Making a smarter savings plan
It’s never too early to start planning for your future
Ask yourself three questions. Do you believe you save enough money each month?
If your job ended, or if you faced some major life challenge, would you have an adequate
amount of money saved to sustain you standard of living for a few months? Are you
living paycheck to paycheck?
These are important questions all people should ask themselves. Everyone knows (or
should know) that we must set aside enough money each month to cover the inevitable "what
ifs" found in our every-day lives. Despite this, Americans save fewer dollars each
year. There are many reasons why people don’t save as much as they could. Here
are just a few:
- Consumers are seeing more of their income go towards debts and credit balances than
ever before
- Many people deny that they could ever encounter an event which would require them to
live off their savings
- Real-world paychecks have decreased since the early 70s (considering the costs of
inflation and other factors)
- Consumers face a constant bombardment of irresistible consumer ads and find more stuff
to buy every day
- Some of us require more immediate help in order to resist the cash sinkholes of
gambling, pathological shopping, or other costly addictions
- Saving money is just not as much a part of the American psyche as it used to be
(unless you are a first-hand survivor of the Great Depression)
Where do I start?
The first and most important step to saving is to complete a
current budget. Most people are shocked to discover
just where their paychecks go. As part of your budget process, examine the portion of
your earnings that is spent on discretionary items. When you examine how
much money goes towards unnecessary items, you may see some immediate ways to set
aside more of your paycheck for future needs. You should also review our
consumer hints section to help you explore ways to make your
consumer dollars go further. Examine your needs and objectives. Once you know
your needs, you can set realistic savings goals and implement the steps required to achieve
those goals. One of the major steps towards being able to save money—after cutting
down on discretionary spending—is to work on reducing and
consolidating your total debt.
Whatever you do, don’t get discouraged. Savings are an on-going effort, and
results won't occur over night. The important thing is to stay focused on the
goals—with a little discipline, you can steadily work your way to building up a
comfortable savings plan.
How much should I save?
What are your goals? Setting realistic savings goals requires a little thought.
Everyone has different needs, but we share certain objectives and common life
experiences.
Want to save a million? Try our Save a
Million Calculator to see how to reach your savings dreams.
Saving for the unexpected
The first goal should be saving for
anything that your life may unexpectedly throw your way. What if I lose my job?
What if I get injured? What if I have a baby? What if I need to spend time away
from work to be with a sick loved-one?
Many people don’t want to think about the "what ifs," but being prepared for major life
events can lessen the pain of almost any catastrophe. It is a good idea to save up
the equivalent of at least three months of pay. This amount should not include
available credit amounts. Once you’ve saved three months of pay, make sure you ignore
that money—you don’t want to cash it out for a stereo or a car down payment. This
money needs to be secure and stable—don’t put it in stocks or some other investment—keep
the savings in a secured institution (like your credit union). After you’ve saved
that minimum amount, you may want to make regular contributions (e.g., automatic monthly
deposits). The most you would want to place in a
regular savings account is perhaps six months
worth of wages.
Reward yourself for saving
When you have saved up for the those unexpected events, you’ll enjoy the comfort of having a
"rainy day" fund. Now, it’s time to reward yourself. Save for something that is
just for you. This type of saving needs to be done while you are also working on
reducing your debt. Debt reduction requires making
extra payments, so your savings at this point may be slow going. However, saving for
a fun goal can be the most satisfying. Perhaps you want to save for some new clothes
or a new TV—whatever the case, you’ll enjoy fully owning what you have saved up for while
incurring no new debt in the process. This type of savings is best done with a liquid
account, whether building up your checking
balance or making automatic deposits to a money
market account. "Liquid" means money that can be easily withdrawn, without
penalties on interest earnings.
Saving for large, planned purchases
Don’t get side tracked on saving only for rewards-based goals. That type of saving can
be ongoing (with multiple savings accounts for each goal), but there are other important,
large purchases to save for. Will you need a substantial down payment for a new car
within a couple years? Is orthodontia in your child’s future? Will you need a
new washer and dryer? These are all larger ticket items that can be paid for with
savings. Such savings plans need to be aggressive in order to maximize interest
earnings and accumulate larger balances within a short time span. This type of saving
is best done with less liquid savings accounts (that is, accounts with interest penalties
for taking early withdrawals). You might use a combination of accounts, but consider
combining a one or two year certificate of
deposit with a money market account that
has automatic deposits. Regular savings
accounts can also be useful, but they never pay as much in interest and they are more
tempting to empty out.
Saving for the important moments in your life
It is also important to save for planned life events. These events are major
occurrences, which we can usually save up for in advance. Such occasions include
weddings, college, home down payments, childbirth, European vacations, or even elective
surgery. Perhaps an ideal plan would use a balance of insured savings and secure
investments. Such savings should have very little concern for liquidity because the
event may be two to 18 years away. Securities investments are non-insured savings
plans (i.e., non-guaranteed). For example; mutual funds, because they’re tied to the
stock market, can drop and rise on a daily basis. However, over time, mutual funds
invariably rise much faster than insured savings plans. Before you plan any long term
financial investments, you should meet with a financial planner. Northwest Community
Credit Union offers free financial planning through the consultants of
Northwest Financial Resources.
Saving for retirement
Besides these goal-oriented savings, you
should also consider your retirement savings.
Retirement savings should be part of everyone’s goals. Not only can people no longer
count on maintaining a pre-retirement standard of living under Social Security, but there
are very real concerns that Social Security won’t even be available for many of us.
Current projections are that Social Security will go bankrupt in 2030. The average
life expectancy is increasing along with average medical expenses. Try our
retirement calculator to help you get
started.
Many people willfully ignore retirement savings because they feel the task is too
monumental. Retirement planning is possible for anyone, provided you begin saving as
soon as possible. As noted earlier, Northwest Community Credit Union offers free
financial planning through the consultants of
Northwest Financial Resources.