4 Must-Know Savings Strategies
While we all know saving is important, understanding exactly what we’re saving for and why can help lay the groundwork for achieving our long-term financial goals. That’s why we’ve created the following streamlined framework for mapping out your plans.
As a general rule, your reasons for saving probably will fall into one of the categories below. Read on to help prioritize your savings goals and customize your savings strategy.
- Emergency Savings
An essential part of any budget, your emergency savings should be easily accessible and consist of enough money to cover three to six months’ living expenses.
Don’t have an emergency account? It can be a big undertaking, so start small and eventually build up to cover several months of costs. Being able to cover the unexpected, such as a job loss or medical emergency, will help prevent you from going into debt, and will give you peace of mind.
Remember that “living expenses” includes major necessities (bills, groceries, transportation) and not extras (restaurants, movies, clothes). While it may be tempting, remember that your emergency savings should only be used for true emergencies. Home improvements, vacations, shopping and more should not touch your emergency savings.
- Smaller Savings
Perhaps you’d like to take a vacation, buy a new computer or splurge on holiday shopping.
Whatever you have in store, the best way to save for these types of smaller, short-term goals is with a high-interest savings account, money market account or certificate. These options can give you access to your money when you’re ready to use it, while providing a safe investment and good rate of return.
Keep in mind that money in a certificate is held for a set length of time and usually is not accessible during the term. Therefore, certificates are a great choice if you want to set aside money you already have and won’t need to access for the length of the term.
- Bigger Savings
Goals that require more money and more planning, such as a wedding, house purchase or college education, fall into the bigger savings category.
Set up automatic transfers to set aside money for these bigger goals automatically. Again, a high-interest savings account, money market account or certificate is your best bet for a safe investment and good rate. For education savings, consider a CESA or 529 plan for additional tax advantages.
Calculate a rough estimate of how much you hope to save, along with your savings time frame. Divide the total amount by the number of months to see how much you should be saving each month. This will help give you some perspective and keep you on track as you create your savings plan.
- Retirement Savings
While other savings goals may vary, everyone should have a retirement savings plan.
Popular retirement savings options include employer-provided plans such as 401(k)s and SIMPLE IRAs, as well as private plans such as Roth and traditional IRAs. Talk to a financial advisor to learn more. They can advise you on the type of investments you should make based on your age, goals and appetite for risk.
In general, you’ll want to save at least 10 percent of your income toward retirement each year. Depending on your age, you may want to save even more. Why? Retirement savings needs to cover everything from bills to groceries to vacations to medical care, so it’s important you save enough to afford the comfortable retirement you deserve.