You work hard for your money, right? And once you earn it, there are four places your money can go. You can spend it, save it, give it away or invest it.
Savings are critical to long-term financial health – so here are some ideas that will enable you to think differently about the value of savings in your life.
First, put your money into context. Why should you save? A base of savings provides security (should things go wrong with your income), flexibility (you have the ability to choose what to do with your money, versus living paycheck to paycheck) and over time it becomes normal to have a cushion of money that you can grow through investments.
A different view to consider is this - every dollar you spend is part of the bigger picture of the economy. It’s your spending, and the spending of people just like you that generates most of the value in the economy. Companies know this, and they make a huge effort to get your attention and pull in your dollars. So unless you have a specific strategy or plan (including a minimum savings number that you want to keep in your account), it’s all too easy for your ‘savings’ to become a new television, or a closet full of clothes you rarely wear!
The way many people manage their money is to have separate savings and checking accounts. Checking accounts are for your day-to-day spending, the money you need for your life to run: your food, clothes, transportation, rent or mortgage and maybe some entertainment.
Savings accounts can be used to hold what money is left over after you pay all your bills. Or better yet, create a transfer every month of a set amount into your savings account. Savings accounts are a great place to build up the money you don’t touch. Set a goal – say to have 3 – 6 months worth of living expenses in your savings account. Banks promote savings accounts as a safe place to save, and they are safe, but when interest rates are low, this money won’t grow much. So once you exceed your savings goal, transfer the excess funds into an investment account where you have your money work harder for you.
A good rule of thumb for savings is the 20 / 50 / 30 rule. Every month transfer 20% of your income into a savings or investment account. 50% of your income stays in your checking account and goes towards necessities – housing, bills, education, transport, food etc. The last 30% also stays in your checking account and is for discretionary spending – clothing, entertainment, travel, charitable donations or gifts. When you get a raise, make sure your transfer reflects the new amount.
This idea of turning savings on it’s head, and making it a planned effort, as opposed to an afterthought, is a great way of driving savings.
Remember, your money is powerful. If you deposit your money in a bank, they can put your money to work and lend it so someone else. If they use it to give someone a cash advance on their credit card, your bank can earn 15% interest – or 15 cents on the dollar, from your savings. When interest rates are low, your bank pays you less than 1% - or a fraction of a penny! Your bank is making a lot of money off of your savings, so why shouldn’t you too? THIS is why it’s so important to learn about investing.
Getting smart about saving is a fundamental pillar in long-term financial success. You can change your financial future if you start to think beyond the bank and getting your money to work for you. And when you plan your savings, you’ll be able to protect yourself from emergencies, save for short-term goals and buy yourself options in the future.