However, higher-returning stocks or even a bond fund may prove too volatile.
“Establish a budget and have a portion of your paycheck sent automatically to the separate saving account,” Houck says.
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Buying a home
Purchasing a home opens up a world of possibilities — and expenses. Most lenders ask for a down payment of at least 3%. And that’s before you make the first mortgage payment.
When saving for a house, start looking for extra money wherever you can.
“If you receive money from your wedding, then consider parking this money in an FDIC-insured bank account for a home down payment,” Houck says.
As with any major money decision, you need to weigh saving for a home against your other financial goals, says Bob Burger, founder of Disciplined Money in Phoenix.
Burger says he recently performed financial reviews for 3 young adult siblings. “None of them had much saved and, actually, all had debt,” he says.
In light of their circumstances, Burger urged each of the siblings to prioritize goals.
“They had to balance the trade-off of leaving money in a low-interest account because it was earmarked for a house purchase with potentially missing out on higher market returns,” he says.
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Saving for a child’s college tuition
There are many ways to save for college, including 529 plans, Coverdell education savings accounts and even savings bonds.
Bankrate’s college calculator can help you figure out how much you will need to save each month if you hope to cover post-secondary school costs once Junior turns 18.
Houck says it may be wise to avoid putting too many eggs in the college savings basket. “I would not fully fund a 529 plan,” he says.
That’s because your child may get scholarships or other financial aid that helps pay tuition costs. Houck suggests leaving yourself some wiggle room by saving for around 75% of your child’s expected college costs.
One strategy: You can save for your child’s college expenses by investing in your own Roth IRA, Schmansky says. Although earnings are subject to early withdrawal penalties, Roth IRA contributions can be withdrawn penalty-free.
“A contribution of $5,500 per year for 18 years can make a large dent in a college tuition,” he says.
And if Junior decides not to go to college, you still have the money for your own retirement, Schmansky says.
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In many ways, saving for retirement is the biggest and most important financial goal of all.
Schmansky says far too many people of all ages make saving for retirement more difficult than necessary by failing to divert enough of their paycheck into their 401(k) to get the full employer match.
“The matching funds are free money,” he says. “It is almost always a good idea to make sure to prioritize getting the maximum match.”
Also, take the time to learn about the options offered by your 401(k) plan. Schmansky says some plans allow participants to contribute on an after-tax basis above the normal contribution limits.
Schmansky says such an option allows workers to later roll the money into a Roth IRA and to enjoy tax-free growth “rather than accumulating excess funds in taxable accounts, which will generate taxes on dividends, interest and growth over time.”