The absolute first thing that a new investor should do before investing a single penny is too build up an emergency savings account. This account should be equal to 6 months of after-tax income. I spoke of this in a previous article and you may want to jump back and read it.
The Simple Dollar recently posted an article that gives a key technique in building up a savings account. Simply go to a different bank then the one that you currently patronize and open a new savings account. Then, have your employer take 10% (or more) of your after-tax income and automatically deposit that money in your new savings account. You will be far less likely to spend this saved money if it is in a separate account in a separate bank.
As I have said before on this site and in my book, The Confident Investor, if you do not have an emergency fund to fall back on in hard times, you will always be nervous about your investment decisions. Eliminate this nervousness and you start to become a Confident Investor.
Check out the Simple Dollar article – it is worth your time.
Well said. I opened an online savings account that did the same thing (Automatic transfer). I was finally able to really start saving painlessly and now have that elusive “Rainy Day” fund that keeps growing. Plus interest rate though still not great easily beats the corner bank.
That is fantastic. In my opinion, automatic deductions from your paycheck that go into a different account are the absolute best way to save. Once you have your emergency fund established, you can start investing for college, house, car, or retirement.
Hello Sean,
Your tips are excellent and as a new, young investor still in college I would just like to say that I am deeply appreciated for the time you take out to inform/ educate a vast about finance. My question in regards to the post would be is there any recommendation to banks that would pay a good/decent interest for having a savings with that particular institution. I have looked at blue-chip banks and they don’t offer as much and internet based banks are just too risky. Thank you and enjoy your day.
Banks cannot afford to pay much in interest in this current market. This is because of the low cost of money available from the Federal Reserve. They are essentially getting that money from the Fed for free so they cannot pay you much more than zero.
You should only use your bank savings account for 2-3 months worth of bills. After that, you should be moving the money into an institution that will let you invest your money in the stock market.