Why save money?
Saving money is certainly a combination of art and science. It takes discipline, strategy, and sometimes discomfort. Knowing why you are saving and what the funds are for goes a long way toward supporting new habits and practices. Just for starters, let’s look at 13 great reasons to get good at saving money:
- Flexibility to pursue your dream career – you can’t quit without a cushion.
- Long-term security – in case you lose your job or are too sick to work.
- Saving for fun – part of the discipline is saving to have a good time.
- Inevitable emergencies – your car breaks down or you have an accident.
- Stress reduction – living paycheck to paycheck is so difficult.
- Helping others – the ability to lend a hand is a great feeling.
- Financial legacy – leaving something to support your family when you pass away.
- Education – life is about learning, for you or your kids, but it is expensive.
- Major purchases – save for a house or for a new car, for example, without carrying too much debt.
- Home maintenance – your house will be an endless project of improvement.
- Minimizing risk – saving and investing lowers your financial risk in life.
- Building wealth – this comes from saving, investing, and compound interest.
- Freedom – being independent rests on financial independence.
Hopefully this list has inspired you to refine your saving practices. The next question is: What is the best way to save money? These are some of the top strategies.
How to save money: tips
If you look online, you will find hundreds of tips about how to save money. But in our experience, these six are the best places to start.
1. Ask yourself: how much savings should I have?
In general, financial advisors recommend saving 20% of your income each year starting from age 25. Thus, by age 30 you’ve saved your full income (20% each year times five years). By 35 you’ve saved twice your income, three times by age 40, and so on. If this isn’t realistic for you, or if you are over 25, don’t worry.
Even if you’re behind in saving, there is still a way to pull together a solid nest egg if you focus. The first and most important step is establishing some savings goals. Financial advisors generally advocate four main goal categories: retirement, emergencies, large purchases (like a car or vacation), and college tuition for your kids.
“But how much savings should I have?” you’d like to know. With regard to your retirement, which usually requires the largest amount of savings, most experts agree that you will need to have saved half a million dollars to be comfortable beyond what Social Security provides. You might find that amount daunting, but you will be surprised by how achievable it is.
A great way to ease yourself into the saving habit is the step strategy. Start by saving $10 in the first week, $20 in the second week, $30 in the third, and so on up to $520 in the last week of the year. This will give you a savings of $13,780 in one year and $275,600 in 20 years. And that’s without any interest at all. If you can find a place to park your money at 5% interest, you will have half a million in 20 years – problem solved.
Now you have that $500,000 target firmly in your sights, let’s look at more money-saving tips.
2. Do some serious budgeting.
Budgeting is a critical component of any saving strategy. Start by making a list of your “fixed” costs – rent/mortgage, utilities, food and staples, phone, internet, and other regular bills. Then track your spending, keeping a list of everything else you spend money on. There are great apps that can help with this. Try You Need A Budget, Pocketbook, Good Budget, or Money Brilliant. The process may sound effortful, but remember that you can only increase your savings by either earning more or spending less. Your budget is your tool for achieving the latter.
3. Change unhelpful buying habits.
The key to good buying habits is the 50/20/30 rule. If possible, spend no more than 50% of your monthly income on essentials and fixed costs and 30% on day-to-day living and dedicate 20% to savings. There are a few helpful disciplines here:
- Automate the savings part by setting up a recurring transfer on the day(s) you get paid.
- Try the 30-day rule. If you are tempted to make a large purchase, put an amount equal to its price in your savings account and wait 30 days. If the desire for the purchase has worn off, congratulations on the expansion of your savings.
- For smaller purchases, try the 10-second rule: Count to 10 and ask yourself, do you really, really want it? If the answer is “no,” put the money you would have spent in your savings account.
- One last habit to be aware of: Be careful about wasting money on higher-end brands when a generic version will do. Lesser known or no-name brands are often just as good and, in some instances, are made by the same manufacturers.
4. Reduce and eliminate your credit card debt.
The mistake many people make with credit cards is that they pay late and they pay the minimum, adding 20% or more in interest plus late fees. In the end, the cost of your purchase could double. Make it a high priority to pay down all credit card debt and stop relying on credit cards in the future. Doing this will mean great savings over time.
5. Create and protect savings accounts.
You may be asking: what is a savings account and how does a savings account work? A savings account is an interest-bearing deposit account held at a bank or other financial institution. The bank records and holds the money you deposit in your account and uses it to make loans to other people. Then it pays you interest in return. In other words, banks take money from one person (while paying interest) and loan money to other people (while charging interest). Be sure to open a savings account with the highest interest you can find and deposit all your windfalls there – tax returns, bonuses, gifts from relatives, etc. Program a regular deposit from your income, 20% if you can manage it. Keep this account separate from your active accounts, perhaps at another bank.
6. Be alert for everyday savings and grab them.
Many budget items you consider “fixed” expenses can be reduced, often realizing a whopping savings. Look into refinancing your mortgage or renegotiating your rent, for example. Utilities and insurance companies are competitive, so see if you can get a better deal. Take a look at your phone and internet plans. Get rid of unnecessary deductions and subscriptions. If you want to know how to save money fast, stop unnecessary spending. If you are serious about gathering savings quickly, consider putting a temporary stop to dining out, going to the movies or sporting events, and grabbing Friday night drinks with friends. And no impulse purchases. Remember the 10-second rule.
Some final savings thoughts
Other savings information you may need concerns CDs and savings bonds. First let’s examine what a is CD in banking. A CD, or certificate of deposit, is a way to make even more interest on your savings. It’s a low-risk savings tool where the bank pays a higher interest rate if you keep your money in the CD for 3, 6 or 12 months or longer. The longer you let the bank keep your money without withdrawing it, the more interest it will pay you. Like savings accounts, CDs are considered low risk because they are insured by the federal government up to $250,000.
Savings bonds are another secure but long-term kind of saving. They are an excellent way to save for a big expense in the future, like college for the kids. Bonds are issued by the United States government to help finance its operations. By purchasing a bond, you are essentially loaning the government money and it promises to pay you back with interest when you cash out, or the bond matures. In considering how to cash a savings bond, you must know the status of the bond. Most savings bonds stop earning interest (or reach maturity) in about 30 years. It is possible to redeem a savings bond after one year, but it’s generally beneficial to wait until they fully mature to redeem them.
So, are you ready to ramp up your savings with bonds, CDs, or savings accounts? Let the experts at Fremont Bank help you figure out the best way to save based on your unique needs. Contact us at (800) 359-BANK(2265) to get started today.