Some people think that having savings simply means that you have some cash on hand that you haven’t spent yet. Others define savings as money that’s tucked away in a money market account or certificate of deposit, awaiting a rainy day, while others might say that extra payments they make to their debts—above and beyond the minimum monthly payment amounts—should count as type of savings.
However you define it, the U.S. Bureau of Economic Analysis has indicated that Americans only dedicated 7.9% of their discretionary incomes to savings in January 2020—what was left over after paying essential living expenses.
What Saving Isn't
Cash that’s left over in your checking account after you’ve paid the monthly bills doesn't necessarily count as savings, especially if you tend to use that money to splurge on a fancy dinner or another treat-to-self in the next month.
Similarly, you haven’t necessarily increased your savings if you’ve saved $5 at the grocery store. You've refrained from spending more than you otherwise would have, but saving means that you actually tucked that money aside somewhere.
Saving is not the absence of spending. It's the intentional act of setting money aside for a specific goal or purpose, or for general life events like buying a house, saving for college, raising children, etc.
Everyone has some big-ticket event on the horizon that will require extra cash, but some people save just because they're fiscally cautious. Some examples of savings goals include:
- Building an emergency fund
- Saving for holiday celebrations or special gifts
- Saving 10% to 15% of your income for retirement
- Saving 1% of the purchase price of your home each year into a "home maintenance and repairs" fund
- Creating a college fund for your kids (or yourself)
- Keeping enough money on hand to cover all your deductibles for health insurance, homeowner's insurance, renter's insurance, or disability insurance so you can easily pay them if you have to make a claim.
An Emergency Fund
Having a dedicated savings account for unexpected events can go a long way toward saving you from financial disaster. You'll be able to lay your hands on cash rather than charge emergency spending to a credit card or take out a personal or home equity loan.
Experts recommend that you stash at least three to six months' worth of essential living expenses to hedge against potentially catastrophic events such as job loss or illness or injury that prevent you from working. Plunk it down in a money market account so it's not just sitting there—it's earning you a bit of interest as well.
Start With a Budget
You can create a budget or roadmap that will help you save the right amount for your important financial goal after you've defined what you're saving for, how much you need to save, and when you'll need that money.
This starts with knowing what you're currently spending, where your money goes, and where you can cut back to free up money that you can divert to savings. This doesn't just mean tallying up big ticket items like your rent or mortgage, car payment, and utilities. Those things are more or less immutable. You want to look for things you spend money on even though you don't have to.
People typically free up savings from what they spend on groceries, entertainment, and non-essentials. Start by figuring out how much you spend on these things.
Stash the receipt each and every time you spend money on a non-essential item, then tally up the receipts at the end of the week. Doing it at the end of each day is even better, or sign up for a budgeting app so you can enter information digitally on your phone as the day goes on. You're less likely to become overwhelmed, and you can make adjustments more quickly.
Enter your "savings payments" into your monthly budget with a due date after you've determined how much you normally spend and how much you can realistically save. Pay yourself just like you would pay any other monthly bill.
An Example of a Savings Plan
Let's say Jennifer that wants to save $15,000 for a wedding someday. She's single, but she wants to be financially prepared to get married in five years. That's 60 months away. She wants to save $15,000, so she must set aside $250 per month: $15,000 divided by those 60 months.
There’s just one problem: Jennifer also wants to save for a honeymoon. She decides that she wants to contribute $3,000 toward that event, so she'll have to save an extra $50 a month over the span of 60 months.
Jennifer begins saving money at the grocery store by buying store-brand items, in-season produce, and stocking up when there are store deals. She begins looking at the bottom of her receipts to see how much she saved by purchasing items on sale, and tallying up the difference between store-brand and major manufacturer's items.
Then she deposits that amount into a sub-savings account earmarked for her wedding and honeymoon savings goals. She sets aside an extra $50 per month by doing so, which is enough to allow her to reach her honeymoon goal in addition to saving for her wedding budget goal.
One Last Savings Tip
There are as many different ways to save as there are personalities. One plan might accommodate your strengths and weaknesses better than others. Consider starting small if saving just isn't your strong suit. Almost every personality benefits from a sense of accomplishment.
Set a modest goal the first month, one you're pretty sure you can attain. Increase it a little in the second month, then a little more in the third month, and so on. You'll be a dedicated saver before you know it.