The ability to save money is the cornerstone of building wealth. It's also essential for one's sense of security. The math is simple: In order to save money, you need to spend less than you earn. However, that is often more easily said than done, especially when you have to give up or forgo things you want. However, if you are mindful, there are plenty of ways you can begin saving money, whatever your age or income level.
The Importance of an Emergency Fund
The first, and probably most important, savings goal you need to consider is building up an emergency fund. You can't always predict what life has in store for you. A financial emergency may take the form of a job loss, significant medical or dental expense, unexpected home or auto repairs, a hurricane or major storm, or something else unthinkable, such as a global pandemic. The last thing you want to do is to rely on credit cards with their hefty interest fees or to be forced to take out a loan.
That's where your emergency fund can come in handy. Historically, the formula for an emergency account is to have enough readily available cash to cover three to six months of living expenses. The figure you settle on may be smaller to start, say $1,000. You can then work your way up from there.
When calculating your expenditures, be sure to consider both fixed and variable expenses so you'll know exactly how much to set aside for emergency savings.
Where to Keep Your Savings
Once you've decided to save some money, the next thing you need to decide is where you should keep it. From depositing a set amount of money into a basic savings accounts at your local bank to certificates of deposit (which can have a duration of anywhere from three months to five years), you need to weigh all of your available options to find out what's right for you.
Remember to consider the amount of interest you can earn on your savings, as well as how accessible the money will be. You may earn a higher annual percentage yield with a CD, but a savings account or money market account could offer more flexibility when it comes to making withdrawals.
Make Saving Automatic
With so many bills and day-to-day expenses to take care of, saving money can seem nearly impossible. One of the best ways to get around this conundrum (and to get into the habit of saving money) is to create an automatic savings plan. Setting up automatic transfers directly from your checking account into your savings account takes all of the guesswork (and temptation to spend) out of your hands.
If you can't make a big leap all at once, start small. Even saving $25 or $50 each payday can make a difference. If you're working on growing your retirement savings alongside your emergency savings, consider scheduling automatic transfers to an individual retirement account as well.
The Difference Between APR and APY
When you're saving money, one of the key things you need to consider is how much money your money is making for you. You worked hard for it, so now your money needs to work hard for you. Two of the most common terms that are used to discuss interest rates are "annual percentage rate" (APR) and "annual percentage yield" (APY), and as a smart saver, you need to know the difference between the two. APR refers to the rates you pay on loans, while APY is the rate you make on deposit accounts.
Cut Spending Leaks
Even if you're saving money, you can always find ways to save more and cut your spending. Sometimes it is simply the little things that add up, and the best way to gauge that is to question all of your purchases. Most people are mindless (not mindful) consumers. For instance, you may be used to getting a $7 latte every morning on your way to work, but do you really need it? One good rule of thumb is that if it's not a necessity (like food, shelter, and clothing), and it's not making you any happier or helping you, cut it from your budget. Find out what your spending leaks are, and learn how to trim those expenses so you can save even more money.
Frequently Asked Questions (FAQs)
How can you save money on groceries?
Pre-planning meals and shopping with a grocery list can help you stay focused and within your budget. Keep an eye out for store brands like Great Value (Walmart) or Kirkland (Costco) that offer similar products at cheaper prices. You can also save money by finding recipes that use in-season fruits and vegetables.
How much money should I save before buying a house?
In most cases, you'll need to save up at least 20% of the home price to avoid extra costs like private mortgage insurance (PMI). Some FHA programs offer homeownership with as little as a 3.5% down payment, but extending your finances could result in less-favorable terms on your mortgage.