Build a Savings Plan

It’s a fair question, especially if you’re on a tight budget. After all, isn’t money meant to be spent on things you need? The fact is that putting your money into savings provides several benefits that will help you achieve financial success:

• Financial security: If you have some money saved up, an emergency won’t financially devastate you. No one enjoys being in an emergency, like getting into a car accident or going to the hospital, but if you do having some money in savings allows you to keep paying your bills on time.
• Take advantage of opportunities: When you have some money in your savings account, you can take advantage of an unexpected opportunity. If you’ve been thinking about flying to Hawaii for a vacation, for instance, you can keep an eye out for any bargains that come your way and use your savings to get the best price as soon as it becomes available.
• Cut back on reckless spending: When you put money into a savings account, it’s money you can’t spend immediately. This means you have to be more careful with the rest of your money. While this might worry some people, the reality is that cutting down on random purchases actually frees up money for you to spend on the things you really want.
• Rely less on credit: Any time you take out a loan, you’re not just paying back the money you borrowed—you’re also paying back the interest on that money as well. When you use money you have saved to make a down payment, though, you can reduce the amount you have to borrow, if not eliminate it entirely. As an added bonus, you can put the money you’re not paying in interest back into your savings.
• Generates interest: Any money in a savings account generates interest, and while you’ll never get rich from it, you’ll actually start to have your money working for you. Even better, once you’ve put aside a sufficient emergency fund you can start putting your money in investment vehicles that give you a higher interest rate, like a certificate of deposit, an IRA or even the stock market.
• Protects your assets: If you do need money for an emergency, you can retrieve it from a savings account much faster than you could if you had to sell an asset, like your house or your car, or reach into your retirement fund. It’s also worth pointing out that if you do need to withdraw money from a savings account you won’t be penalized, whereas you will get hit with a stiff penalty if you need to, say, dip into your IRA.

This is one of the most common questions people have when they’re starting to save. They want to know how much should be in their emergency fund in order to make them financially secure.

Most financial experts recommend having at least $500 in an emergency savings account, which will help you cover most small emergencies. In order to be truly ready for an emergency, though, you should have between three to six months’ salary set aside. This will get you through almost every serious emergency, including if you lose your job.

Once you have between three to six months of salary saved, you can start to use your savings account to plan for larger purchases, such as a car, a house, your child’s college fund and, of course, retirement. How much you need to save for these goals depends, but the more money you can save upfont, the less you’ll have to take out in loans, which will save you money.

When you decide to start saving, the first thing you’ll notice is that several financial institutions offer several different types of savings accounts. So how do you figure out what savings account is best for you?

In order to answer that question, you need to know the most common features of savings accounts:

• Minimum Opening Deposit—How much money you need to open the account in the first place.
• Minimum Balance Requirement—How much money the financial institution requires you to keep in your account at all times. If you go below the minimum balance requirement, expect to get charged a monthly fee.
• Monthly Service Fee—Some financial institutions charge you a certain amount each month for the privilege of maintaining a savings account with them. One of your first questions should be, “Do your savings accounts have monthly fees?” If the answer is yes, avoid that financial institution, since you can easily find savings accounts that don’t charge a monthly fee.
• Interest Rates—The interest rate determines how much money you’ll get each month from a financial institution based on how much money is in your bank account. In general, the higher the interest rate, the better, so it’s worth searching for the best savings account rates.
• Online Account to Account Transfers—In the Internet Age, savings account should offer online transfers between accounts as a basic feature that you can access through a financial institution’s online banking platform, as well as it’s mobile app.
• Mobile Check Deposit—Many financial institutions now let you deposit a check into your savings account using their mobile app. All you have to do is take a picture of the check with your smartphone or tablet and the app will automatically send it to your savings account.
• Easy Account Access—Finally, make sure your savings account lets you easily withdraw the money you put into it. This is especially important if you’re selecting a savings account in which to store your emergency fund.
• Federally Insured up to $250,000—All savings accounts are federally insured up to $250,000 per depositor. The Federal Deposit Insurance Corporation (FDIC) insures all bank accounts, while the National Credit Union Association (NCUA) covers all credit union accounts. 

Types of Savings Accounts

Once you know the common features of savings accounts, you can start to look at the types of savings accounts financial institutions have to offer.

• Traditional savings accounts—This is an excellent option for someone starting to save. There are a lot of benefits of a traditional savings account, including that it’s the easiest type of account to open and provides easy access to your money when you need it.
• Jumbo savings accounts—This is what some financial institutions call a savings account that has over $100,000, and they may pay a higher interest rate on these accounts.
• Money market accounts---Also known as a high yield savings account, money market accounts have a high minimum opening deposit of around $2,000 and a minimum balance requirement. In return, you’ll get a higher interest rate that you would from a traditional savings account. (It’s worth pointing out that credit union interest rates vs banks are usually higher.)
• Joint savings accounts—If you have a spouse or other long-term partner, you can open one of these accounts with them. Since the account is owned by at least two people, the NCUA and FDIC multiply the insurance limit by the number of people in the account, making joint savings accounts ideal if you’re saving for a big purchase.
• Club accounts—Club accounts have a higher interest rate than traditional savings accounts, but you won’t be able to access the money you put in them until a specific date. This is an ideal way to save for a financial goal like Christmas shopping or a summer vacation.
• Prize-linked savings accounts—These accounts give you the chance to win rewards if you reach certain financial goals. If you need a savings account with incentives to save money, a prize-linked savings account can really help. However, you should make sure that the interest rate on the account is still competitive with a traditional savings account.
• Specialty savings accounts—An account designed for specific savings goals or specific groups of people is a specialty savings account. This includes health savings accounts, college savings plans and even children’s savings plans. These types of accounts can have many different advantages, including tax-deductible contributions, tax-deductible withdrawals, or lower minimum balances.

With all these types of savings accounts available, it’s understandable if you ask, “How many savings accounts should I have?” There’s no one answer that works for everyone, but a good rule of thumb is that you want to have as few as you can manage.

If you’re thinking about opening a new savings account, ask yourself why you’re opening this type of account and what you’d like it to do for you. If you’d like to open a money market account, for instance, ask “What are high yield savings accounts like money market accounts going to do for me that a traditional savings account won’t?”

At this point, you know why you should save and what you should look for in a savings account. Now all you have to do is start saving money. Here are some easy ways to get yourself into the habit:

Look at Your Budget

Your first step should be to look at your budget. If it shows you have money left at the end of each month, put that money into your savings account.

If there isn’t a lot of wiggle room in your budget, don’t worry. Even if you can only save $25 a month, it’s still a step in the right direction as long as you’re consistent.

Save 10%

Once you’ve gotten used to regularly putting money from your paycheck into savings, it’s time to take things to the next level. When financial experts get asked “How much money should I save each month?” they usually say that putting 10% of each paycheck into your savings is a good start.

For most people, living on 90% of their paycheck won’t be an issue. If money is tight, however, you might have a harder time figuring out where that 10% will come from. Here are some ways to save money on a tight budget:

• Make your own meals instead of eating out
• Make a list before you go shopping and stick to it
• Repair clothing instead of tossing it
• Switch to generic brands
• Shop at thrift stores
• Cancel unused subscription memberships
• Wait 30 days before buying an item you don’t need
• Renegotiate your bills

Once you’re comfortable saving 10% of your paycheck, try to increase the amount you put into savings gradually. If you can save at least 15% of each paycheck, you’re doing pretty well.

Automate Your Savings

If you can divert a certain amount of each paycheck from your checking to your savings with an automatic savings account transfer through direct deposit, saving money regularly will be much easier. This can also take away the mental roadblock of having to personally remove the money from your checking account.

Add Windfalls to Your Savings

If you happen to get a windfall ranging from birthday money to a larger-than-expected refund thanks to using some effective tax savings strategies, put it all in your savings account. This will not only build up your savings, it will also reduce the possibility of using that windfall for an impulse buy and let you focus on using it for a financial goal that’s actually important to you.

Gamify Your Savings With a Prize-Linked Savings Account

One popular trend to help you develop a habit is “gamification,” which is basically making a game out of a task in order to encourage people to stick with it. You can use this to help you make a habit of saving money if you use a rewards savings account. Since rewards savings accounts give you the chance to win prizes if you reach certain financial goals, you’re more likely to put aside money to reach them—and once you’ve built up the habit of saving, you’ll be more likely to stick with it even if you move away from the prize-linked savings account.

After you’ve been saving for a few months, you’ll realize you’ve acquired a decent nest egg. Now it’s time to figure out what to do with that money sitting in the bank.

Create an Emergency Fund

When most adults start saving, they want to know how to start an emergency fund that will get them through a crisis. While a traditional savings account is the best place to start building an emergency fund, after you’ve saved at least $2,000 you should open a money market account specifically for your emergency fund money. That way, your money can earn a higher amount of interest but it will still be accessible to you if you need it.

Save for Financial Goals

Once you have at least three months of salary in your emergency fund, you should start thinking about your financial goals. If you’re having trouble coming up with some financial goals, take some time and think about what your life goals are and how you can achieve them. You might want to buy a nice house, get a new car, pay for your child’s education or save up enough money to retire comfortably.

Write down your goals, and then sort them based on how long they might take to achieve. Short-term goals are goals you could expect to achieve in the next five years or so. Medium-term goals are ones you might be able to accomplish them in 10 years, and any goals that will take longer than 10 years to achieve are long-term goals.

Saving for Short-Term Goals

If you’re saving for a short-term goal, a traditional savings account is your best bet. However, once you have $2,000 saved toward your goal you should start looking for a money market account. You’ll be able to take advantage of the higher interest rate, yet still have easy access to your money when the right opportunity comes along.

Saving for Medium- and Long-Term Goals

Planning for these kinds of goals requires you to take a step out from the comfort zone of savings accounts and into the world of investments. While the two concepts are similar, there’s a significant difference between saving and investing. The biggest difference is that investing your money has a lot more potential for profit, but you also can’t access your money as easily as you would with a savings account.

Investing is too large a topic to cover in depth here, but in general you’ll want to look at safe investments that can also provide a high rate of return. Here are some potential investment options:

• Certificates of Deposit (CDs): Most financial institutions offer these savings account alternatives. When you deposit money into this account, you commit to keep it there for anywhere from a month to a few years. In return, you earn a higher interest rate than you would if you kept your money in a savings account.
• Index funds: These funds mirror the performance of stock market indexes such as the Dow and the S&P 500.
• Mutual funds: These funds pool the money from a large group of investors and use it to invest in stocks, bonds and options. These funds can be safe, but you will have to pay a fee to the person or team in charge of managing the mutual fund for as long as you’re part of it.
• IRAs and 401(k)s: These programs are specifically set up to help investors with retirement. They all offer tax breaks of some kind, and employers might even match contributions to your 401(k), in essence giving your money to save.