Saving money is always a good idea. It helps you prepare for life’s uncertainties and can enable you to create the future you want. But if you haven’t jumped on the bandwagon yet, you’re not alone.
A survey performed by the Federal Reserve found that 44% of respondents couldn’t cover an unexpected expense of $400 without selling something or borrowing money. Further, the average American only saved 6.4% of their disposable income in 2017.
If you’re ready to beat the statistics and create a savings plan that works, we’ve got the tools and tips you need. Here are the key reasons saving matters, how much you should save, and how to get started.
A few good reasons to start saving today.
First, let’s take a look at why saving is so important.
- Emergencies happen. If you don’t have any savings at all, you should start by building a modest emergency fund. Only one in two adult Americans have enough savings to cover an emergency expense of just $400. Which is a modest amount as far as unexpected expenses go. The average unexpected medical expense is around $2,800 (source). It’s good to keep about $5,000 on hand for whatever need may arise.
- To buy a house. Having the cash for a 20% down payment can save you a small fortune in interest payments and help you avoid paying for private mortgage insurance altogether. To illustrate, a 20% down payment on a $200k home could save you around $12,700 within the first five years of your mortgage (source).
- To fund your retirement. Getting a jumpstart on your retirement savings can help you to harness the power of compound interest. For example, if you save $5k per year from age 25 to 35 (a total investment of $50k), you will have $602,070 by the time you hit 65 (assuming an annual return of 7%). Start when you are 35 and contribute $5k every year until you retire at 65 (a total investment of $150k) and you will have about $60k less ($540,741).
- To travel. Who doesn’t love to travel and explore our beautiful planet? Most people want to take vacations and have specific destinations they hope to see in their lifetime. However, consider that the average cost of a vacation for a family of four is $4,580. To prevent a growing pile of debt, it’s best to start a savings account to fund your travels.
- For peace of mind. Living paycheck to paycheck is stressful. You never want to be down to your last dollar, hoping you don’t run out of gas or struggling to get groceries. Having a cushion allows you to relax and stay out of survival mode. You can relax a bit knowing that you are able to handle the inevitable bumps in the road.
- To fund your child’s education. Paying for a college education can range from around $10,000 to $35,000 per year. While student loans are available, they can hinder students for several decades after graduation. Saving up for your child’s education will help them get the best start at life.
- To pay for a wedding. A wedding is a large expense that sets couples back at the beginning of their new life together. By saving up in advance of the wedding, couples can prevent themselves from going into debt.
Saving money can help on many fronts. However, if you’re barely making ends meet without saving, you may be thinking, “I know it would help, but I just can’t right now.” Not to worry. Below, we’ll cover how much you should save and how to do so even when it seems difficult.
How much should you save?
Most financial experts say that you should save an amount equal to six months worth of your expenses (i.e., rent, school, debt payments, groceries, gas, etc.). For example, if you pay $3,000 per month for all of your expenses, you should have $18,000 in your savings.
If you can’t work for some reason, this will keep you afloat for half of a year to figure out another financial solution.
Additionally, you should have an emergency fund, a retirement plan, and goal-specific savings you want for things like a down payment on a home, a vacation, etc.
Strategies to save money
If you are new to saving money, or if you’d like to learn how to increase the amount you save, here are a few strategies that can help you.
The first step on the road to saving money is to become aware of your spending habits. You can do so by reviewing your bank statements, having a mobile app track you, or tracking your expenses manually (if you are old school).
Take note of where your money goes and separate the necessities from the optional expenses.
For example, if you have to pay $1,000 in rent, that is a necessity. On the other hand, if you buy a coffee from Starbucks every morning and eat lunch out a few times per week, those expenses are optional.
By becoming completely aware of what you spend, you can take control. Pay the necessities and decide how you can reduce your other spending to designate more to your savings.
Negotiate down your bills
Some bills are non-negotiable but most have some wiggle room.
For example, when it comes to your electricity bill, contact your provider to find out if they offer any discounts or payment plans. Some will look at your bills from the past year and let you pay the average amount monthly so you don’t have huge bills during summers or winters.
Further, government programs that exist that may be available to you depending on where you live and how much money you make per year.
Additionally, cable, phone, and internet providers will often lower your bill or offer you a promotion to keep your business. You may also qualify for a discount based on your place of work or due to an association you are part of. It doesn’t hurt to call and ask.
Remember, the companies are competing against other providers for your business in most cases.
Next, a major way to save money is to comparison shop. Look around for the items or service you want and compare offerings from multiple sellers or providers. This includes everything from your gas and groceries, to your lawn service, manicures, auto loan, and credit cards.
For groceries, consider utilizing coupon websites to save and opt for the store that can offer you the best value.
For your auto loan, check if your current lender is offering you the best interest rate you can get. Shop around to see if refinancing could save you on your monthly payment and overall.
The same goes for student loans, home loans, credit card debt, a personal loan, etc. Many lenders are out there waiting to offer you a deal but you will miss it if you don’t look.
Comparison shopping takes a bit more time and effort but will result in significant savings.
Increase your income
Lastly, earning more money can help you to save more.
Think about the ways you can maximize your income at your current job. Is there a promotion you can work towards that pays better? Could you work overtime? Pick up hours? Seek additional training to increase your commissions?
If your income is maxed out at your current job, could you pick up a side gig in your spare time? Many opportunities exist from becoming an Uber or Lyft driver to teaching English online or writing web copy for businesses. Browse around to see if anything suits your skillset.
Make the most of your savings
Once you start saving, you’ll face a new question. Where do you keep the money so that you get the most out of it?
Most people open a savings account with their standard checking account. It allows you to put away money that you want to save and offers a modest interest yield.
Savings accounts don’t usually come with high minimum deposit amount. You can open an account even if you don’t have much money to deposit.
They also often make it difficult to frequently withdraw or transfer money out of the account. Most don’t provide you with a debit card or check-writing abilities so you can only get money in person or by requesting an electronic transfer.
There is a federal regulation which limits the number of outgoing transfers to six per billing period. This can help you to save money because it makes it more difficult to access your money on a regular basis.
The average savings account annual percentage yield (APY) is 0.09%. However, many online institutions offer interest rates which are around 10 times higher. Comparison shop as choosing the one with the best APY can help you earn significantly more.
Money market account
Another option is a money market account. Like a savings account, it is designed to be a place where you deposit money and leave it to grow over time. However, money market accounts often come with a debit card.
While subject to the same limit as savings accounts, withdrawing and transferring money at ATMs is not restricted. This grants you easier access to your money than most savings accounts.
Money market accounts also often have a higher APY (o.15%, on average) as well as higher minimum deposit amounts.
Certificates of Deposit
A third option is certificates of deposit (CDs). CDs are also designed for you to deposit money and leave it to grow. However, CDs require that you deposit a certain amount and leave the money in the account for a specific amount of time (one month to five years).
The interest you will earn is determined by a fixed interest rate. The longer you leave the money in the account, the more you will earn.
The drawback with this option for some will be that you can’t access the money without paying an early withdrawal penalty. That can also be an advantage as it encourages you to leave the money to grow.
These three savings account options can help you save and earn at the same time. The right fit for you will depend on the amount you want to deposit and the level of accessibility you want.
Save money and safeguard your future
Saving money can help you to gain financial security and peace of mind. It enables you to rest assured that you can stand on your own two feet when unexpected expenses pop up. Further, you can plan to obtain the future you desire. That can involve a new car, home ownership, a comfortable retirement, or a college education for your son or daughter.
Learn more tips and tricks below and browse our collection of money saving tools.