Having savings means you have put aside money to use at a later time. You do not need to use these funds to meet your monthly financial obligations. Having a savings account and working to build it up is good financial practice. It can help to ensure you have the money you need should there be a concern over time – such as an emergency or unexpected bill to pay.
As you consider building your savings, take a few minutes to consider your savings goals. Defining why you are saving money could help you to make better decisions about how to save (and how aggressively to do so) over time.
The Importance of Savings
Saving is essential for many reasons. First, it can help you through financially challenging times. If you have savings, you can use them to help you meet your financial obligations, such as paying your rent or mortgage, if you cannot work. It also allows you to put money aside for later, such as for retirement.
Savings give you peace of mind, too. Knowing you have money in an account to help cover your expenses helps reassure you that your and your family’s needs will be met over time.
Building a fund of essential or emergency savings is one of the first goals to set and work toward. These are funds you will put in an account that’s accessible. Opening a savings account that is linked to your checking account works well.
These savings are meant to be there for you in an emergency. For example, if your car breaks down, you need to pay to repair it to continue getting to work. It is always wise to work toward creating a savings account that has enough money to cover emergencies, so you do not have to turn to a credit card in such instances.
Initially, work to build an emergency savings of $1,000. Keep these funds safely put aside – don’t use them in your monthly budget.
Then, work to build on this initial amount. It is usually ideal to add to this account so it has three to six months’ worth of your monthly income. That way, if you cannot work for a period of time, you have enough money to continue to meet your financial needs.
Additional Savings Goals
You don’t have to stop there. Instead, continue to work to build up your savings over time. You can also create specific goals for other needs you have. Here are some examples:
- Set up an account to save for retirement. It may seem like a long time from now, but the sooner you start saving for retirement, the sooner you’ll reach that goal and be able to retire.
- Consider saving for a down payment to purchase a home. If you plan to buy a home, you may need between 3% and 20% of the purchase price as a down payment. That’s the cash you’ll need to start the process.
- Save for vacations or other large purchases. You can create individual savings goals for any significant investment you want to make. There is no real limit to what you can do with these funds.
- Start saving for your child’s college education. You may qualify for tax-advantaged savings opportunities here, which means you could lower your tax obligations by contributing to a qualified savings account.
- Buy a car. Saving up the money to purchase a car will cost you less. Remember, if you buy a car with a loan, the actual amount you pay is the sticker price and all of the interest you will pay over the life of the loan. That becomes very expensive.
Write down any savings goals you have. Having enough money in the bank to minimize financial risk is its own reward.
Reaching Savings Goals
Having goals is good, but you also have to develop a plan for getting to them. There are a lot of ways you can save money. Look at your personal goals and then create a plan to do so. Here are some strategies to help you do that:
Incorporate savings into your monthly budget.It can be just as important as any other item in your budget to put money aside for each month. Pay yourself first.When your paycheck reaches your bank account, immediately transfer money to your savings. That way, you are always putting savings first. Aim to save 10% to 20% of every paycheck.That may not be easy to do at first, but doing so can help you to keep more money working for you.
Break down big savings goals into chunks. That way, you can see your progress more readily, and that can help you to stay motivated along the way. As you put money into your account, recognize how important this is for you and for your long-term financial health.
Published July 2023