If you’re worried about not having enough money set aside to get through the tough times that always await you, you’re not alone.
Check Out: Stimulus Updates You Need to Know for Summer 2022
Social Security: New bill could give seniors $2,400 more a year
A new GOBankingRates survey of more than 1,000 American adults shows that people care more about increasing their savings than any other aspect of their financial lives. About 29% of respondents to a GOBankingRates survey said they wanted to learn more about how to save money, which in addition to learning how to invest, pay down debt and increase passive income, which were the next hot topics.
If you’re among the nearly 1 in 3 people who care most about learning how to be a better saver, keep reading to start your journey.
The basic principle of saving is to store money you don’t need right now so it’s there when you need it later. Whether you’re saving for an emergency or a specific goal like a vacation, the savings are separate from the money you spend on a daily basis, which belongs in a checking account.
“You should keep at least one month’s worth of expenses in your checking account at all times,” said John Li, co-founder and CTO of Fig Loans. “You’ll need to keep this cash base in your account to avoid NSF payments, overdraft fees and sweating every time you swipe your card, wondering if there’s enough money to cover the purchase. .”
Your savings are also separate from the money you plan to invest. Like savings, you invest money that you don’t need immediately, but unlike savings, investments involve significant risk that can lead to losses in the pursuit of gain.
Saving your money is all about minimizing risk and keeping your money safe so it’s there when you need it.
POLL: Are you worried that Social Security benefits will be cut in your lifetime?
The classic savings account is the easiest and most common way for people to protect money they don’t need today so that it will be there tomorrow.
“Once you have at least a month’s worth of money in your check, it’s time to move on to your emergency fund,” Li said. of little interest but still liquid enough to be useful when you need to access it ASAP.”
It’s common for parents to open savings accounts for their children to introduce them to the world of personal finance at a young age, and people often maintain savings accounts throughout their lives.
Available at all banks and credit unions, savings accounts are FDIC-insured — you’ll never lose the money you deposit, no matter what happens with the bank. Unlike some other savings vehicles, like CDs and bonds, savings accounts are fully accessible – you can withdraw money from them at any time, up to a certain number of withdrawals per month.
When you deposit money in a savings account, the bank can make a profit by lending that money to borrowers. In exchange, the bank pays you a small commission in the form of an annual percentage yield (APY).
Different banks pay different returns. They’re still relatively small, but thanks to compound interest — which earns you interest on interest already earned — even small returns can generate big returns over time.
If you deposited $1,000 in a savings account with an APY of 0.60% and contributed $100 each month, you would have $13,425.95 after 10 years despite only contributing $13,000.
The St. Louis Fed says the national average savings account APY is 0.06%, which would be a pittance even if inflation didn’t diminish the purchasing power of the dollar at the fastest rate in 40 years. – but you can do better than average.
Credit unions, which are member-owned nonprofits, typically offer higher returns than banks, and online banks like Ally typically offer better rates than larger banks that maintain branches.
Virtually all banks and credit unions have tools that can make you a better saver. Some offer goal-based savings, which allow you to build up savings in “baskets” – one basket can be for a new car, another for an emergency fund, and another for a vacation. Others offer rounding savings, which rounds up purchases you make with a debit card to the next dollar and deposits the difference into your savings account.
The most important tool of all, however, is automated savings, which puts savings on autopilot without the need for self-discipline.
“To set yourself up for long-term financial success, you can set up automatic savings contributions each month to pay yourself first and then spend what’s left over,” said Brittney Castro, CFP at mint.
The standard advice for a healthy emergency fund is savings that could see you through three months without income – then and only then should you start risking money in hopes of making money investing .
“Your savings balance shouldn’t fall below 90 days of spending, which should be enough to cover an unexpected period of unemployment while looking for a new job,” said Dorothea Hudson, personal finance expert at InsuranceProviders.com. “Your expense reserve account should maintain a sufficient balance to cover expenses for a below-average month. So if your gross average income is $5,000 and your monthly deficit averages $4,000 , the reserve account should never drop below $3,000.
If you’re looking for a little more money than a standard savings account can earn you, consider these options for building up your savings:
- Money market accounts: Money market accounts are very similar to savings accounts, but they tend to offer higher returns. The trade-off is that they often require higher minimum deposits.
- Certificates of deposit (CD): CDs generally offer higher returns than savings accounts, but they don’t offer the same accessibility. With CDs, you agree not to touch your money for a set period of time, which can range from six months to five years or more.
- Savings vouchers: Bonds straddle savings and investment. They are like CDs in that you deposit money which you agree not to touch for a fixed term in exchange for receiving your principal plus interest at the end of the term. They are different, however, because when you buy treasury bills, you are lending money to the government. Because they are backed by the full confidence and credit of the United States government, they are among the safest investments on the market.
More from GOBankingRates