Beware Of “Daylight Spending Time”
Rather than saving energy, daylight saving time prompts us to spend more money.
Get the latest tips and tricks to help you save money effectively
Rather than saving energy, daylight saving time prompts us to spend more money.
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Americans think they can reach their long-term financial goals, even though they also think they’re not going to have enough money to last their entire lives.
Anytime you can set up a system to work without you, it’s more likely to work. If you have to remember to set aside money each month before you spend it, it’s less likely to occur. So, you want to make savings automatic.
The best idea is to ask your HR department to split the Direct Deposit for your paycheck. Allocate 5-10% of your income to deposit directly into your savings account while the rest goes to checking. This way, you don’t even have to think about setting money aside. Otherwise, set up a recurring monthly transfer from your checking to your savings account.
Your first savings goal should be to have a $1,000 balance that you maintain in your main savings account. This should be the minimum balance that you try to keep in the account so you have funds to cover most emergencies. Then you can use the funds if your car breaks down, you have an expensive home repair or an unexpected medical bill.
As you’ll see below, this is not the full financial safety net you need. But it’s a good, solid first milestone that you can aim to achieve.
A true emergency fund is big enough to cover all your bills and necessary budgeted expenses for up to 6 months. This means you can be out of work due to unemployment or a medical issue for half a year without facing financial distress. You don’t have to rely on high interest rate credit cards to cover your expenses or take out costly payday loans.
Total up all the necessary expenses in your budget and multiply by three. This gives you the next savings milestone you should aim for after your basic $1,000 emergency fund.
A traditional savings account typically has an interest rate of less than 1%. In fact, 1% is considered a “high rate” when it comes to savings accounts. The problem is that such a low rate means it takes a long time for your money to grow. You’ll be lucky if you ever achieve your goals with such little growth.
In order to save money effectively, you must make those savings grow effectively. This means you need better growth rates than your basic savings account can offer. Without more robust investment tools, it will be hard to achieve stable long-term savings.
If you don’t like the risk of the stock market and you prefer to start small, look to cash equivalents first. Cash equivalents refer to any investment that you can easily convert to cash. This actually includes basic checking and savings accounts, as well as investments like Money Market Accounts and Certificates of Deposit.
Money Market Accounts function like savings accounts, except they usually have higher minimum balance requirements. The applied interest rate is usually higher, too. In fact, most MMAs work on a tiered rate system. This means the more you save and the higher your account balance, the higher your rate of return, too.
CDs are a type of short-term investment that also offer better rates for saving. You deposit a certain amount of money that matures over a certain term; typically, terms range from one week up to five or ten years. At the end of the term, you withdraw the money or let it roll over for another term. This type of savings can be good to hit specific goals like we will describe below.
Think about savings in terms of specific goals that you want to reach. For instance, you would have your basic savings and emergency fund, long-term retirement savings, and then savings that you allocate for certain purposes. This will help you save strategically and ensure the money doesn’t get spent.
So, let’s say you want to buy a car next year. You have $3,000 in savings that you want to use for the down payment. If you put that money into a 12-month CD, it can grow for a year and it’s not sitting in your savings account where it can get spent. Allocating savings this way helps ensure you can pay for specific goals with less need for financing. You can also pay for things like vacations without high interest rate credit card debt coming home with you.
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