The Importance of Building Different Types of Savings

Highlights

  • Making saving money a habit, starting when you are young, yields short and long-term benefits.
  • Saving money is linked to other financial habits. To save sensibly, look at your spending, debts, and long-term plans.
  • Future You is certain to advise Present You to save money.
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Saving Money to Provide Security

Money. "The love of money is the root of all evil." "Money makes the world go 'round." "Money, it's a gas, grab that cash with both hands and make a stash." The Bible, the lyrics of "Cabaret" and Pink Floyd each offer a perspective on money. 

For good or bad, money is necessary to good financial health. Earning it, through work or investment, isn't enough. You need to save money. There are plenty of examples of people who burned through piles of money and end up with nothing. 

You probably don't have the "pile of money" dilemma. If you want to have money to use for any significant purpose, you need to save it. What you set aside and put into savings is what will give you security, flexibility, independence, and a solid financial foundation.

Maybe Ben Franklin said it best? "A penny saved is a penny earned."

Open a Savings Deposit or Money Market Account or Find a Better One

You need a savings account. If you don't have one, open one and start making a habit of saving. If you do have one, check and see if you can find an account that pays more interest or has other features that are better than your current account.

The Building Blocks of Good Financial Health are Linked

Building savings is necessary if you want to buy a home, protect yourself and anyone dependent on you, have enough money to invest so your money makes money, or save enough for retirement not to have to work the rest of your life. That means that your age, lifestyle, goals, and habits will dictate how you prioritize your savings, as well as your income, assets, and what you have built up so far.

Your savings don't exist in a vacuum. How much you save is connected to:

  • Your spending, how you track it, and how it compares to your income
  • Any debts you have and how you pay them
  • The plans you have to cover unforeseen events

Building Savings Accounts - Choose the Right Type for Your Needs

Just as there are many reasons to save money, there a number of different accounts you should have. Because you can open savings accounts that charge no fees and have no minimum balance requirements, it makes sense to have separate accounts. Keeping your money separate is a small way of reinforcing the purpose of your account and keeping you from spending the money for a different purpose.

Emergency Fund

An Emergency Fund is the first savings you should build. You wear a seat belt when you drive, not because you expect an accident, but to be prepared if one happens and limit the damage. An Emergency Fund protects, similarly, providing a cushion from the financial shock that comes with a loss of income or an expense appears out of the blue.

If you have a big, fat $0 in your Emergency Fund, don't be scared. Start putting money aside out of your next paycheck. Don't pay attention to the advice that you should have an Emergency Fund with six months of living expenses. Commit to save any amount out of each paycheck, then do it. Make saving money a habit, as a first step.

An emergency fund is not the only way to guard against unexpected expenses or unforeseen problems. Insurance serves that purpose, too. While you are building your Emergency Fund, assess your needs for medical, disability, and life insurance. Including that in your planning will help you choose the right priorities for your money.

Basic Savings Account

A savings account is a safe place to keep the money you are building up to spend on something important. The money you deposit into savings for a down-payment on a home or vehicle purchase; a family vacation; buying presents for loved ones for their birthdays and holidays won't disappear, even if the bank is robbed or goes out of business overnight. The federal government guarantees the money. (And if the federal government goes belly-up, there will be more to worry about than what is in your savings account.)

Savings accounts pay interest. How much interest you earn depends on the kind of account you open and where you open it. Because rates can vary from .01% or less (which is next to nothing) to about 2.5% (not enough to make you rich, but better than a stick in the eye). 

There are different type of savings accounts with different features, fees, and interest rates. You can look at a Money Market Account, a High Yield Checking Account or a Certificate of Deposit as alternatives to a traditional savings account.

When it comes down to it, it is far more important that you are saving money than the kind of account you choose.

Hands Out of the Cookie Jar - Set Up Special Deposit Accounts

When you save money for a specific purpose, it's up to you to spend the money for that reason. Mom or Dad aren't going to yell at you or punish you if you dip your hands into the account. You have to hold yourself accountable to not spend money in your down-payment fund for something else you want. That will set your home-buying back.

One way to encourage discipline is to set up separate accounts for different purposes. There is still no one to stop you from raiding the account, but it makes it clearer how much you have built up for each purpose and gives you a psychological boost to keep saving. 

Retirement Savings

Retirements savings are crucial to your long-term financial security. Leaving aside the debate about whether Social Security will be there for you when you retire, Social Security alone won't support a comfortable retirement.  It is your responsibility to save enough money to support you after you start working.

Advice from Future You

If your future self comes to you and has any advice, other than "Put all

You may have the option of a 401(k) plan through work or something similar, or you may have to set up your own selecting one type of individual retirement account. Either way, don't wait until you are older to start.

Investment Savings

As is the case with any long-term savings, the sooner you start saving, the better. It is not quite the same as the quote about the Chicago political system's "Vote early and vote often," but if you start early setting aside money for investments, you give yourself a greater chance of growing your account. You also set more favorable conditions for diversifying your investment holdings.

How Lucky Do You Feel?

You get to choose how much risk is acceptable when making any investments. Generally, the older you are, the more reason you have to avoid risk. If you are younger, consider taking a small percentage of your investments and put them in something that has a higher risk, but could yield a higher return.

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