How To Save and Invest the Clark Howard Way

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Money expert Clark Howard is giving you his 10-step guide to saving and investing for free, all in one place: right here!

Follow these rules, and you’ll be much more likely to gain financial security in your life.


Table of Contents

  1. Live on Less Money Than You Make.
  2. Be a Saver Before You Become an Investor.
  3. Make Investing for Retirement Your Highest Priority.
  4. Enroll in Your Company’s Retirement Plan.
  5. Start a Roth IRA if You Don’t Have Access to a Company Retirement Plan.
  6. Put Your Money in a Target Date Fund.
  7. Automate Your Investment Contributions.
  8. Increase the Amount of Money You’re Investing Over Time.
  9. Don’t Change Your Investment Plan Due to Big Swings in the Market.
  10. Set Aside Any Extra Cash.

Clark Howard gives free advice via his steps to saving and investing.
Clark.com

1. Live on Less Money Than You Make.

Many people live paycheck to paycheck. That can make it extremely challenging when unexpected financial hiccups occur. That’s a stressful place to be.

It’s important to create a surplus by finding a way to make more money than you’re spending.

“I want you to really think through the fact that the key to having financial security in your life is living on less than what you make,” Clark says.

Think that’s an impossible goal? It can be tough to get started, but here’s some help. (Hint: It all starts with making a budget. It’s difficult to save money if you don’t know where your money is going in the first place.)


2. Be a Saver Before You Become an Investor.

You can lose some or all of the dollars you invest. But when you save, you aren’t putting your money at risk.

Clark strongly recommends that you start by saving an “oops” fund, also called an emergency or rainy day fund. If you’re starting from nothing, open a savings account at an online bank or credit union that requires only a small minimum (or even zero) deposit. Even if you can contribute only $10 per pay period, start there and allow that money to build over time.

“If you get really ambitious with having emergency funds, the standard book answer is that you save six months of living costs: what it would cost you if you had no pay at all coming in for six months,” Clark says.

He acknowledges that six months’ pay can seem like an unreachable savings goal, so much so that many people feel overwhelmed and just give up.

“Don’t feel that you need to save that amount tomorrow,” Clark says. “Start where you can and just develop the habit of saving first; then worry about getting to six months.”

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If you’re a high-income earner, look at using a tax-free money market fund (a municipal money market fund) instead of an online savings account. A savings account could force you to pay federal taxes as high as 37% on the interest you earn. Municipal money market funds are exempt from taxes.


3. Make Investing for Retirement Your Highest Priority.

Once you’ve protected yourself against emergencies with some savings, start investing for your retirement.

It can be tempting to postpone the delayed gratification of retirement investing and spend your money on other things, but it’s important to be disciplined.

“The highest priority is to save for your own retirement. The highest priority,” Clark says.

How to invest for retirement can be a daunting prospect, but Clark’s tips below show you the easiest path.


4. Enroll in Your Company’s Retirement Plan.

If you’re an employee, talk to the appropriate person at your company about enrolling in the retirement plan. This simple step can set the financial foundation for the rest of your life.

“Investing can seem so complicated that you might shut down and do nothing about it — or feel you need to hire someone to guide you,” Clark says. “However, it doesn’t need to be complex. You probably already have the opportunity to get started right where you work.”

The most common type of company retirement plan is a 401(k).

Many companies offer “matches,” giving you even more incentive to fund your retirement plan. A “match” is money your company adds to your 401(k) plan based on your own contribution. The most common company match is 50 cents for every dollar you contribute, up to 6% of your annual salary.

Clark’s advice is to always contribute enough to get the full company match because that’s free money.

Employees can contribute up to $19,500 to their 401(k) plans for 2021. Anyone 50 or older can add an additional $6,500 in catch-up contributions.

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5. Start a Roth IRA if You Don’t Have Access to a Company Retirement Plan.

If you don’t have the option to join a company retirement plan, don’t worry. There’s an alternative:  an Individual Retirement Account (IRA).

Clark prefers a Roth IRA to a traditional IRA for most people.

With a Roth IRA, you contribute after-tax dollars. But your money grows tax-free, and you can withdraw it without owing any taxes during your retirement years.

With a traditional IRA, you contribute pre-tax dollars (these dollars don’t count toward your taxable income). Your money grows tax-deferred, but you’ll pay taxes on it when you withdraw it during your retirement years.

If you’re over age 40 and you earn a big paycheck, Clark recommends a traditional 401(k) so you can get the upfront tax benefit. You’ll likely have a lower income tax rate during retirement. So even though it’s safe to say taxes will rise in the future, you’ll still probably end up saving money.

No matter your age, if you’re not a big income earner, Clark recommends a Roth IRA.

So where do you get an IRA? Click here to learn Clark’s recommendations. “For IRAs, you get to pick where you invest your money. And I want you only in low-cost providers,” Clark says. “What that means is you pay no commissions for the money you put in, and the management fee for managing your money is tiny each year.”

He adds, “The greatest indicator of how much money you’re going to have down the road is strictly how much you paid in management fees.”


6. Put Your Money in a Target Date Fund.

Now that you’ve set up your 401(k) and/or your IRA and have started contributing to them, make sure to put that money to work.

You’ll have choices for how to invest the money. Clark recommends a target date fund as a simple, smart investment solution.

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“Just pick the year closest to when you think you’re going to retire, and slap all the money you’re saving into that choice,” Clark says. “You don’t have to do a thing other than invest your money. It’s the ultimate in ‘set it and forget it’ investing — and could be the best and easiest investment choice you ever make.

Target date funds automatically rebalance your portfolio with the proper mixture of investments based on how many years you are away from retirement. When you’re young, retirement fund administrators will invest heavily in stocks. When you’re older, they’ll reduce your exposure to stocks, hopefully leaving enough in your portfolio so that your returns outrun inflation.


7. Automate Your Investment Contributions.

The beauty of company-sponsored retirement plans is that, when you set up the account, you can have your contributions automatically deducted from your paycheck.

Automated investing prevents you from spending money that you should be investing. It also aligns with Clark’s “set it and forget it” strategy that is by far the easiest to maintain.


8. Increase the Amount of Money You’re Investing Over Time.

Clark understands that, if you think about how much money you need to save for retirement or even for your emergency fund, it’s easy to get overwhelmed. That’s why he recommends getting started in whatever way you can.

At this point, hopefully your contributions are automated, either coming out of your paycheck and going into your company 401(k) or automatically getting transferred into your Roth IRA at regular intervals. Put it on automatic pilot.

“Don’t blow your mind about how much money you have to save. Instead, tackle it one paycheck at a time, one monthly contribution at a time,” Clark says. If you’ve established a good emergency fund and have automated your retirement contributions, by now you’re probably getting used to not spending that money and to the satisfaction of seeing it grow.

At this point, Clark says you should take the next step. “Every six months, I want you to increase your contributions by one cent for every dollar you earn. You’re not going to miss that one additional cent, but you’ll steadily increase the amount of money you’re putting aside for your future. And you’ll be living on less than what you make.”

In order to have comfort in your retirement, Clark recommends saving a dime for every dollar you make if you start investing in your 20s.

“If you’re not putting that dime in, you’re not going to have saved enough money. If you start in your 30s, you’ve got to do more than a dime, and 40s more than that, and on like that. So no one can go from nothing to a huge amount. And I mentioned earlier, you start putting in what you put in and then step it up every six months.”

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9. Don’t Change Your Investment Plan Due to Big Swings in the Market.

Once you’ve gotten this far, your biggest enemy is the temptation to wander off the path.

For some people, that happens when the market crashes. Clark recommends avoiding any sudden, large shifts in your investments (buying or selling).

“Markets always go up and down, up and down, up and down,” Clark says. “This is not a time to jump in — or jump out — of the market, especially when you’re young. This is absolutely the circumstance where you put money in once a month or once every pay period and leave it alone.”


10. Set Aside Any Extra Cash.

If you’ve reached step 10 in your life, congratulations. You’re on your way to building wealth.

If you have fully funded your retirement plan at work, set up an IRA as well (again, Clark recommends Roth IRAs for most people). Start to make automatic contributions to your IRA in a target retirement fund just as you’re doing at your company 401(k) or equivalent plan.

And if you have more income after that?

“Think about the priorities in your life,” Clark says. “Maybe you want to buy a home. Maybe you’re trying to save up money to buy a car for cash instead of with a loan. Maybe you’re trying to strengthen your rainy day account.”

You can set a monetary goal for each of your priorities and open separate savings accounts for each goal. There are also online savings accounts that allow you to separate your funds into buckets for different goals. Again, Clark likes online banks or credit unions for savings, as you’ll earn more interest than at a traditional bank.

“It’s all about you thinking, what are the goals you want to achieve in your life,” Clark says. “And then setting aside money to make those goals happen.”


Final Thoughts

Your personal income, age, goals and values are unique. But sound saving and investing principles apply to everyone.

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The good news is that Clark’s saving and investing advice is simple to follow. It also helps take away the stress you may have about money, because you can follow this plan and achieve financial freedom.

“The goal of these steps, if you’ll follow them, is for you to have financial security in your life,” Clark says. “I want you to lower the level of anxiety you feel about money and instead increase the amount of financial security you have. I want you to win.”


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