When you save money, you're putting it aside to meet your needs down the road. That is, savings is not money you will use to pay your monthly bills or cover the costs of your current expenses. It is money you decide to put aside for some reason in the future. That could be to build up over time for a big purchase, like a car or home. It could also protect you against times when your income falls below your needs.
What Are Savings?
To define savings, consider this. It is the amount of money that comes from your income that you do not spend on your current expenses. Saving money is essential and can foster long-term financial health. When you have savings, money is available to pay for unexpected needs and emergencies.
You may need to use some of your savings for medical treatment, and you may need to use it to repair your car to get to work daily. Savings can help people to become more financially secure over the long term.
Think of savings as money you will not use this month to cover your spending or bills. Your goal should be to save as much as you can.
Where Should Money Be Saved?
One of the big questions many people have is where to put their savings. There are a few different options. Most often, putting your money into a traditional savings account is ideal. This allows you to keep the funds accessible through your debit card or a visit to the bank, but it is still not in your wallet, where you are more likely to spend it.
Banks and credit unions offer savings accounts, which is a safer way to save money than keeping cash at home. If someone were to take that cash, there is no way for you to prove you had it or that it belongs to you. However, when in a bank, it is protected by the federal government (up to certain limits).
You can also benefit from interest accruing on the savings account. Banks and credit unions pay you an interest rate, or a certain percentage, every month you leave the money in that account. In this way, savings accounts help you to make money. It is good to compare several financial institutions to find the best option for your needs.
For longer-term savings, consider a certificate of deposit or an investment account. These accounts could help you grow your savings faster, but it is always important to remember that any investment has some risk.
How Much Should You Save?
The more you save, the better. There are a few steps to take.
Start with setting up an emergency fund. This is about $1000 that you put into your savings account to use for emergencies, and it's there as a backup in case you need it.
Then, create another savings account that you build up from there. Most often, saving 3 to 6 months of your monthly expenses is essential. For example, if you need $4,000 monthly to cover your bills, your next savings goal should be to put $24,000 away into savings. These funds are for more significant concerns, such as losing your job.
Another way to look at savings is the amount of money per paycheck you deposit into your savings account. For many people, an initial goal is to deposit whatever they can from their budget. Then, work up to 10% of every paycheck. In the ideal situation, 20% of each of your wages will be put into savings.
If you earn $1,000, make sure that $100 to $200 is put into a monthly savings account. Keep doing that and make it a part of your budget. Over time, you will build up your savings to reach an amount you feel comfortable having tucked away.
How to Get Started
To start saving, open a savings account with your bank or credit union. Link it to your checking account.
Then, work to build a budget. Your budget should be based on your monthly income, covering all of your expenses. Allot a certain amount, 10% to 20% of each check, to savings.
Pay yourself first. Often, your bank can set up a service to help you with this. When your paycheck arrives in your checking account, your bank (or you) can move a certain amount of money from checking into a savings account. Setting this up to be automatic helps to minimize the risk that you will not remember to move the funds.
After building up your savings, consider paying down your debt. Once you reach six months of income, work to pay down your existing high-interest debt. Doing this will help you reduce your monthly costs while also enabling you to continue meeting your financial obligations. Over time, you'll pay off your debt and have the funds necessary to build your savings.
Make saving money a priority. Doing so can help you build financial security and also enable you to cover emergencies without having to turn to credit to do so. It can be hard to start, but it is worth it once you put a plan in place.