Savings represent that portion of your income or earnings that is put aside and not spent.
Life can be full of surprises, both good and bad. Building savings is a great way to ensure that you have extra cash available for emergencies, unexpected bills, medical expenses, and future goals.
Most importantly, saving is an important commitment to future prosperity and a lifetime of financial well-being.
Often kept in a general savings account, which can be accessed for any reason. This is the most common type of savings.
Savings that are to be used only for emergencies, such as medical bills or to cover expenses if you lose your job.
Note: Paying for last minute Coachella tickets does not count as a financial emergency!
Typically kept in a dedicated tax-deferred investment account, such as an IRA or 401(k), to provide income after you retire.
Savings fund built up for a specific reason, such as to fund the downpayment for a house, buy a new car, or pay for a family vacation.
Having savings means that you know you always have a little extra money in the bank should you need it. Just knowing that you have something to fall back on can relieve much of the stress of living from paycheck to paycheck.
If you have an emergency fund, you won’t be financially ruined if something unexpected happens. A healthy emergency fund can help ensure that your life stays on track even if you become ill or injured or lose your job unexpectedly.
Buying a house, having a family, and retiring are all significant life events that require financial planning. By beginning to save early in life, you can ensure a more secure future.
Savings accounts can be a powerful way to grow your money. This is because you earn interest on the interest already earned in previous years, called “compound interest.”
Reasons to put your money into a savings account:
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Assume you deposit $1,000 into a savings account that offers a 2% interest rate compounded annually. If you do not withdraw any money, your balance will grow as follows:
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If you contribute more to your savings account each year, the amount of interest you earn increases and compounds even faster.
Of all the reasons to save, retirement is perhaps the most important; once you stop working, you may have to depend on these savings to cover all your expenses for the rest of your life.
There are many ways to invest for your retirement, whether through an employer-sponsored retirement plan, such as a 401(k), or a self-directed investment account.
You don’t have a time machine to invest in the past like Biff in Back to the Future II (So good, right?), but you can always start saving early to make your later years more tolerable!
How much you can invest each year is limited. The annual contribution limits for 2017 and 2018 are as follows:
401(k) | IRA | |
2017 | $18,000 | $5,500 |
Additional Catch-Up Contributions for those over 50 | $6,000 | $1,000 |
2018 | $18,500 | $5,500 |
Additional Catch-Up Contributions for those over 50 | $6,000 | $1,000 |
Depending on what type of account you have, traditional or Roth, each has different tax-deferral benefits:
1. Document your spending
Make a list of monthly bills and expenses to see how much of your income you need to spend to maintain your standard of living.
2. Cut costs
Determine where you spend money unnecessarily and cut down.
3. Open a savings account
Open a dedicated savings account to keep your savings separate from your spending money. Choose an account with minimum fees and maximum interest rates.
4. Pick a percent
Decide on a specific percentage of each paycheck that you will devote to savings based on your budget. Try to save as much of your income as reasonably possible
5. Automate
Set up an automatic transfer amount from your checking account to your savings account each pay period. When your paycheck is deposited, a set amount of money should automatically go to your savings account.
6. Forget about it
Let your savings account grow on its own. Resist the temptation to dip into your savings for frivolous expenses.
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[toggles heading=’References’]
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