can ruin the fund's performance. Funds with a higher cost are harder to make money with, and the more they cost, the better they need to perform.
Another common investment cost is a marketing cost. A marketing cost's fees help pay for marketing or distribution. Essentially, you are paying managers to promote a fund to other potential investors. This cost is specifically called a 12B-1 fee.
A common cost specific to IRAs are annual and custodian fees. These fees are small ($25–$90 a year), but they add up over time. Custodian fees apply to retirement accounts and cover costs associated with completing IRS reporting regulations. You can expect to pay between $10 and $50 per year in custodian fees.
Conclusion
In summary, 2023 is the year to start saving money for investing. You don’t need to set aside huge amounts in your investment savings account for it to be effective; a little goes a long way. As long as you follow the rule of thumb for budgeting (50/30/20), saving will become second nature to you. Remember to prioritize your investment goals, stick to a budget, and avoid splurging to ensure your investments remain on track. With these tips, you will be on your way to achieving financial stability and reaching your investment goals in 2023.