Whether you’re saving to become a homeowner, for retirement, or for some other purpose, building savings is a crucial goal for every consumer. When we educate people about the budgeting process, saving up an emergency fund is often the first goal we tell people to set.
Make savings a regular habit you think about routinely and practice all year-round. Creating and growing your savings account is a life skill that everyone must develop, so don’t put off saving for another time. Here are some tips for managing your savings starting today.
Don’t Go Overboard
If you put too much into savings, you can set yourself up for failure just as surely as if you save too little. If you save too much and leave your checking account short of what you need to pay all of your bills, you’ll have to dig into your savings for regular living expenses, defeating the purpose of having the savings account.
Start modestly, and increase the amount you put into savings only if you can afford to live without the money. After a few months of getting used to a new budget, you should find that you can increase the amount you save. Your goal will eventually be to save 20% of your earnings, but you probably won’t be able to set aside that full amount until you’ve paid down your debts.
Separate Your Savings
It’s typical to have a checking and savings account with the same bank or credit union. This makes it easy to transfer funds back and forth between the two accounts—your bank will probably let you use a website or app 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.
To keep your savings from dwindling over time, it’s better to find an entirely separate financial institution, even an online-only bank, and transfer funds to it for savings purposes. Some online banks offer the best interest rates on their savings—shop around for the best return you can get. You won’t earn as much as you would need for something like a retirement account, but it should be 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 less convenient to access in the hopes that the funds will stay in the bank rather than end up being spent.
Choose the Right Type of Savings Account
Besides typical savings accounts, you might want to explore more long-term options for saving. A CD (Certificate of Deposit) should earn higher interest than your savings account, but the money will be locked into the account for a set period of time. You can get CDs for a wide range of time periods, but typically they range between a few months and five years. The longer the term of the CD, the better interest you’ll earn.
For really long-term goals, you’ll want to look at individual retirement accounts (IRAs) that are FDIC insured or 529 plans for education savings. Once you’ve got your emergency fund established in a form that is accessible, excess savings could be invested in a mutual fund or the stock market. Beware that these deposits may be risky, so exercise caution any time you make an investment.
See our free Basics of Financial Planning booklet for more information about these kinds of options and long-term savings.
Work Towards Savings Goals
It’s really important to have firm goals established that you are working toward. It’s not enough just to commit to saving; you have to know what you’re saving for and how much you need to accumulate.
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. Remember to keep the emergency savings fund in an account you can access during a genuine emergency, and put other goals into a higher interest-bearing money market or other savings vehicles.
More Resources: Financial Goals Examples and Tips
Use Direct Deposit
Talk to your employer about having your paycheck directly deposited into your bank account. Take advantage of this option if it’s available, and 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.
The idea is to have the savings put aside automatically so that you don’t notice the money or have to save it yourself. It can be difficult to set aside that money when you have so many financial obligations and temptations competing for those funds. Setting up automatic savings is much easier than making yourself save with every paycheck.
Treat your savings as a bill, and pay yourself first. Figure out what you can afford to save each month and direct deposit $100, $50, $25, or even $10 a month. Pay for yourself first! It adds up and will become habit-forming. Remember to start small, think big.
Check in Regularly
With online banking, you’re always a quick login away from knowing how your savings are doing. If you use online bill pay, you should plan to check your account every few weeks to make sure there are no problems and no bills that need to be paid. While you’re doing your regular banking online, check in on your savings to make sure everything is going okay.
Look to see if your bank has a dedicated app for managing your accounts. Using a smartphone app will typically be quicker and more secure than logging in through a web site, and depending on your smartphone, you may be able to authenticate with a fingerprint or face ID, reducing the need for logging in with passwords.
Save From Every Source of Income
Whenever you have money coming in, no matter the source, save part of it. If you are saving 20% of your paycheck, then set aside 20% of every other dollar that comes in. If you have a yard sale, receive a gift, or cash in your credit card rewards, treat that like another paycheck and save at least the same percentage.
If you’re saving for the long term and your income changes, consider increasing your savings. If you get a 5% raise, think about saving all of that extra money. After all, if you could get by before the extra money came in, then you should be able to keep your spending levels the same and set aside the increased funds.
Related Article: The Best Way to Use Your Coronavirus Stimulus Check
Treat Your Savings as Off-limits
Dipping into your savings for any reason should be a last resort. For your emergency savings, tap into those funds only in the event of a bona fide emergency. For your savings goals, use the money only for the goal you originally set in writing.
Any changes to your savings goals or how you use those funds should be carefully planned and set out in writing in advance. If you are making a spur-of-the-moment change to justify tapping into your savings, stop and reconsider whether the situation truly warrants it.
One way to look at your savings is like a cherished family heirloom. Would you sell such a thing to resolve your immediate situation? If so, then it might be acceptable to dig into your savings.
Commit to Save
We’re a campaign sponsor for America Saves. This program was originated by the Consumer Federation of America and helps people reduce debt and build wealth by encouraging savings. The campaign uses social marketing principles and asks consumers to take a pledge to save. Savers get regular reminders about saving, monthly challenges, and helpful tips and advice for meeting financial goals.
Visit our campaign page at Inland Empire Saves to take the pledge today. Then follow America Saves’ three basic steps:
- Set a Goal.
- Make a Plan.
- Save Automatically.
Pay Down Debts
Building savings is essential to your long-term financial health. Anything that gets in the way of your ability to save, like debts, should be addressed.
If you can pay off debts and keep them paid off, you’ll free up income that interest charges and monthly debt payments would otherwise take. That extra money every month will make it easier to meet your regular financial obligations and build savings.
Related Article: How to Start an Emergency Fund to Prevent Debt
If your debts are making it harder to establish or grow your savings, talk to a debt counselor about creating a plan to become debt-free.
