April is Financial Literacy Month, a month-long effort to highlight the importance of financial knowledge and a great time to improve your own knowledge. This week, we are highlighting the importance of savings and how to build a savings account that you can depend on. Read on to learn savings basics!
Why Should I Save?
According to Bank Rate, more than 40 percent of Americans would not be able to cover an unexpected $500 expense without borrowing money or using a credit card. This highlights exactly why it is so important to save for long- and short-term goals as well as the importance of having a well-stocked emergency fund. We can’t plan for the unexpected, but we can prepare, and if you have important goals for the future, whether it is buying a car or a home or just a simple vacation, saving consistently is the way to reach them.
How Much Do I Need to Save?
The recommended amount to have in savings differs from person to person and lifestyle to lifestyle. Most financial planners recommend saving at least 10 percent of your income in various ways including retirement funds, emergency funds and short- and long-term savings accounts. If that number seems overwhelming, you’re not alone. According to a 2016 study, 69 percent of Americans have less than $1,000 in savings. That doesn’t have to be you! The trick is to make savings a priority, set attainable goals and commit to your financial future.
How Do I Set Savings Goals?
Goals are different for every person, so to set meaningful goals you have to take stock of what is important to you. Everyone should have an emergency fund ready to handle unexpected emergency expenses such as medical visits and car repairs. Other than that, you might have long- or short-term goals like buying a house, buying a car, saving for retirement or paying off existing debt. Pick a few goals that are important to you and determine how much you will need in each. Start by committing to saving $1,000 in an emergency fund, and go from there.
How Do I Reach My Goals?
Savings is more like a marathon than a sprint—it will take time to reach your goals, and that’s okay! Saving a little bit at a time rather than a whole lot all at once will make it much easier to reach your savings goals without sacrificing quality of life. Once you have determined how much you need to save, think about when you need to have that amount saved up and work backwards to determine how much you will need to save per month to reach your goals. For example, if you want to have $1,200 in an emergency fund one year from now, you will need to save about $100 each month. If you want to save up $10,000 for a down payment on a house five years from now, you will need to save $2,000 per year to meet your goal. That means each month, you will need to put away about $167. If you need help determining how much you should be saving, there are many savings calculator tools out there that can help you better understand your financial goals.
Don’t Forget About Retirement
With many more pressing and immediate matters in mind, it can be easy to push off saving for retirement—but the earlier you start saving the more you will have when it comes time to retire. If saving a lot toward retirement seems daunting, it’s okay to start small. Talk to your employer about 401k options, or open an IRA account with your bank. Then, start with saving just 1 percent of your income. Each year, work toward bumping up one more percentage point until you are saving at least 5 percent of your income each year toward securing a well-funded retirement.
Quick Tips for Easy Savings
- Make savings automatic. Instead of manually moving money into your savings account, set up an automatic draft each month or each paycheck.
- Keep a separate savings account for each savings goal, and name your accounts to match. Taking money from savings account XYZ might be easy, but mentally it is much harder to borrow from your account labeled New Car Fund.
- Reduce your expenses to save more for the future. Eliminate unnecessary spending to free up cash to reach your savings goals faster.
- Save your windfalls instead of spending them. This includes tax refunds, bonuses, raises and gifts. If you can’t stomach putting all of it into savings, commit to saving half.
Saving money is a crucial part of securing your financial future. For more information about budgeting, see our previous blog, Budgeting 101. Check back next week for our next installment of Financial Literacy Month series, Debt Management 101.
