In this post we'll talk about savings. Saving money is absolutely vital to your financial well being. Saving isn't important just for those "rainy days." Your savings can literally save your life in case of emergencies and once you know The Truth About Credit, you'll live a happier life living within your means.
It's easy to think you can't save money, especially if you're trying to climb out of debt. But there are ways to cut back on expenses and increase the amount you save. And there are different types of accounts and financial institutions you can choose from, depending on your needs.
If you've ever had even a minor emergency -- like your refrigerator breaking down -- then you don't need anyone to tell you how important it is to have a little cash in reserve. There are lots of reasons why it's important to save money. The slide above lists just a few of them. Emergencies can be any number of things: a new roof for the house, out-of-pocket medical expenses, or a sudden loss of income. With advances in medicine and health care, people are living longer, which means if you retire, you're likely to need money to live on for a longer period of time. Social security was designed to supplement, not replace, income during retirement. And the costs for public and private education are rising every year. It's constantly getting tougher to meet all of life's demands.
There are three basic ways to save money if you're in debt. It all depends on how much debt you have and how much you intend to save. You need to strike a balance between paying down existing debt and building up your emergency savings fund. You can't just count on your credit and incurring more debt in an emergency.
Cutting expenses is like making money. The money you save is like extra money you have earned. We've wrote about and walked you through the process of Preparing A Spending Plan so you can see what you spend on a monthly basis. Here are some suggestions for ways to help cut your expenses:
Cut down on restaurant meals and take-out meals, as well as prepared foods from the supermarket.
Reduce your home utility bills by turning off lights in empty rooms, being conservative with the thermostat, checking weather stripping to eliminate drafts, and air drying dishes and laundry.
Seek out garage sales and your newspaper's classified sections for discount purchases on many new or slightly used items.
Use your local public library for free reading materials, or reduced-price videos, audiotapes, CD-ROMs, and children's games for rent.
Comparison shop for clothing and household items.
Avoid expensive gift wrap and shop dollar stores for gift bags.
Exercise for a healthier body and state of mind. Consistent exercise over time can also reduce health-care expenses.
Join a co-op or food-buying club to save hundreds of dollars per year over regular supermarket prices. Call the National Cooperative Business Association at 1.800.636.6222 for a list of regional warehouses.
Pump your own gasoline and use the lowest octane recommended for your car. Keep your engine tuned up and your tires properly inflated.
If you want a dog or cat visit your local animal shelters. The purchase fee often includes vaccination and neutering, which can save on vet bills.
A reasonable savings target is 5 to 10 percent of your income - enough to cover one or two possible "emergency" expenses, or three to six months of normal expenses. Put away a certain amount of money each week, no matter how small the amount.
And if you can find extra work to increase your income while also cutting expenses, you can really make your savings accumulate quickly. Can you take on a part-time job? Try to be creative. There are many ways you can earn extra money.
A good saving strategy is to pay yourself first. Here is a worksheet that will help you identify ways to cut expenses, calculate your savings plan, and commit to how much you will save every month. Click on the link below to download a worksheet. Fill it out now and hang it on your refrigerator to remind yourself that, even though you may be in debt, you still have a savings plan.
There are "interesting" and "uninteresting" places to put your money -- that is, places where your money earns interest, and places where it doesn't. Once you have extra money, keeping it under your mattress is an "uninteresting" way to save it. A bank or credit union is much better because you earn interest on the money that you keep there. Make sure you always keep things interesting!
Interest is the price of money. So when you have a savings account, you are paid interest on that account. But if you borrow money, like when you charge purchases on a credit card, you pay interest on the money. And since credit cards usually charge compound interest, you pay even more interest every month until you pay off your balance in full.
There really is no shortage of places to put your money to save it. But what account is best for you? It depends on your savings goals and how long you plan to leave the money untouched. Here is a list of some of the financial products available:
Bond: A promise to repay the principal along with interest on a specified maturity date.
Certificate of Deposit (CD): An interest-earning savings device offered for a fixed amount of time. Interest rates grow higher the longer the CD stays in the account, and there is a penalty for early withdrawal.
Keogh Plan: A pension plan that lets self-employed persons make tax-deductible payments for themselves and their eligible employees to a fund held by a trustee.
Stock: A share of a particular company or corporation that can be purchased, and which represents part ownership in that company.
Regular Checking: Accounts that may have a minimum balance requirement and/or service fees. Your deposit in a bank is insured by the Federal Deposit Insurance Corporation up to $250,000.
Employer-based 401(K) Plan: A retirement plan in which employees of a private corporation can contribute a portion of their pre-tax earnings into the employer's specified investment funds. Employers may also contribute a full or partially matching amount.
Checking Account: A short-term demand deposit account that lets you withdraw funds without prior notice. Some checking accounts earn interest, others do not.
Individual Retirement Account (IRA): A retirement investment account. Deposits into the IRA may be tax-deductible, and investment earnings on IRA funds are not taxable until withdrawn.
Mutual Funds: An investment that pools the funds of investors who buy shares of ownership for investment in a diversified portfolio of securities (stocks, bonds, funds) issued by other corporations or governments.
NOW Account: NOW stands for Negotiable Order of Withdrawal. This account earns interest like a savings account, and may have a required minimum balance or service fees. This type of account is FDIC insured.
Savings or Money Market Accounts: Accounts set up through banks or credit unions that offer a variable or fixed interest rate.
Share Draft Account: This is just like a NOW account, but at a credit union. These deposits in federally chartered credit unions are insured through the National Credit Union Share Insurance Fund and provide the same safety as the FDIC. State chartered credit unions may be insured by NCUSIF or private insurance.
Money Market Deposit Account: This type of account usually has a specified minimum balance and may restrict account holders to three checks per month.
Money Market Mutual Fund Account: This type of account is offered by investment companies. There may be a large minimum amount for which a check can be written. These accounts are not protected by federal deposit insurance.
OK. So let's review. Saving prepares you for life's little emergencies, as well as for your future. And you can save, even if you're in debt, by cutting expenses, earning more money, or both. The slide above lists some guidelines to help you plan your savings.
If you save money, interest works for you, but if you owe money, interest -- especially compound interest -- works against you. Before you put your money anywhere, choose the account and financial institution that are right for you.