Tips for saving more money and watching it grow.
Lately, it seems we’re constantly bombarded with terrible news, from ongoing public health concerns to the war in Ukraine, and, of course, inflation. Fortunately, many of us saved record amounts of our income early in the pandemic, and that combined with historically low unemployment has helped us to weather this difficult economic period. But for how long? Today’s economic situation certainly shines a light on the importance of savings.
Putting money aside in savings hasn’t typically been a habit many of us have cultivated. The vast majority of Americans have no savings — or at least haven’t saved regularly. Now seems like the perfect time to turn our current savings trend into a long-lasting habit that helps us meet future financial challenges and savings goals, and develop peace of mind.
How to Save
When I was just starting out in my career, my money was tight. I remember thinking, “There’s no way I can afford to put money aside in savings — I need every dollar I get!” But for most of us, this simply isn’t true. A good household budget will reveal where your money is going each month, and often you’ll find that you’re spending more than necessary on non-essential expenses. Even putting aside $50 a paycheck can add up to more than $1,200 a year. You can decide the maximum amount you can set aside each pay period or month and work with your employer and bank to have those funds automatically deposited or transferred into your savings account regularly. When you don’t actually see that money showing up in your checking account, it will be out of sight and out of mind, which allows it to grow untouched.
Create Your Emergency Fund
The upside of squirreling money away these days is that we’re creating an emergency fund for ourselves in the case of job losses, unforeseen medical issues, or repairs on vehicles. Even the economy stabilizes, keeping an emergency fund intact is critical. Financial guru Dave Ramsey recommends that everyone have an emergency fund of at least $1,000, and this is advice we subscribe to here at Ludmila CPA. If you don’t currently have this much set aside, you should make this a top priority.
Put anything extra after you’ve done your monthly budget into a separate savings account that you can access for true emergencies. This is not for buying clothes, taking trips, or paying bills, which are expenses you should be anticipating and budgeting for. Rather, this emergency fund is for the expenses we don’t see coming — like a new tire or car repair, a busted air conditioner, or a burst pipe in your plumbing — and it should sit outside the accounts you use to pay bills. It should be fairly liquid, so not an investment, but not so easy to use that you’re tempted to. Once you have an emergency fund in place, you’ll enjoy peace of mind from knowing that a true emergency won’t wipe you out financially.
Then you can move to the next step: creating a safety net.
Save 3 to 6 Months’ Worth of Expenses
It’s always a good idea to plan for the worst — a job loss, a catastrophic illness, etc. — by accumulating enough money to live on if you lose your income. With economic uncertainty expected to linger for months or even years, it’s especially wise to start growing your financial safety net of three to six months’ worth of household expenses. You’ll find that having this amount set aside provides tremendous reassurance that you could survive a loss of income.
Once you have this in place, put as much savings as you can into your retirement account(s).
Where to Keep Your Savings
Depending on your purpose and goals, you have several types of savings accounts to choose from:
- Basic Savings Account: This is an easy option — ideal for having direct deposits automatically placed into it and liquid enough to access in case of emergency. However, interest rates on savings accounts are so low — lower than inflation — that it’s not a great way to grow your money.
- Money Market: A money market offers more interest — though only slightly more — enabling your money to grow a bit faster. And it’s just a touch less convenient to access, which can be a good thing, as it won’t tempt you to dip into it for non-emergencies.
- Certificates of Deposit: A CD is a good, conservative savings option that forces you to hold off on using your savings. With this time deposit, you wait for the CD to mature and accrue interest, based on a specified fixed interest rate. These offer slightly higher interest rates than savings accounts, but rates are so low right now that it might be best to select a CD with a shorter term that will mature more quickly. When interest rates are higher, go for a longer period to see that savings maximized.
- Investments: To grow money, experts recommend a portfolio of diverse assets — real estate, businesses, mutual funds, and other financial instruments offered by brokerage firms. Many tax-favorable accounts deserve attention, namely the traditional and Roth IRA, which you should contribute to regularly. Consult a professional to discuss which one is best for your situation.
- Health Savings Accounts: An HSA is for families or singles who have high-deductible health plans to accrue savings for medical expenses. The nice thing about this plan is that it enables you to pay for medical expenses with pre-tax money.
- Education Savings Plans: Plans such as the 529 are designed to help families afford the rising costs of college. Speak to a financial professional to set this up or determine how best to save for your child’s college education.
Now’s the time to start making savings a habit, for your long-term financial health. We’d love to help guide you toward the right savings solution — contact us today.
And enjoy your summer!