Having money stashed away for the future is not just for those unexpected moments like when your car suddenly needs a new alternator. With some planning, saving money can help make life milestones even more special or give you that much needed vacation. A successful saving strategy can offer peace of mind in addition to a better future.
What is saving?
Saving is simply the portion of your income that is not spent. People save for a variety of goals like buying a home, sending their children to college, or taking a vacation in addition to keeping money set aside for emergencies. While saving is an invaluable tool for success, it is often pushed to the back of the priorities list. In fact, 63% of Americans are currently living paycheck to paycheck.
Why saving is so important
While saving tends to take a backseat to life’s other expenses, it’s important for everyone regardless of how much they’re making, what life stage they’re at, or what their monthly expenses are. Saving not only offers peace of mind when the unexpected happens, but it offers the opportunity for a better future. Having savings for your goals means you can buy a house, have the wedding of your dreams, and feel confident in the life waiting for you in retirement.
Short-term vs. long-term goals
While it might take a little longer for savings to accumulate for college or retirement, having money set aside can help you achieve your short-term goals like getting out of debt or saving for a special vacation. In general, short-term goals are within the next 5 years. The differences between the length of time you’ll be saving can also impact the type of account you use for saving.
Types of savings accounts
A general savings account is the traditional savings account that most people think of when they think about savings. This account is typically found at a bank or credit union. You have easy access to your savings through this type of account.
A Money Market account is a unique savings account that generally earns a higher savings rate than traditional savings accounts. These types of accounts may have a higher minimum deposit than traditional savings accounts.
A Certificate of Deposit (CD) account is an account where you agree to leave your money for a set period of time. During that time, your money earns interest and when the CD matures you can either withdraw your savings or roll it into a new CD.
A High-Yield savings account is an account that offers a higher interest rate on your savings compared to a traditional savings account. This means that your savings is earning money on its own.
An IRA is an account set up at a financial institution for the purpose of saving for retirement with a tax-free growth or on a tax deferred basis.
How much money should I save?
The amount of money you should save will depend on your goals. In general, before you start saving for something bigger like a house or a wedding, you should establish an emergency fund. An emergency fund is a savings account that holds 3 to 6 months of essential expenses to cover emergency situations like an illness or job loss.
How to be a better saver
If you’ve been living paycheck to paycheck or struggle to put aside money regularly, it might be time to work on your savings skills. Here are some simple ways to get started:
- Record your expenses 💸 – a good way to start is to first understand where your money is going. Take a look at your expenses for the past month and then categorize them. This will give you a good picture of where your money is going.
- Find ways to cut down on your spending 📉- once you have a complete picture of your monthly expenses, you can look for areas to cut down. Could you eat more meals at home and less out? Are you paying for subscription services you don’t actually use? Create a realistic plan to cut down on your expenses and open up some of your income to be saved.
- Set goals – Saving with a goal tends to be more successful than saving just to save. Once your emergency fund is taken care of, determine what you’re saving for and how much you’ll need for this goal.
- Think of savings like a bill to yourself – Making savings a nonnegotiable part of your budget, prevents it from falling to the back of the priorities list. Consider it like a bill you have to pay each month except that you’re the recipient.
- Automate your savings ✅ – the easiest way to ensure you don’t miss that payment to yourself is to set up an automatic transfer from your checking account each month. If you do it once, you don’t have to think about it again. Your savings will grow on autopilot.
How to build an emergency fund
Having an emergency fund for the unexpected can reduce the reliance on high-interest credit cards or personal loans. It may seem overwhelming to think about putting 3 to 6 months of expenses into a savings account but to get started, think small. Start by saving something as small as $5 a day as you build out your emergency fund strategy.
Your emergency fund strategy:
- Start by determining what 3 to 6 months of expenses is for you. You want to ensure you have enough to cover essential costs like rent or mortgage payments, groceries, gas, etc. Add up your monthly expenses and multiply it by 3 or 6. That’s the goal number for your emergency fund.
- Make a budget to see where you can start saving more. As discussed, having a good understanding of where your money is going on a regular basis can help you determine what your essential expenses are. Use that as a guideline to create a budget for yourself with a provision for saving for your emergency fund.
- Look for ways to increase your savings over time. Continue to revisit your budget on a monthly basis to determine if there are other areas you can cut down on. And pay attention to whether you met your budget or not. If you find that you didn’t spend as much on groceries as you thought, you can transfer what’s left into your emergency fund. And, don’t forget if you get a bonus or a pay raise, add it directly to your emergency fund.
- Think about what happens when you reach your emergency fund goal. When you’ve reached your goal with emergency savings, you don’t want to stop saving now. Think about what your other savings goals are (home, vacation, wedding, etc.) and now shift the focus to saving for that goal.
Saving for a HOME 🏠
It can be exciting to put money away for your goal of homeownership but can also be daunting if you don’t know where to start. Here are the simple steps for getting started saving for a home:
- The first step to saving for a home is knowing how much you can afford. To get this number, you can use a Home Affordability Calculator which will prompt you to input information like your income and debts to calculate the amount you can afford.
- Next, you’ll need to determine how much money you’ll put down–your down payment. This number will be your savings goal. You can use a Mortgage Calculator to get to this number but keep in mind that if you put down less than 20%, you’ll have to pay Private Mortgage Insurance. And, don’t forget to consider expenses like closing costs and moving expenses.
- Just like with your emergency fund, you’ll want to determine how much you can put away each month and add more when you can.
- When saving for a home, you might want to consider downsizing. If you can live on less for a while, you can put extra funds away for your home and achieve your savings goal quicker. Saving for a home is a big goal so cutting costs in favor of putting more money away can help you reach your goal faster.
- And finally, cut down your debt. Not only will that free up some room in the budget to put more money toward your home savings, but less debt can be beneficial toward your goal. Your debt to income ratio is taken into account when lenders are considering you for a mortgage so the less you have, the better off you’ll be.
Saving for VACATION 🌅
Whether you’ve always wanted to backpack across Europe or a beachside getaway somewhere warm is on your mind, the right savings strategy can help you reach your vacation goals. Here’s how to get started.
- Start by adding up costs of the trip you’re planning. Consider costs like flights, hotels, food and don’t forget to budget for things like souvenirs. Do some research and determine how much you’ll need to save.
- Open an account strictly for vacation savings. If everything is in one account, it can be a challenge to keep track of what money belongs where. A separate account can help you keep better track of your vacation savings.
- In addition to your budgeted vacation savings, try a savings challenge. A savings challenge can help you put away extra money to help you reach your goal faster.
- Take advantage of credit card rewards points. If you choose a card that offers points that can be redeemed as cash back, you can use those rewards for your vacation savings. Just make sure to use your card for things that are already in your budget so you’re not overspending just to get the rewards.
Saving for a WEDDING 💍
A wedding can be one of the most exciting times in your life. It can also be expensive. If you’re planning on putting away money for a wedding, here are some tips to get started:
- Start by figuring out what kind of wedding you want including when and where. Different times of the year can be more expensive than others for weddings. It’s also important to consider location. If you’re having a destination wedding, that will impact the costs.
- Figure out your wedding preferences first.Then, create a guest list. It can be challenging to determine who gets an invite and who doesn’t but doing this up front will help you get a handle on costs. A lot of venues or caterers price by guest so having a general headcount up front will give you a good idea of costs.
- Once you have a good picture of the type of wedding you want and how many guests will attend, you can start to do some research on how much this will cost. This will help you create your wedding savings goal. Don’t forget to add in each element of wedding planning to the expenses that you’ll be responsible for like flowers, favors, and even tips for your vendors.
- Get on the same page as your partner. Having a regular wedding planning meeting on the calendar where you talk about the plan and the budget can help keep the finances in mind as you go through the process.
- Consider if there are areas you can cut down in. Just because it’s tradition, doesn’t mean you have to have it at your wedding. Things like flowers or hiring a limo might be extra expenses that you don’t need. You can also consider areas where you might DIY like invitations or favors.
Saving for COLLEGE 🎓
- Sending your child to college is an exciting time but it’s also expensive. If you’re hoping to avoid taking out too much in student loans, a little planning can go a long way.
- Start saving as early as possible. Even if your child is still young, putting away a little money for college on a regular basis will add up over time.
- Do some research on college costs. Local colleges might be less expensive than ones out of state and tuition prices might rise over time but this research will help you determine a range for saving.
- Consider opening an Education Savings Account. An Education Savings Account lets you make tax-deferred contributions for your child’s education that can then be used tax-free to cover qualified education expenses.
- Or, a Home Equity Line of Credit (HELOC) can be a good option for you. A HELOC often has a lower interest rate than other loans, and the interest may be tax deductible.
Don’t forget to rely on things like financial aid and work study programs that can reduce the cost of tuition.
Saving for RETIREMENT 🏔
Whether retirement is decades away or years away, having a good retirement savings plan will set you up for success later in life. Here’s how to get started:
- Understand the difference between a 401k and an IRA. Both accounts have valuable tax benefits. The biggest differences between the two are that a 401k is offered by your employer and allows higher annual contributions while you can open an IRA on your own and it will typically have more investment options.
- Start saving as soon as possible. Like saving for your child’s education, the earlier you start to save, compound interest can work in your favor. Taking advantage of your employer-sponsored plan is an easy way to get started.
- Meet your employer’s match on your 401k plan. Take full advantage of what your employer is willing to contribute to your retirement savings.
- Don’t forget to rollover your 401k if you change jobs. Otherwise, that money is just sitting there instead of working in your favor.
Saving money for the future takes some thought and planning but it has the power to set you up for success. Whatever your savings goals are, use the tips in this guide to help you get started. You can find more savings and personal finance tips in our Insights Center here.