What are Savings?
It’s the money you have left over after your generated income is spent. Savings should not be guaranteed as leftovers; rather, they should be set aside before you spend.
Why Important?
Savings are an emergency fund.
They will come in handy when you need to pay for an unexpected expense. To ensure you are always prepared for a financial emergency, you must commit to keeping and growing your reserves. Additionally, money in the bank increases with interest and is protected, even if the bank runs into trouble. Outside of emergency situations, savings are also useful for making down payments on large investments, such as buying a car or a home.
Saving is an important commitment to future prosperity. This kind of commitment is made harder by what psychologists call “present bias,” which is the tendency of people to irrationally prefer gratification today over a larger gratification tomorrow. For example, many people would rather have $4 today over $5 a week from now, but almost nobody would choose $4 a year from now over $5 a year and a week from now. The famous “marshmallow experiment” illustrates the power of present bias in individuals at even a very young age. To watch the marshmallow experiment, click here.
How Should I Save?
Savings are best kept in a savings account so that they can stay safe and earn interest. Banks are willing to pay you for the opportunity to loan out your money, and through compounded interest rates, the growth of your savings can increase steadily.
How Much Should I Save?
It is important to strike a balance between giving yourself a profitable cushion for the future and spending to enjoy the present. Putting aside 20% of your income is a good, traditional start to a savings plan.
5 Simple Ways to Save
- Plan ahead
- Make a budget
- Identify what you are saving for
- Use the right tools and technology to track your money
- Separate needs vs. wants
Tips for saving
- Commit to placing a percentage of your income into savings before you begin spending any of your money.
- Keep track of what you’re spending in a journal.
- Review your spending to find places to cut back.
- Make saving automatic and built into your accounts.
- Even small amounts matter; understand the power of compound interest to grow your money.
- Use the 50/30/20 Rule to budget your money:
- 50% of your for living expenses
- 20% for paying back debt, saving and investing
- 30% for fun and personal
