Savings

• Emergency Fund

An emergency fund is a savings account with enough money to cover your necessities for 3-6 months. This includes savings for rent, food, utilities, and other things you cannot live without. An emergency fund does not need to include funds to cover eating out, shopping, or entertainment. Once you create a budget and have disposable income you can save, start putting money into your savings for your emergency fund. Try not to touch these savings unless you absolutely need to. If your car breaks down, that is a cost you can use your emergency fund for. If you’re broke until next week, and your friends want to go out for drinks, you probably shouldn’t touch that emergency fund. 

Part of being financially stable is being able to handle when large unexpected costs happen in life. If you’re living paycheck to paycheck, a $500 doctor’s bill may put you in serious debt. However, if you’re able to save up an emergency fund, you can pay off that bill without a sweat. 

If you pull money from your emergency fund, start saving some money from each paycheck to get it back to its original amount. Once you have 3-6 months of savings in your emergency fund, you should feel comfortable saving for other financial goals, like a new car or a vacation. 

• How Much to Save

How much you should save depends on how much you can realistically save. If you are living paycheck to paycheck and do not have enough income to save anything, try to see if you can work on your budget or if you qualify for any financial assistance programs to give you wiggle room to save. Your first savings goal should be to save an emergency fund of 3-6 months necessary expenses. Once you have that saved up, you can start saving for other goals, like a house or car. If you think you’ll have to make a large purchase soon, for example, if you think you’ll need to purchase a new car in the next few months, try to save more than you usually would. You might have to cut down on some habits like eating out, but that will be worth it if you can pay for the large purchase in cash instead of taking out a loan. 

There is no set rule on saving, but the consensus is to save as much as you can. Whether it’s for a goal, a rainy day, or something else, you will never regret having savings. 

• Saving for Retirement

Many people do not worry about saving for retirement until they are closer to retirement age. Even though it does seem far away, the sooner you start saving, the less you’ll have to save each month to be able to live well in retirement. If you save for retirement, you can invest your savings in the stock market to earn compound interest. Earning compound interest means you will earn interest on the interest you’ve already earned; it will increase your savings exponentially compared to a regular savings account. Even stashing $20 a month into your retirement savings will give you thousands of dollars of return when you retire. 

That being said, the cost of living rises every year due to inflation. So, while you may be able to live on $20,000 a year now, you will need much more than that by the time you retire. Also, depending on when you retire, you may not receive Social Security benefits. Many economists and government officials believe Social Security will run out before your generation retires. However, don’t let that scare you. If you save often and save early, you will be okay. 

How much you save for retirement greatly depends on your income and what you can live on. The general rule is to save about 10-15% of your income each year for retirement. 

• Spending Your Savings

So you’ve built up a savings account, you like seeing the large number whenever you open your banking app, but now you have a large purchase to make. It may feel weird to take money out of your savings after you spent so long building it and stopping yourself from spending it, but money is made to be spent. It is common to feel shame or sadness when you have to spend your savings. Just keep in mind that the money is there for a purpose, and that purpose has presented itself to you. 

• Where to Save

Here is a video on compound interest. Keep compound interest in mind when determining where to save and how much to save. 

Compound Interest Explained in One Minute 

There are many places to stash your savings. You can keep cash under your mattress, you can use the savings account that comes with your checking account, or you can invest it in the stock market. Depending on how long you plan to save that money, all of these options may work for your money. 

If you’re planning to use the money immediately, or if the money is an emergency fund that may need to be accessed quickly, keep the money in a savings account. While a savings account does not earn a lot of interest (.01-.1% generally), it is a safe place to keep your money. Your savings are insured up to $250,000 at each bank or credit union you keep it at, so no fear. 

If you want to put your money in a place that’s a bit more difficult to get access to, invest in the stock market. Money in the stock market generally earns more interest than in a savings account. Depending on what you invest in, you could get somewhere between 3-10% interest on your savings. 

There are multiple ways to invest in the stock market. You can purchase a Certificate of Deposit through your financial institution, you can open an account through an app like Acorns or Robinhood, or you can start what’s called a brokerage account with a broker (think Fidelity or Charles Schwab). Be sure to double-check the fees you will be paying for any of these accounts. 

If you’re saving for retirement, you can invest in an IRA (Individual Retirement Account). An IRA is similar to a brokerage account, but the government has given tax advantages for the money in an IRA, so you would end up paying less in taxes and other expenses related to the account than if the money was in a brokerage account. There are other rules associated with IRAs, such as when you can take out the money you’ve made.