Saving Money and Your Financial Future
Saving money is one of those things that is much easier said than done. Studies show that many of us are good at knowing how we can save, but many believe they can save better. And, many of us don’t save at all…even though we know we should.
There is more to saving than spending less money, even though that can be the most challenging aspect of saving money. The following are critical questions you must ask yourself when you save money:
- How much money should you save?
- Where will you put your money?
- How can you make sure your money stays where you put it?
How Much Money Will You Save?
Financial experts suggest that you should save 10 percent of your gross income each month. The best way to do this is by paying yourself first before you pay any other bills. For example, if you make $1,000 per month, be sure to pay yourself at least $100.
In many instances, individuals will have this money automatically debited from their paycheck so they never see or “touch” the money before it is deposited into their checking and/or savings account. Furthermore, the temptation to put in less money is taken away when you don’t see it to begin with.
Saving and Interest
When it comes to savings, though, interest is what it’s all about. Interest is what is charged or paid for the use of a person’s money. For example, a financial institution pays you a certain amount of interest for funds deposited into its account(s); it then provides loans and other investments using that money.
The amount of interest you receive on any deposit depends on the rate and annual percentage yield (APY) paid on that account. As the name suggests, an APY is the yield you earn on a deposit over a year. It refers to your earnings – how much money you’re making. It is important, therefore, to not only look at the interest rate, but at the APY as well. In most instances, the longer you keep your money in a certain savings or investment account, the higher the rate and APY.
Where Will You Put Your Money?
When it comes to saving money, interest is the name of the game. Some accounts will earn more interest on your money than others. You should look for your ability to access the account, the requirements for keeping money in the account, and whether or not it is federally insured. All of these variables are taken into account when determining a rate or yield on an account.
Funds deposited at a financial institution are usually federally insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending upon the type of financial institution. The FDIC was created in 1933 to provide insurance protection for depositors if their bank fails, and protects funds up to at least $250,000 (or more in some instances).
The NCUA was created to supervise federal credit unions and the National Credit Union Share Insurance Fund (NCUSIF). It provides insurance protection for deposits at credit unions up to $250,000 (or more in some instances).
Types of Savings Accounts
The following are the different types of savings accounts commonly used in the industry today. Use your mouse to click on each type of account to learn more about it.
Basic Savings Account
These accounts are the easiest and most accessible accounts for those who are just beginning to save. Additionally, they are also the safest investment you can make as they are federally insured at a financial institution, and in most instances, there is a nominal minimum balance requirement to earn interest. Some savings accounts are created for special purposes, such as Vacation Club Accounts or Holiday Club Accounts, and carry a little higher APY, but the access to funds is more limited.
Money Market Account
As your savings grows, you may want to consider a money market account. These accounts allow access to your funds by writing a check or making an electronic transfer; however, the amount of times you can access your account each month is limited. You also earn a higher amount of interest in these accounts because they require a higher minimum balance to open; most commonly a $1,000 or $2,500 minimum balance requirement.
Certificate of Deposit or CD
With these accounts, your financial institution holds your money for set period of time – usually three months to five years. You cannot withdrawal money from your Certificate of Deposit at any time during its term without penalty. These accounts are federally insured and are an excellent way to invest for longer periods of time in a safe and controlled environment.
Individual Retirement Accounts (IRAs)
IRAs are investment accounts designed to keep your money secure until you retire. In fact, you will be heavily penalized if you access your money prior to a certain age. They are usually set up like certificate of deposit accounts, where the longer you keep money in a term, the higher the rate and yield. If you obtain these accounts through a financial institution, they are federally insured separately from your other savings accounts, up to $250,000 (or more in some cases).
How Can You Make Sure Your Money Stays Where You Put It?
There are things you can do to make sure your money grows. Let’s take a look:
- Set savings goals.
- Establish a Reasonable Budget
We will take a look at each of these areas in a little more depth.
Set savings goals.
Whether for short-term or long-term savings, you have options available to you in the market. If you want to buy a new car, that may be a shorter-term goal and you can utilize shorter term savings options, such as a money market or certificate of deposit. For retirement, you may need to look into IRAs or other types of investment vehicles at a brokerage firm or other money management company.
Make sure you take into consideration the following five things when you establish your budget.
- Specific. Your goals must be specific in order to be effective. If you want to buy a house in three years, the goal must be written and stated as such.
- Measurable. How will you determine if you have reached your goal? You need to make sure you can measure it. If you want to purchase a house in three years, that would be your measurement.
- Attainable. If you haven’t saved any money and you want to buy a house in three years, you may not be able to reach that goal. Be sure you stretch your household budget, but make the goal something that is attainable.
- Relevant. Your savings goals need to be realistic. It's important to honestly evaluate your savings situation and make adjustments where necessary. In other words, be honest with yourself.
- Time-Based. You need to make sure your savings goals have an achievement date on them. Don’t let them become never-ending goals; put a time limit on them.
Establish a Reasonable Budget.
A great way to keep your money earning interest for you is to keep from withdrawing it for expenses and other purchases. Once you establish your goals, you are then ready to create a budget for your household. Your budget is your lifeline to achieving your savings goals.
You will need to do the following in order to create a functional and reasonable budget:
- Trim Your Expenses. You need to figure out what you can live without and where you can trim some of the extra “fluff” that you may be spending. Reaching savings goals may require a little sacrifice from all members of the household. As long as your goal is reasonable, you can do it.
- Stop Using Credit for all Purchases. Try to pay for as much as you can with cash or your debit card. Prepare for your purchases; don’t just buy them spontaneously.
- Keep a Record of Your Month. Sit down on a monthly basis to review your budget and adjust where necessary. The more you stay on top of your budget, the more likely you will achieve your savings goals.
Saving money is a critical part of any household. By following these guidelines, you will be able to achieve the success you desire in your financial future.