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The following is a guest post. Enjoy!
Why Now is the Time to Save and Not Spend
It’s always important to have a modest savings account balance. However, a good chunk of saved change cannot be more welcome than during an economic recession. With so many people being forced into foreclosure and even bankruptcy, now is not the time to liberally spend or rack up a substantial amount of debt.
How to Get Started Saving
One of the reasons countless individuals have been driven to financial ruin is simply because they didn’t have a backup savings plan. If you are one of the millions who have endured bankruptcy or the loss of a house, it isn’t too late to start saving money.
The Importance of An Emergency Fund
An emergency fund is essential. The majority of people will admit to living paycheck-to-paycheck, but what happens if you fall ill or get into an accident that requires an extended amount of time off work? Even worse, what happens if you face job termination?
Emergencies aren’t limited to your work attendance either. You could find yourself falling behind if your vehicle’s transmission needs replacing, the washing machine goes out, or any number of vital, everyday items you take for granted suddenly end up in need of replacing.
Alternatively, you may end up having to dish out funds you don’t have for an emergency dental or medical procedure. Although you can get the cash with personal loans and credit cards, that’s an unexpected monthly payment that you hadn’t counted on or budgeted for. Unless you have an emergency fund in place, you could be a heartbeat away from financial disaster.
Getting Started with a Savings Account
Never tell yourself that you can’t afford to save money. Simply put, you can’t afford not to! The easiest way to save money is with a simple savings account, and you probably already have one that has a minimal balance, if any. Start putting money into your savings account with each paycheck you earn, even if it’s only five or ten dollars. That amount will add up over time.
When you are ready to open a savings account, it makes sense to shop around to find the account that best suits your needs. For example, if you compare savings accounts at any comparison websites, then you may find that there are accounts that offer better interest rates than those offered by your bank.
How Much Should You Save for Your Emergency Fund?
$2,500 is a good amount for any emergency fund but continue to deposit funds as often as you can. A good way to do this is to use any tax refunds toward your savings account. If you don’t get much money returned during tax season, you’re probably not withholding enough. Update your W-2 form with your employer any time of the year.
A good rule of thumb is to never spend money on account fees. Make sure your bank offers free checking and savings beyond any initial trial period. Some credit unions may require you to keep $25 or so in savings to act as a share, but the money is still yours. Big banks may charge you $5 a month for savings, which is something you want to avoid.
Nobody knows when we will begin seeing significant economic growth again, so if you have to spend money, do it wisely. Cut expenses where you can, and be mindful of your savings goal.
How about you all? What techniques do you use to maximize your savings each month? Do you have an emergency fund set up? What bank/online bank is it with? How many months worth of expenses do you keep in the account?
Share your experiences by commenting below!
Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.
Thanks for sharing this article Les! I think that now, more than ever, people are aware that they do need to save. However, what they are lacking is a practical guide to get them started. As such, it’s important to address these issues.
- @ Now not being the time to rack up large sums of debt –
- So yes, I definitely agree that now is not the time to get in to huge amounts of consumer debt (car loans, furniture loans, credit card debt, etc).
- However, I would argue that now, since interest rates are so low, it’s actually a great time to either take out a new mortgage loan or refinance your existing mortgage on a a primary home or other type of real estate. According a recent investigation I performed, interest rates are lower than they have been for 50 years currently. As such, it’s a great, low-cost time to take out good forms of debt on appreciating assets.
- However, this assumes that you have some excess money for down payments, etc, which might be a little hard to come by with the tough economic times. But, it’s a good thing to bear in mind.
- @ Always remember the account hierarchy –
- When you’re beginning to think about opening up a savings account and funding it, it’s ALWAYS important to keep the account hierarchy in mind.
- What the account hierarchy tells us is in what order new funds should be prioritized as they are received. For example, if you don’t currently have adequate health insurance coverage, you have no business opening up a savings account and beginning to fund it until you have appropriate health coverage.
- @ Being prudent with the use of your emergency fund balance –
- It’s very important for us to take a moment to think about what emergency fund money should actually be used for.
- The way I think about what types of expenses qualify for emergency fund use is this: if I don’t pay for this expense, will either my health or income/earning ability be hindered?
- For example, if the car that I use to drive to work breaks down, I would be justified to use my emergency fund for these repairs since the car enables me to arrive at work safely where I earn my income.
- One thing that I have to respectfully disagree with in this article is recommending that emergency fund money be used to fix up things around the house. I would argue that these items are not actually “emergencies” in the sense that your health or earnings ability will be affected.
- Instead, I would recommend setting up an automatic transfer each month in to a home maintenance savings account.
- @ Be careful what type of savings account you choose –
- One thing mentioned briefly in this article is that where you choose to open a savings account has a big impact in the amount of interest you will receive on your balance. And, I just wanted to add a little more detail to that advice.
- For example, if you open up a savings account with Bank of America, you might only receive a 0.05% annual interest rate on your money. Talk about ridiculous!
- However, if you open up an online high-yield savings account with ING or Dollar Savings Direct, you can currently earn 20 times more (1% annual interest rate).
- @ The importance of automatic transfers when saving money in your Emergency Fund account –
- One thing worth adding to the guidance given above about creating an emergency fund is that in my experience, the best and most effective way of consistently building a cash emergency fund is to set up an automatic deduction/transfer from your checking account at the beginning of the month to your emergency fund savings account.
- Having this transfer automatic increases the likelihood that it occurs every month, and scheduling the transfer at the beginning of the month/pay period ensures that you don’t spend this money.
- @ How much money to save in your emergency fund –
- In the article above, Les mentions that $2,500 is a good amount to have in your emergency fund.
- However, I think a better way to go about determining how much each individual should carry in their fund is to shoot for having 6-9 months worth of expenses in this account. This ensures that if you get separated from your current job, you have enough money saved up to live on while you are looking for more work.
- @ Increasing your tax withholding to force you to save money –
- In the article above, it mentions that one way to increase savings is to use money you receive in your tax return. And, if you’re not receiving a large enough tax return, you can increase your W2 withholding.
- While it is definitely true that increasing your tax withholding will automatically take money out of your account and inhibit you from spending it, I would argue that this is not the best way to save money because you are effectively giving an interest-free loan to the government.
- Instead, I would recommend simply setting up an automatic withdrawal from your checking account to your savings account the day that your pay check is deposited each pay period. This will enable you to earn this interest for yourself.
***Photo courtesy of http://farm2.static.flickr.com/1063/5126344583_9031352c31.jpg
