The act of saving itself outweighs any amounts or strategies. Even if you achieve the saving goal you set out for yourself, it is important to continue saving as if you haven’t hit your mark yet.
One of the biggest perks of having a budget is being able to set money aside for saving. Setting money aside at first may be a difficult proposition, but seeing the amount increase will only motivate you to save more. Here are the three most important things you need to know about saving.
1. The Sooner You Start, The Better
Starting is the hardest part. Even if the years of your youth are behind you, the best time to start is right now. If you are young and devoid of specific goals, it is still important to slowly save up. You will be glad you did down the line. It is a good money-related habit to cultivate and it will eventually become second nature.
If it makes you feel any better, most Americans have less than $1000 saved, while 39% of all Americans have no savings to speak of. It is never too late to start.
2. Different Savings Accounts You Should Have
If you are just starting, it may be intimidating to know that there are several categories of savings accounts and that you should ideally have all of them. Do not worry, you will eventually work your way up to having all of them. These accounts are:
· Emergency Fund
Chances are that you have heard of or had an emergency fund at some point. It is simply money that is readily available in case of an emergency. This could be a health emergency, being laid-off, or any other real emergency. An impromptu night out with friends does not classify as an emergency.
It is recommended that you have this account in a different bank from your checking account to curb your free access. For the amount, you will find recommendations starting from $1000 to a year’s worth of expenses. A good average could be 3-4 months of minimal living expenses. For low-income households, $2500 is a good starting amount to have. It should be calibrated to your needs to prevent financial disaster in case of unexpected emergencies.
· Retirement Fund
This is where starting early reaps the most benefit. While you may save in a normal savings account, you will be denying yourself a lot of benefits. Retirement accounts act like investment accounts and accrue interest over time. Additionally, retirement accounts have special tax advantages, either tax-deferred or tax-exempt.
With Tax-Deferred accounts, you do not pay taxes on the part of your income you direct toward your retirement fund. You only pay tax when you eventually withdraw the amount. Tax-Exempt is the opposite, where you contribute with after-tax dollars but are not taxed when withdrawing.
Saving 10-15% is recommended, but may not be realistic for everyone.
· Short-Term Savings
Should be easily accessible in a high-yield savings account. Short-term savings are great for a cause taking place in the next year or thereabout. This could be for moving, a vacation, or a new car. You can have many short-term savings accounts for your different short-term goals.
· Long-Term Savings
This can be for goals in the next 5-10 years; longer than short term but shorter than retirement. Accounts can be a mix of high-yield savings accounts and investment accounts. Investments can be broken down into stocks and bonds. It is working your money without much involvement from your end. For investments, it is important to be sure that you will not require that money for at least 5 years to avoid losing money after pulling investment prematurely.
3. Small Steps, Big Wins
The act of saving itself outweighs any amounts or strategies. Even if you achieve the saving goal you set out for yourself, it is important to continue saving as if you haven’t hit your mark yet. The Goal-Gradient Hypothesis shows that you are more motivated to work towards a goal the closer you get to it. These small steps snowball into huge savings and more opportunities to grow your wealth. Consistency is key.