Money Saving / Savings Tips
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If you’re worried you won’t have enough money saved to get you through the tough times that are always just around the corner, you’re not alone.
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A new GOBankingRates survey of more than 1,000 American adults shows that people care more about increasing their savings than any other aspect of their financial lives. Roughly 29% of respondents to a GOBankingRates survey said they want to learn more about saving money, which trumps learning how to invest, pay off debt, and increase passive income, which were the next hottest topics.
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If you’re among the nearly 1 in 3 people who care the most about learning how to become a better saver, read on to start your journey.
Savings Accounts vs. Checking Accounts vs. Investment Accounts
The basic principle of saving is to store money you don’t need right now so it’s there when you need it later. Whether you’re saving for an emergency or for a specific goal like a vacation, savings are kept separate from the money you spend in your everyday life, which belongs in a checking account.
“You should keep at least a month’s worth of expenses in your checking account at all times,” said John Li, co-founder and chief technology officer of Fig Loans. “You’ll need to keep that cash base in your account to avoid bounced payments, overdraft fees, and sweating every time you swipe your card, wondering if there’s enough cash to cover the purchase.”
Your savings are also separate from the money you plan to invest. Like savings, you invest money you don’t need right away, but unlike savings, investments carry significant risks that can lead to losses in the pursuit of profit.
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Saving your money is about minimizing risk and keeping your money safe so it’s there when you need it.
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Savings Accounts: The Gold Standard of the Rainy Day Fund
The classic savings account is the most basic and common way people protect money they don’t need today so they have it tomorrow.
“Once you have at least a month’s worth of costs on your check, it’s time to move into your emergency fund,” Li said. “Open a high-interest savings account, so your money earns a little interest but remains liquid enough to be useful when you need to access it ASAP.”
It is common for parents to open savings accounts for their children to introduce them to the world of personal finance at a young age, and people often maintain savings accounts throughout their lives.
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Available through all banks and credit unions, savings accounts are FDIC insured: you’ll never lose the money you deposit no matter what happens with the bank. Unlike other savings vehicles, like CDs and bonds, savings accounts are fully accessible: you can withdraw money from them whenever you want, up to a certain number of withdrawals per month.
Understand how savings accounts pay you back
When you put money into a savings account, the bank can make a profit by lending that money to borrowers. In exchange, the bank pays you a small fee as an annual percentage yield (APY).
Different banks pay different returns. They’re always comparatively small, but thanks to compound interest, which pays you interest on interest already earned, even small returns can add up to significant returns over time.
If you put $1,000 into a savings account with 0.60% APY and contributed $100 each month, you would have $13,425.95 after 10 years even though you only contributed $13,000.
Get the most out of your savings account
According to the St. Louis Fed, the national average savings account APY is 0.06%, which would be paltry even if inflation wasn’t eroding the dollar’s purchasing power at the fastest rate in 40 years, but can do better than average.
Credit unions, which are not-for-profit organizations owned by their members, often offer higher returns than banks, and online banks like Ally often offer better rates than big banks that maintain branches.
Virtually all banks and credit unions have tools that can make you a better saver. Some offer goal-based savings, allowing you to accumulate savings in “baskets” — one basket might be for a new car, one for an emergency fund, and one for a vacation. Others offer round-up savings, which round up purchases you make with a debit card to the nearest dollar and deposit the difference into your savings account.
However, the most important tool of all is automatic savings, which puts savings on autopilot without the need for self-discipline.
“To set yourself up for long-term financial success, you can set up automatic savings contributions each month so you pay yourself first, then spend what’s left,” said Mint CFP Brittney Castro.
So how much should I save?
The standard advice for a healthy emergency fund is savings that could see you through three months with no income; Then, and only then, should you start risking money in the hope of making money through investing.
“Your savings balance should be no less than 90 days of expenses, which should be enough to cover an unexpected period of being unemployed while looking for a new job,” said Dorothea Hudson, personal finance expert at InsuranceProviders.com . “Your spending reserve account must maintain a sufficient balance to cover expenses in a below-average month. So if your average gross income is $5,000 and your monthly deficit averages $4,000, the reserve account should never drop below $3,000.”
Alternatives to savings accounts
If you’re looking for a little more money than a standard savings account can afford, consider these options to boost your savings:
Money Market Accounts: Money market accounts are very similar to savings accounts, but tend to pay higher returns. The downside is that they often require higher minimum deposits.
Certificates of Deposit (CDs): CDs generally pay higher yields than savings accounts, but they don’t offer the same affordability. With CDs, you agree not to touch your money for a specified period of time, which can range from six months to five years or more.
Savings bonds: Bonds straddle the line between saving and investing. They are like CDs in which you put money that you agree not to touch for a set period of time in exchange for receiving your principal plus interest at the end of the term. However, they are different because when you buy Treasury bonds, you are lending money to the government. Because they are backed by the full faith and credit of the United States government, they are among the safest investments on the market.
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About the Author
Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was previously one of the youngest nationally syndicated columnists for the nation’s largest newspaper syndicate, Gannett News Service. He worked as the business section editor for amNewYork, the largest newspaper in Manhattan, and worked as the style editor for TheStreet.com, a financial publication in the heart of New York City’s Wall Street investment community. .
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