Here’s a primer for saving money: all you need to know about why, how and where to save your hard earned dollars.
We’d like to give you a closer look at saving money. Here’s where we try to answer all your questions about the cash you want to keep safe.
For many people, it sure feels like there’s just not enough money going around, but one way to change things is to curb spending habits and learn how to save. It sure sounds simple but why are our saving rates so low in the U.S. compared to other countries? I actually knew some people who still hid their cash in a safe in their house. With cash lying around like that, then there’s quite a temptation to make use of it somehow. If you leave the extra cash in an accessible place, you may be more likely to exchange it for that Bar Blender on sale at Sharper Image.
I can tell you from experience that saving ranks up there in difficulty along with losing unwanted pounds or sacking a couple of bad habits (or vices?); why else would there be a proliferation of such resolutions come the beginning of each year?
It’s been said that saving money is all about attitude and determination, much like dealing with any other challenge. It’s also the start to a working plan that can bring you so much more down the road. I think people who are already masters of organization and control will find this to be no big deal. For everyone else, maybe a little inspiration may help. So I asked myself the basic questions: WHERE, WHY and HOW? I pooled together various resources and called upon my own experiences to come up with the answers.
Where Should I Put My Short Term Savings?
Before thinking about investing, make sure you have funds parked in safe accounts to handle short term needs.
Checking accounts are primarily used for transactions so expect not to get a good return from it. Open one at a bank.
Pros: Very liquid, convenient, FDIC insured.
Cons: Very low returns, you may pay fees for all sorts of transactions.
High Yield Savings Account
Savings accounts are a step up from checking accounts but still offer relatively low returns. Available at your bank.
Pros: Low minimum balances required, FDIC insured.
Cons: Low returns, in some institutions may offer less convenience than a checking account.
Money Market Deposit Account
A deposit account that requires a minimum balance and possibly limited transactions. Available at your bank. Not much more exciting than a savings account.
Pros: Very liquid, convenient, accessible via transfers, FDIC insured.
Cons: Lower returns than CDs, fees charged for overtransacting.
Money Market Fund
I like money market funds as these are liquid, stable funds placed in CDs, government-backed securities and commercial paper, and which have relatively attractive rates. There are state-based funds as well as general taxable and non-taxable funds. I prefer the non-taxable funds that are not tied to a state’s finances so that risk is mitigated. Find this in brokerages and mutual fund families.
Pros: Convenient by allowing transfers, has higher rates than savings or money market deposit accounts, and has check writing privileges. However, for “security purposes”, I’d rather keep my electronic or paper check writing activities limited exclusively to my checking account and I would prefer to simply funnel additional funds to it from a money market fund if necessary. This way, I keep things simple by keeping only one checkbook or by sourcing only one account for payments, plus I’m able to track transactions better. Also, money market funds have fairly stable NAVs (net asset values); in 20 years of using such a fund, I have never seen the NAV fluctuate. Thus, the risk is very low, but note that it still does exist.
Cons: Not FDIC insured, no guarantee that the NAV stays at $1.
Certificate of Deposit
These are instruments with specific maturities that vary in length of time period (3 months to 5 years) till maturity. Get this at banks or brokerages.
Pros: Very safe, FDIC insured, the longer the length of maturity, the higher the guaranteed rate of return.
Cons: Somewhat illiquid in the sense that you need to keep your money tied up in the CD till it matures or pay a penalty to get your money out.
US Savings Bond
This includes Treasuries, I Bonds and EE Bonds; these are backed by the full faith and credit of the US government. Check out Treasury Direct for all about how to invest in these vehicles.
Pros: Safer than anything, exempt from state and local taxes, decent yields.
Cons: Taking your money out before the maturity date may cause you to lose part of your investment.
Why Should We Care About Saving Money?
To reach financial independence.
This is the ultimate reason to save because what money can buy, other than the requisite material goods and services, is freedom and independence to do as you wish with your time.
To be prepared and anticipate the twists and turns of outrageous fortune.
This is what an emergency fund is all about: don’t get caught with your knickers down!
To realize a known goal somewhere in the horizon.
If you know you’ll be facing a big expenditure down the road, then get ready for it. One day, you’ll be looking up at those Ivy League ivory towers, then you’ll need to walk that little girl down the aisle and eventually put yourself to pasture in some tropical island.
To achieve your dreams.
This is a warm and fuzzy answer. Many times it’s something luxurious, like a fancy new home entertainment center or a heated pool or a sailboat that you’ve always wanted. But it could also be something as prudent as eventually just having enough to deem yourself ready for the investing or even the business world.
To grab on to the next big opportunity.
When the time is ripe, you better be there with the cash. Just the right moment can make all the difference and determine just how many 0’s there should be at the end of your money totals.
To prove something to yourself.
I believe in measuring successes no matter how small, since it really helps with building confidence. Conquering the challenge of living within one’s means is sure one of those measures. Start saving and bask in the light of a personal victory!
How Should I Save? Or What Are The Best Practices For Saving Money?
Here’s how to save for the near term:
Know how much money you’d like to put away.
You can start by knowing how much you can afford to sock away. What is your discretionary income like? Your first priority is to retire your debt. Along with this goal, you should also consider building your savings. If you can manage a savings program, then check out my general rule: take out 10% of your gross income and stuff it in your savings fund. Better yet, aim for 15% if you can. Once it reaches a certain amount to address short term goals AND after your debt’s been covered, then you can then divert the 10-15% going forward into investments.
Choose the type of vehicle to place your money in.
Find out where you’d like to park your money in. There are many choices which I discuss further below but the answer for you lies in how much certain characteristics matter to you, such as liquidity and convenience, rate of return and stability.
Compare financial offerings across the board.
You can check out Bankrate.com or iMoneyNet.com for:
- available interest rates
- comparable yields over identical time periods
- the fees for maintaining such an account
- the minimum investment required to open an account
- any other terms governing the account such as: how liquid will the funds be and are there penalties for withdrawal
Apply will power. Lots of it.
Just like weight control, one of the best ways to stop spending money and finding enough to save is to go cold turkey. I found that by distracting myself and replacing my catalog shopping hobbies (or habits?) with some other activity, I’ve managed to ignore the temptations that come by my house every month via colorful ads and catalogs.
Stop buying impulsively.
Before buying an item, give it a few days. After a few days, chances are that your interest in the item will wear off and you may no longer be as interested in making the purchase as you had been at that earlier time.
Pay yourself first by automating your savings process.
What you don’t see won’t tempt you. Set up an automated savings program through banks or financial institutions that will automatically suck your money into a savings or money market account or other short term fund.
Check up on how much you’ve got and keep track of your savings.
There are many ways to address your savings: you can earmark them for short, medium or long term goals. Keep an eye on how much you are saving so that once you’ve got enough in short term instruments, you can move on to the next step and invest the rest for growth or income, and be able to take a bit more risk. For kicks, you can also check on how well you’re doing.
Now that I’ve tackled all the major questions about savings, we are left with one last thing to ask: WHEN? When should you start a savings program? I’m sure you know the answer to that one! (Hint: Don’t wait!)
Created November 10, 2006. Updated June 11, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.