Want to hear something scary? Almost 70% of all Americans have less than $1,000 in savings.
Even worse, 34% of all Americans have no savings whatsoever.
That means most of us are living paycheck to paycheck.
A medical emergency or auto accident would bankrupt most of us.
So why don’t more people put money in their savings accounts?
According to this Bankrate survey, almost 40% of people said they couldn’t save because they had too many expenses. Other people said that their job “wasn’t good enough” for them to start saving money, and other people were too worried about paying off debt to start saving. Still other people just haven’t gotten around to it yet.
These are all understandable reasons. If you feel like most of your paycheck has to go to bills or paying off credit card debt, you’re not going to want to have even less money to get you through the next couple of weeks.
Also, let’s be honest—saving money is a chore, like eating vegetables or cleaning the bathroom. It’s more fun to be able to spend your money on something fun than it is putting aside the recommended amount week after week.
What most people don’t realize is that saving money isn’t a sacrifice, and that you don’t need to be Warren Buffet to parlay your savings into a nest egg that will set you firmly on the path to financial security.
Why should I save money? It’s a fair question. Sometimes saving any money seems like a pipe dream, especially if you’re already on a tight budget. However, putting money into savings has several benefits.
Let's take a closer look at each of these benefits of saving money to help you better understand the importance of saving money.
The most obvious benefit of saving money is the financial security you gain. If you have some money saved up, an emergency won’t financially devastate you. No one wants to get into a car accident or go to the emergency room, but when those emergencies happen, having some money set aside to deal with them will let you afford to keep paying your other bills and help stop all your accounts from falling into the hands of collections companies.
Having money in a savings account won’t just help you be prepared for sudden emergencies, though. Another benefit of saving money is that it can help you take advantage of unexpected opportunities, too.
For instance, let’s say you’ve been thinking about flying out to Los Angeles for a vacation in four months. If you have money in your savings account, you can keep an eye out for any bargains that come your way and make sure you’re getting the best price.
If you have nothing in savings, on the other hand, you’ll need to start saving immediately. You’ll pass up a lot of opportunities and have to buy the ticket closer to your deadline, at a much higher price than you would have otherwise.
An additional benefit of having money in a savings account is that it can also help you cut back on reckless spending. One of the fears people have about saving money is that they won’t be able to access it when they need to. Strictly speaking, they have a point, but in reality what having money in a savings account does is force you to prioritize what you really want.
If you put, say, $100 into your savings account each paycheck, you’re not going to take that $100 out of necessary expenses, like rent, utilities, food or loan payments. Instead, it’s going to cut into the funds you set aside for entertainment, clothing or miscellaneous expenses, and that’s going to make you think about any purchases you make in those areas. Interestingly enough, cutting down on random purchases in these areas will actually free up more money for you to spend on things you really want.
Another good reason to have money in a savings account is that it will help you 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, which can amount to hundreds if not thousands of dollars more.
When you use money you have stored up in savings to make a down payment, you can reduce the amount you owe, if not eliminate it entirely—and you can put the money you’re not paying in interest back into your saving
Saving money is a crucial first step towards making your money work for you.
Saving money is also a crucial first step in making your money work for you. Putting your money in a savings account generates interest, and while you’ll never get rich from it, you will actually start to have your money working for you. Even better, once you’ve established good saving habits and put aside a sufficient emergency fund, you can start putting your money in investment vehicles that give you a higher rate of return, like a certificate of deposit, an IRA or even the stock market.
Finally, having money in a savings account can also protect 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 (i.e. your house or car) or reach into an investment fund. It’s also worth pointing out that you won’t be penalized if you need to withdraw money from a savings account, whereas you will get hit with a stiff penalty if you need to, say, dip into an IRA.
Before we start talking in-depth about the best ways to start saving money, we need to cover one more important topic—the difference between saving and investing.
On the surface, it seems like a simple distinction. Ask almost anyone if they know if there’s a difference between saving and investing and they’ll say yes. If you ask if they know what the difference is, though, you’ll get a lot less positive answers.
This is understandable. After all, the concepts of saving and investing both stem from the idea of setting aside some money in the present in order to increase your financial security in the future. To make matters even more confusing, both savings and investments offer interest on the money you set aside.
They’re not the same, though. When you save, you’re putting money aside in a secure location, usually a financial institution, until you need it later. It’s worth noting that part of what makes financial institutions like credit unions and banks so secure is that every bank is insured by the FDIC and every credit union is federally insured by the NCUA up to $250,000.
When people put money into a savings account, they’re usually setting it aside in case of an emergency. They may also be saving for a short-term goal, like putting a down payment on a house or an automobile.
When you invest money, on the other hand, you’re trying to reach bigger financial goals that are at least four to five years in the future. These goals can be something like saving for your child’s college fund or saving for retirement.
Investing money has a lot more potential for profit than putting your money in a savings account. For instance, if you put your money into an index fund, you can expect your money to earn anywhere from 5% to 9% a year, and that’s without taking compound interest into account. Compare that to the interest rates of savings accounts, which usually hover around a fraction of a percent.
Knowing whether to save or invest your money is key to achieving your financial goals.
The trade-off, of course, is that investing money also involves risk. The stock market may crash, businesses may go under and even real estate can be devalued. If that happens, you’ll end up losing money.
One other difference between savings and investing is how easily you can access your money. You can access money in a savings account almost immediately, but if you want to take money out of an investment account you’ll have to make sure the right forms have been filled out and processed first.
Knowing whether to save or invest your money is key to achieving your financial goals. If you’re just starting out, though, you’ll want to focus on saving money until you have a good emergency fund set up.
One of the biggest hurdles to overcome when you first decide to start a savings account is figuring out just where the money will come from. This is especially difficult if you have debts to pay off. Should you be putting money aside in savings to be used later when it could be used to pay down your debt faster instead?
Unfortunately there’s no answer that applies to everyone, and ideally you should be both paying down your debts and adding to your savings at the same time. However, there are some guidelines you can use when deciding whether to save money or pay down debts.
First, always pay off the minimum balance of debt. If you don’t make at least the required payments, you’re inviting financial mayhem.
If you’re not paying at least your minimum payment, at best you can expect to be charged late fees, which may be substantial. At worst, you may trigger penalty interest rates that are much higher than the original rate. Your credit score may also be lowered, which will make getting another loan a lot harder, if not impossible. You might even lose your house or your car if you don’t make payments on those loans.
Second, make paying down high-interest debt a priority. This type of debt could cost you a lot of money if you let it linger. The most obvious example of this is credit cards, which usually have interest rates in the double digits.
Low-interest loans, on the other hand, were designed to be paid off gradually over time. If you can make the minimum payments on those, you might want to consider putting more of your money in a savings account rather than aggressively paying down these types of debts.
Finally, if you don’t have a lot of money saved up, you should make saving a priority. The minimum amount you should have in savings is $500, so if you have less than that you’ll want to prioritize saving money until you reach that threshold.
This is one of the most common questions people have when they’re starting to save. How much is enough?
As we mentioned before, most financial experts recommend having at least $500 in your savings account. That amount should get you through emergencies ranging from an emergency tow to paying a small doctor bill.
However, it’s important to remember that $500 is the minimum amount you should have. In order to be truly ready for an emergency, you should try to have between three and 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 your current 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 important life events will depend upon your personal goals. However, know that the more you can save up front, the less you will have to take out in loans in the future, which saves you money in the long term.
When you decide to start saving, the first thing you’ll notice is that there are several financial institutions ready and waiting to take your money. Some will even promise you a toaster if you open an account with them! Of course, you should not be opening a savings account because you need a new toaster, or a radio or duffel bag. You’re looking for the best savings account. The only problem is, how do you know what makes one savings account better than the other?
Fortunately, you can compare savings accounts. Before you can do that, though, you need to know what the features of a savings account are.
Let's take a closer look at each of these savings account features to help you understand why each of these are important to pay attention to when comparing the best savings accounts for you.
The first standard feature of a savings account is its minimum opening deposit. This is the amount you have to have available to even open the account. In general, savings accounts with a low or no minimum opening deposit is best, since it lets you open your savings account more easily.
Closely related to the minimum opening deposit is the minimum balance requirement. As you might expect, this is the minimum balance a financial institution will require you to keep in your savings account at all times. If you go below the minimum balance requirement, expect to get charged a monthly fee.
Needless to say, you should avoid a savings account with a minimum balance requirement. If you have to withdraw money from your emergency fund, you don’t need the threat of a monthly fee hanging over your head as well.
Another savings account feature you’ll want to avoid is the monthly service fee. This is a fee financial institutions charge you to have a savings account. You’ll want to stay away from any savings account that charges a monthly service fee, especially when so many savings accounts without a monthly service fee are available.
The interest rate is the one feature that most financial institutions advertise. It’s the money you get each month from the financial institution in return for you keeping your money in a savings account. How much you get is a small percentage, often not even a full percent, of the money you have in the financial institution.
In general, the higher the interest rate on a savings account, the better. However, you will want to make sure that a savings account with a high interest rate doesn’t also have a monthly service fee or minimum balance with a penalty fee. Either one of those can erase the benefit of a high interest rate on a savings account.
Since we’re in the 21st century, a savings account should offer online transfers between accounts as a basic feature. Online banking in general lets you manage your money no matter where you are, and being able to transfer money between your accounts online makes moving money into (or out of) your savings account painless.
Another savings account feature you’ll want to look for is an automatic savings transfer. This feature works in conjunction with direct deposit, and it lets you automatically transfer a portion of your paycheck into your savings account. This way, you’ll never miss the money you’re putting into savings.
While we’re talking about digital savings account features, one nice option is being able to make mobile check deposits directly into your savings account. This feature lets you deposit your checks by taking a picture of them with your smartphone or tablet and automatically sends it to your financial institution. It’s much more convenient than having to go to a brick and mortar branch of a financial institution.
Finally, you’ll want to make sure the savings account you select lets you easily withdraw your money. Being able to withdraw your money when you need it is just a matter of common sense. As we previously discussed, you want to be able to access money in your savings account when you need it, so a financial institution that won’t let you do this is pretty much useless.
Ideally, you would also want no limitations on the number or method of transactions, but thanks to Regulation D of the Federal Reserve Board, you’re limited to six transactions per month. Having said that, you’ll want to investigate what, if any, penalties a financial institution will levy on you.
Some banks may charge you an excessive use fee that ranges between $2 and $15, while others may make a note how many times you exceed the limit and penalize you for repeated violations. Still others may just close your savings account altogether or change it into a checking account. Perhaps the best way a financial institution can deal with an excessive number of withdrawals from a savings account is to simply decline the transaction.
It’s worth noting that Regulation D does not limit the number of transactions you make in person or by an ATM. So if you need to dip into your savings often, those options are open to you.
Finally, all savings accounts are federally insured up to $250,000 per depositor. This means that if anything happens to the financial institution in which you keep your money, you can rest assured that the federal government will reimburse you. The Federal Deposit Insurance Corporation (FDIC) insures all bank accounts, while the National Credit Union Association (NCUA) covers all credit union accounts.
Once you know about the features common to savings accounts, you can start to look at the types of savings accounts financial institutions offer.
While a basic savings account is a fine option, especially for someone new to savings, knowing the different types of savings accounts can help you select the one most suitable for you.
Let's explore each of these types of savings account option in a little more detail to help you understand the best option to help your reach your financial goals.
The first two types of savings accounts are actually variations of the basic savings account. The jumbo savings account and the high interest savings account both pay a higher interest rate than the basic savings account.
A jumbo savings account is what some financial institutions call a savings account with a deposit of over $100,000, and they may pay a higher interest rate on these accounts. A high interest savings account is similar to a jumbo savings account, although they usually require a high minimum opening deposit to begin. If you meet the minimum deposit, though, you can expect to get a relatively high interest rate, usually over 2%.
Another type of savings account with a higher interest rate than a basic savings account is a money market account. You’ll also usually have easier access to your money, including being able to write checks against the account and accessing the funds with a debit card. This kind of account also has a high minimum opening deposit, around $2,000+, as well as minimum balance requirements.
If you have a spouse or other long-term partner, you can get a joint savings account with them. These accounts are just like a basic savings account, but since it is owned by at least two people, the NCUA and FDIC multiply the insurance limit of the account by the number of people in the account. This makes this type of account ideal if you would like to save up for big purchases, like a down payment on a nice house.
If you’re saving with a specific goal in mind, like a vacation trip or Christmas shopping, you might want to open up a club account. Club accounts have a higher interest rate than a basic savings account, and they have a specific date when the balance and dividends are transferred to your checking or savings account in order to help you with your goal. This is an ideal way to save throughout the year.
A rewards savings account, like First Alliance Credit Union's WINcentive account, gives you the chance to win rewards if you reach certain financial goals. In the case of WINcentive Savings, for every $25 month-over-month increase in your balance, you get one entry into a monthly, quarterly and annual state prize.
If you need a general incentive to save money, rewards savings accounts can really help. You can even use any rewards you win to further reach your savings goals. However, you’ll want to make sure that the interest rate on the savings account is competitive with a basic savings account.
A Health Savings Account (HSA) can help take the sting out of going to the doctor. Any contributions you make to these accounts are tax-deductible, and you pay no tax as long as you use the money for a qualifying medical expense. The only requirement for getting into one of these accounts is that you have to be enrolled in a health plan with a high deductible.
Children, teens and young adults can also find savings accounts created with them in mind. Youth and teen savings accounts usually have more flexible terms than a basic savings account, such as a lower minimum balance requirement. Opening an account for your child is also a great way to begin helping them learn the value of saving at a young age.
College savings accounts, also known as 529 plans, are used to pay for higher education expenses, such as tuition, room and board, books and other materials. Deposits to the account are not tax deductible (consult your tax advisor), but withdrawals are as long as they are used for qualifying education expenses.
A savings account is one of the best ways to save money, but it isn’t the only way. You can put your money in several other types of savings vehicles that are similar to the savings account discussed above, but have one or two significant differences.
In some ways these types of accounts are closer to investments than a typical savings account. Let's take a closer look at each of these alternative savings accounts to help you understand when they might be most beneficial to you.
A Certificate of Deposit, also known as a CD, starts to blur the line between savings and investing. You deposit money into this account, and then commit to keep it in 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.
When you put your money into a CD, you can’t take it out whenever you need it. If you absolutely need to get it you can, but you’ll usually end up paying a penalty.
An Individual Retirement Account, also known as an IRA, will let you put up to $5,500 a year in a savings account you can use to fund your retirement. This money is tax free, although when you start withdrawing the money it will be subject to standard income taxes. You will also pay a penalty if you withdraw any money in your IRA before you are 59 ½ of 10% plus the standard income tax rate.
A Roth IRA is similar to a traditional IRA, except that the contributions are not tax-deductible. However, the amount you withdraw isn’t taxable. Depending on how you invest that money, this can be a huge benefit.
You’ve probably heard of a 401(k) retirement plan. This is a plan sponsored by employers that let you put aside a portion of your income for tax savings. The employer may match some of your contribution in these plans, and if they do you should contribute up to their matching limit. You’re throwing away free money if you don’t.
Anything you earn with money in a 401(k) plan can grow as tax-free savings, although the money you withdraw is subject to standard income taxes. Like an IRA, withdrawing any money before age 59 ½ will incur a 10% penalty.
One of the safest type of savings is the U.S. Savings Bond. You have to be a United States citizen to buy a U.S. Savings Bond, and when you buy one you cannot resell it to another investor. The minimum value of a bond is $25, and the maximum value is $10,000.
A U.S. savings bond doesn’t pay interest until it is redeemed or until it matures (much like a CD), usually between 15 to 30 years. You can redeem a U.S. Savings bond 12 months after you buy it, but if you redeem the bond less than five years after you purchased it, you forfeit the last three months of interest.
You can buy two different types of savings bonds. The Series EE U.S. Savings Bond is sold at face value and has a fixed rate of interest, while the Series I savings bond’s rate of interest is adjusted for inflation.
At this point, you should have a good idea about why you should save and what to look for in a savings account. This only leaves one question—how do you go about saving money?
It’s a good question. Saving money can be a hard habit to acquire, especially when you could spend money on so many other things. This is especially true if you have a tight budget and every dollar seems to matter.
Fortunately, there are a lot of ways you can save money. Some of them even make it as automatic as tying your shoelaces.
The first step is making sure you have a budget in place. If you don’t have one, don’t worry—you’re not alone. According to this Gallup poll, only 33% of all Americans actually keep a household budget.
Starting a budget is actually pretty easy. The first step is to total up your fixed expenses. These can include:
Once you’re done with that, calculate what you’ll want to spend on other necessary expenses. This category includes:
If you’re not sure how much you spend on these categories, come up with an estimate. If you’re having trouble coming up with an estimate, a good first step is to look at your eStatements from the past month or two to help you figure out what you spent where.
Once you have all your expenses written out, figure out how much you make monthly from all your sources of income. Then subtract your expenses from your income and see how much there is left. A budgeting calculator, like the one First Alliance Credit Union offers, can help keep the process organized and make budget planning much easier.
You might not have much money left over, but that’s okay. The important goal at this stage is to make sure you actually have money left over. If you don’t, you’ll need to figure out how to cut back on expenses, especially if you’re bridging the gap with a credit card or worse, a Payday loan.
A common misconception is that the amount of money left over in your budget is the amount you should be saving each month. That’s a good place to start, but it’s not necessarily the amount you should be saving.
How much you should save actually depends on your experience. If you’re just starting out, you should try to save 10% of your income. You should also limit the amount you save to 10% if saving more would affect your ability to pay your monthly bills. If 10% isn’t feasible, don’t fret—at the end of the day even saving as little as $25 a month is a step up in the right direction, so long as you are consistent.
Once you’ve been saving 10% for a few months, though, you should try to increase the amount you put into your savings gradually. Exactly how much is up to you, but financial experts agree that if you can save at least 15% of your income, you’re doing pretty well.
Once you have your saving goal set up, you’re ready for the real challenge—actually putting money in the bank account. This can be a hard thing for a lot of people.
One way to get around this is to automate your savings. By setting up direct deposit to automatically divert a certain amount of each paycheck into your savings account, you can set up a regular saving schedule. This can also take away the mental roadblock from manually removing the money from your checking account yourself.
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 those financial goals. Even better, 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 reward savings account.
If you can save up to 20% of your paycheck without having to change your spending habits, congratulations are in order. That’s not the case for most of us, though. In many cases, you’ll have to figure out where to find more money in your budget in order to meet your savings goals.
Fortunately, there are hundreds of easy ways to save money. They range from day-to-day changes to annual reviews.
After you’ve been saving for a few months, you’ll start to notice you’ve acquired a decent nest egg. Even if you’re only saving 10% of your paycheck, you’ll have a few hundred dollars in the bank that you can use in case of emergencies after about two months. After about two and a half years, you’ll have three month’s salary saved up. (At 20%, it will only take 18 months!)
First, take a moment and congratulate yourself. You’ve achieved your first big savings goal, and it puts you ahead of most Americans.
Next, turn your attention toward other, larger goals. While savings accounts are wonderful financial tools, once you have a sizeable emergency fund stored up you’ll want to put your money into different savings vehicles to help you achieve your new goals.
What are these goals? It depends a lot on you and your priorities in life. Financial advisors have several different models to help you decide where you should allocate your savings, but the first step is usually to figure out what your goals are.
If you’re having trouble figuring out what your financial goals are, think about your life goals and how you could achieve them. Most people want to save up enough money to have a comfortable retirement, for instance. You might also want to buy a house someday, buy a new car or pay for your child’s college education. Your goals might also revolve around events, such as saving up for a wedding or even taking a cruise that tours Antarctica.
No matter what they are, just write them down. You also don’t have to worry about what other people might think—these are your goals for your life.
Once you have some goals, sort them out 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 might take longer to achieve, but you might be able to accomplish them in 10 years. Any goals that will take longer than 10 years to achieve are long-term goals.
For instance, saving for a new car is definitely a short-term goal. Planning out your retirement, on the other hand, is a long-term goal, as is saving for your child’s college fund. Saving up for a down payment on a house might be a short-term or medium-term goal, depending on how much money you think you can put aside towards it.
If you’re saving for a short-term goal, you’ll usually want to stick with a savings account. If you can find a high-yield savings account you might want to park your money in there, but a CD might pay you a higher interest rate.
Once you have around $2,000 saved up, start looking into money market accounts. You’ll get a higher rate of interest, but you’ll also have more access to your money if you need to act quickly to take advantage of an offer, such as an auto sales event or just the right used car arriving on the dealer’s lot.
Planning for these kinds of goals requires you to step out from the comfort zone of savings accounts. You’ll want to make savings a part of your strategy, of course, but at this stage you’ll want to start investing your money, too.
Investing is much too large a topic to cover here, but in general you’ll want to look at safe investments that can also provide a high rate of return. Warren Buffet, one of the best investors in the world, suggests that most people will be fine if they invest in an index fund. That’s a good first step to take.
You’ll also want to look into mutual funds, which pool the money from a large group of investors and use it to invest in several different stocks, bonds and options. Mutual funds can be nice, since you won’t be completely wiped out if one of the stocks or bonds in the fund goes bankrupt, but you do have to pay a fee to the person or team in charge of managing your account, which means a portion of your profits will be deducted to pay for said fund.
If you’re saving for retirement, you’ll especially want to look into IRAs, Roth IRAs and 401(k) programs. These programs all offer tax breaks of some kind. Employers may even match contributions to your 401(k), in essence giving you free money to save.
Eventually, you’ll want to revisit your original savings account to make sure you’re getting the most out of the money you have saved there. If you have thousands of dollars saved up, why not put some of that money to use in savings accounts that offer a higher rate of interest than a basic savings account?
You could open up a high-interest savings account with part of the money. You might also want to create a CD ladder—a set of CDs that mature at staggered intervals so your money can still be accessible while still generating more interest.
The important thing to keep in mind is that you should still be able to have access to your money when you need it, so make sure you have at least a couple thousand dollars in your savings account. If you have to spend more than that, then you can dip into your high-interest savings account or use the funds in a recently-matured CD.
When you start saving money, you’re taking a small but very significant step into the world of financial success. You’re making your money work for you, and you’re guaranteeing that you’ll be more prepared for a crisis.
However, you’re also getting an even bigger advantage—you’re changing the entire way you think about money. Instead of looking at money as simply a way to buy things, you’ll be looking at it as a tool you can use to achieve your financial goals. This opens the door for you to start investing and generate even bigger returns on your money, which can provide huge benefits for you later in life.
Good luck and good saving!
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