From the piggy bank that sat atop your dresser in your childhood bedroom to the meager 1% interest you earn on your bank-sponsored savings account, at some level we all understand that it is “important” to save money. However, as the average rate of personal debt in America continues to rise, whether from student loans, credit cards, or other means, it becomes obvious that, as a collective, we have lost sight of this important financial creed.
Saving money for both life’s incidentals as well as long-term, planned expenditures, is critical for overall financial health. Along with a personal or household budget, it is among the most important and financially-responsible things you can do.
What Savings Give You
Most people understand that they should have a healthy savings account and, in fact, saving actually gives you a whole lot more than money in the bank:
Peace of Mind
There aren’t many among us who haven’t tossed and turned in bed worrying about financial struggles. Whether it is how on earth you plan on making the rent payment next month or fears over a potential job loss or paying for college/retirement, we have all been there. By working on a savings plan, we relieve one aspect of our stress by ensuring that there is money tucked away for these situations.
Whether you are living paycheck to paycheck in a job you hate or living in a neighborhood with a high crime rate, money in the bank expands your options and helps you out of the “traps” of life. With a 3-6 month emergency fund, you can quit your job without having another waiting or look into moving to a safer area thanks to a sizeable security deposit. While neither of these options ensures that your problems will go away, just having them is soothing.
Your Money Working for You
When every dollar you make turns around and becomes a dollar you spend, you force yourself into a corner where the only way you have to make any money is to work. Not only does this take the notion of retirement off the table, it allows life to pass you by. The secret of the super-rich is that most of the money they earn works for itself through investments, planning, etc. While saving and investing is by no means a guarantee of a 7-figure tax return, it does give you the option of freeing up your time and enjoying more of what life has to offer.
How (and What) to Save
While saving itself is important, doing it “right” maximizes its benefits. While any saving is better than nothing, having a plan, a blueprint of savings strategies helps. Of course, there is no one, best way to save, but there are a few clear goals and priorities that need to be set.
You Need an Emergency Fund
Saving for retirement, college, a new flat screen TV, whatever, may sound like a smart financial plan, but it is all for naught if one job loss or illness lands you without an income for any length of time. Without a secure, liquid emergency fund you are left with one of a few terrible options:
- using high-interest credit cards to pay your bills
- mining retirement and educational savings accounts at a high interest and penalty
The beauty of an emergency fund is that it also works for smaller “emergency” expenditures such as sudden car trouble or an accident, temporary illness and doctor’s bills, or unexpected home repairs. The rule of thumb is that each individual/household should have 3-6 months’ total salary saved in an easy-to-liquidate form. Generally, this means a short-term CD or bank-sponsored savings account.
Retirement Is More Important than Education
As parents, we all want what is best for our children, including giving them the option to attend prestigious institutions or just college in general. However, it is not a good idea to sacrifice your own future for your child’s college expenses. Why?
For starters, there are a number of programs in place from scholarships to grants to loans which are designed to help students achieve their college dreams and many times parents can utilize these programs as well. However, outside of a dwindling social security net and rapidly-defaulting pensions, insured retirement is nearly extinct.
Second, many retirement savings plans, particularly employer-sponsored 401(K) programs, offer “match” contributions. In this scheme, an employee contributes a particular amount of his or her weekly paycheck (generally 1-3%) and the employer matches it. There is no cost to the employee when this takes place. In other words – it’s free money!
Getting Saving “Right”
Learning how (and what) to save is as important as the act of saving itself. However, all of this has one common factor: financial accountability. By thinking about your money as more than a means to pay bills or as a necessary evil, by making it work for you through smart spending and saving, you become a “millionaire” no matter how much you earn because you eliminate the one thing that really separates the “poor” from the “rich” – security.
**What are some tips and tricks you use to save? What priorities have you made in terms of saving and why?