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Saving money is a vital step on the road to financial success. Unfortunately, it’s a step many people avoid. They believe they don’t make enough money to save, or that they have so many expenses they can’t set any money aside.
The truth, however, is that when you know the best ways to save money and earn interest, you’ll be able to put money in your savings without having to sacrifice in other areas. Even better, you can parlay your savings into a nest egg that will bolster your financial security and help you achieve your financial goals.
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:
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:
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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
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.
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:
When you become a member of First Alliance Credit Union, you automatically get a traditional savings account in which you can start direct depositing part of your paycheck. You can also take advantage of all our savings accounts and even invest money with us when you start saving for a long-term goal.
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