Building savings is a crucial goal for every consumer, and something we stress with everyone we counsel. America Saves Week may have ended last week, but we urge you to think about building savings year round.
Don’t go overboard
Putting too much into savings can set you up for failure just as surely as saving too little. If you leave your checking account short of what you need to pay all of your bills, you’ll have to dig into your savings, defeating the purpose of your savings account.
Start modestly, and only increase the amount you put into savings if you are able to afford to live without the money. After a few months of getting used to a new budget, you will hopefully find that you can increase the amount your save. Ultimately, your goal will be to save 20% of your earnings, but that full amount probably won’t be obtainable until you’ve paid down your debts.
Separate your savings
Most people have a checking and savings account with the same financial institution. It’s very easy to transfer funds back and forth between the two accounts-many banks let you use a web site to transfer funds immediately. This is convenient when moving money into savings, but usually it’s too convenient when it comes to pulling money out of what should be a long-term savings account.
Sometimes, it’s better to find an entirely separate bank, even an online-only bank, and transfer funds to it for savings purposes. Some of these online banks offer the best interest rates on their savings. If you look around, you may be able to earn as much as 4% on your savings. That’s not enough for your retirement accounts, but it’s a lot better than the typical bank account.
Also consider a local credit union with fewer branch locations for your savings. The goal is to make the money a little less convenient to access in the hopes that the funds will stay in the bank rather than end up in your pocket.
Work toward savings goals
Your first savings goal is to set aside 90 days’ income in an emergency savings fund. Once that goal is achieved, then you can start to save for other goals, like vacations, a new car, a down payment on a home, etc. Keep these funds separate by starting a new account for your goals. Or consider transferring your emergency savings fund into a higher interest-bearing money market or other savings vehicle (be sure not to put your emergency fund into a risky investment).
Talk to your employer about direct deposit of your paycheck. If it’s available, take advantage of it, and try to have a portion directly deposited into your savings account. Remember to only set aside as much as you can afford at first, increasing the amount as you pay down your debts.
Building savings is essential to your long-term financial health. Always keep the motto of America Saves Week in mind: “Build Wealth, not Debt”.