October 12, 2020, is National Savings Day. This seems like the perfect day to reflect and ask yourself, “How intentional have I been with my money this past year? How can I do better and save more next year?”
Ensuring adequate savings is part of the financial planning process. It is commonly neglected because individuals tend to focus on the “here and now.”
Here are some savings tips to help you develop better saving habits:
Create a Budget. Budgets can feel intimidating and limiting. But they are the best way to determine how much money you spend, what you’re spending it on, and how much is left for other things. To create a budget, review the last 12 months of spending by reviewing your credit card, debit card, and bank statements. Using a spreadsheet or an online service like Mint, record where every dollar went. This will provide you with a cash flow assessment that shows your income, recurring expenses (such as your mortgage and electric bill), and your non-recurring and discretionary expenses (such as dining out and new shoes). By subtracting your expenses from your income, you are (hopefully) left with an amount that can be used for other things, such as building up your savings.
Make saving automatic. Now that you have a budget created, you should know how much money is available after paying bills. Bill paying is the number one priority, and saving should be your second priority. The best way to maintain a formal saving plan is with automatic sweeps out of your checking account and into a savings or investment account. Start small. Even $20 per month can make a difference. As you earn more money or get more comfortable with your plan, you can increase the amount.
Establish a purpose for your money. Consider your personal and financial goals. Do you want to renovate your house, buy a sports car, or go on a vacation? Are you saving for a special event, such as a wedding? Open a separate savings accounts, commit to your purpose, set up your automatic sweeps, and watch it grow! It’s helpful to know how much you need and what your timeline is as well. Be sure to share your goals with your financial planner during the financial planning process.
Build an emergency fund. Not having an emergency fund can be financially catastrophic if something unexpected happens. Sudden unemployment, illness, injury, or a leaky roof can create large unanticipated expenses. This is why we recommend setting up a savings account intended explicitly for emergencies. Ultimately, this fund should contain enough money to cover at least six months of non-discretionary expenses (i.e., mortgage, utilities, car loans, and other bills that must be paid each month). Since most people cannot fund this account all at once, set up an automatic sweep from your checking account that can slowly and steadily grow it. Read Your Emergency Fund: How Much is Enough? For more tips on this.
Save for retirement. Start saving for retirement the moment you get your first job. It might seem crazy to think of retirement when you’re 23 years old, but the reality is that things happen later in life that may disrupt your ability to save. You may eventually buy a house or have kids. These milestones might shift your financial priorities for a time, making it harder to save for things like retirement. So save early.
When automating your 401(k) contributions, set it as a percentage of salary, not a dollar amount. This way, when you get a raise, your retirement contributions will increase automatically.
If your employer offers a 401(k) match program, participate! It’s free money! Here’s how it works: let’s say your employer provides up to a 4% match. For every dollar you contribute (up to 4%), your employer will add a matching contribution to your account. So if you only contribute 2%, for example, you lose out on the additional dollars that your employer would have given you.
Control your impulses. The popularity and ease of online shopping have made impulse buying all too common. We “add to cart” the moment we see something we like, and while you hopefully have enough discretionary income to pay the credit card bill, consider if those funds would serve you better in one of your savings or investment accounts. Try the 24-hour rule. Wait a day and sleep on it before you buy that next great thing.
Save unexpected money. Have you ever received a surprise refund check, won a bet, or received a bonus? Does your credit card have a “cash back” option? Whenever you receive “extra” money, add it to your savings or investment account, rather than buying another gadget or sweater you probably don’t need.
Statistics show that most Americans are not saving enough money – not for retirement and not for emergencies. The savings tips above are appropriate at every age and stage of life, and saving even a little bit can prove beneficial in times of need.
Not saving is just one of the common money mistakes that people make. Read about some other common money mistakes people make in our Money Mistakes Series: