What are Savings?
Savings are the portion of your income or earnings put aside and not spent.
To ensure you are always prepared for a financial emergency, you must commit to keeping and growing your reserves.
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1. Emergency fund.
Savings will come in handy when you need to pay for an unexpected expense. This can include many of life’s most difficult moments including accidents, disability, health issues and much more. Emergencies can be very expensive and financially devastating, so it is better to prepare in advance.
2. Your money will work for you
The benefit of having money in the bank is that it will increase with interest. As your contributions increase over time, you will be earning compounded interest on the money that you have.
Whether you put your money into a liquid savings account or into a brokerage account, it is an opportunity to invest in your future.
3. It is protected.
Even if the bank runs into trouble, your money is protected. The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects up to $250,000 of deposits in banks and savings associations.
3. Useful for making down payments on large investments.
This includes investments such as buying a car or a home and even college tuition. Many of the largest expenses during a lifetime need to be considered and accounted for long before the time they occur.
4. An important commitment to future prosperity.
Putting aside money is a great opportunity to start saving early for retirement.
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.
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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