Master Your Savings
You’ve evaluated your current spending, created budgets, and wrangled your debt. Now it’s time to talk about saving money! Saving money allows you to plan for your future; whether it’s purchasing a home, going on vacation, buying a car, retiring early, or paying for college, saving is the way to get there stress-free!
How to Start Saving
One way to help kick-start your saving habit is to take a long-term view of your finances. Think about your financial goals—are you saving for a down payment on a house that you hope to purchase in a few years? Do you want to take a nice vacation next year? Are you planning to retire early or start your own business? Are you thinking of starting a family? When you have financial goals in place, it is easier to save money and reduce your spending because any excess spending takes money away from your goals. For example, if I spend $534 on a shopping spree, but I’m also trying to save for a big vacation I want to take next year, I might think twice before making those purchases. Instead, I might allocate $150 for my shopping spree and put the remaining $384 into my vacation savings account. Thinking long-term encourages saving because you’re limiting your spending now for a specific financial goal.
To make saving easier, set up automatic transfers or direct deposits into a savings account. If you get your paycheck through direct deposit, distribute that deposit into both a checking account and a savings account (or even multiple savings accounts). You can make the deposit into your checking account fixed (use your monthly budget and add in any fixed costs for bills, rent, mortgage, etc.) and then have the remaining balance go into your savings account. As your paycheck increases over time, the same fixed amount will go into your checking account, but the amount into your savings will increase. This is a really easy way to increase the amount you save each year. If you don’t have the option of setting up direct deposits in this way, set up an automatic monthly transfer from your checking to your savings account for a percentage of your income. It is easier to save money when you never have access to it to spend it.
One very important part of saving is to create an emergency fund. If you have zero savings today, the first thing you should do is begin saving for your emergency fund. An emergency fund is a savings account that is easy to access and always has enough money in it to cover 6 months of expenses. This account is for unexpected emergencies. For example, if you lose your job, how much money will you need to keep a roof over your head and food on the table until you find another one? If you unexpectedly have to make a major home or car repair, you can use this account to pay for it. Once you have your emergency fund complete, then you can start other savings accounts for vacations or retirement.
Where to Put Savings
In terms of where to put money you’re saving, there are many different options. Broadly, they fall into the following categories:
• Savings Accounts—accounts at a traditional or online bank that have an interest rate; these accounts are easy to access, and money can be deposited or withdrawn at almost any time (there is a limit of six withdrawals per month from a savings account that has been set by the Federal Reserve).
• Certificate of Deposits (CDs)—accounts at a traditional or online bank that have a fixed interest rate over a fixed term; money is deposited into these accounts for a certain period (for example, three years), and during this time, the money cannot be taken out without forfeiting interest and/or paying a penalty.
• Investment Accounts—accounts that are used to invest in bonds or the stock market; money in these accounts can usually be deposited or withdrawn at any time, but it might take a few days to process transactions, and they are riskier than savings accounts or CDs since there is no guaranteed return/interest rate. This option should be used for long-term saving such as retirement.
Tomorrow we’re going to discuss how to make smart purchases!
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