Changing Your Financial Habits: Savings!
Welcome back! Today we are back talking about good financial habits.
Last time we talked about developing the financial habit of budgeting and tracking your spending.
Today, we are talking about savings. Savings may actually be the most neglected part of our budget, BUT it’s probably the most important.
These days so many of us are living paycheck to paycheck and I get that it’s hard to make saving a priority, but what if an emergency happens? An injury, an illness or medical bills, or your car breaks down?
Of course, this is an unexpected expense, but where will you get the money for it?
Recent data shows that 39% of Americans would have a hard time covering an unexpected cash expense of just $400. And realistically, some of these emergency occurrences can cost a lot more than $400. So how do we make that number better?
This is where savings comes in and why it’s so important. Even if the amount you save is small, it adds up and more quickly than you think. When you make your budget, the first category should be paying yourself by putting money in a savings account, or even multiple savings accounts.
So what does saving really mean and what is it for. Generally, savings is done for either short term or long term goals. Short term goals are ones that you hope to reach in a 6 month to 3 year timeframe. Long term goals are for things that will take anywhere from 3-5 years to reach or even longer.
To explain this further, let’s first talk about the 3 categories of expenses.
First is fixed expenses. These are things which really shouldn’t change like your rent or a car note.
Second are variable expenses. These are expenses you know about but they may vary like groceries. They could be different depending on what you have going on. For example, in the summer when your kids are home more so you may need more groceries at home or perhaps around the holidays. Your grocery bill may be more than normal around these times.
Lastly is a periodic expense. These are expenses you know about but they only come up occasionally. These are things like birthday gifts, holidays, vacations, school fees or uniforms. And this is where short-term goals can come into play.
To cover variable or periodic expenses, consider setting aside a certain amount each month to cover that expense. Then when the time to pay the bill or buy the gift arrives, you have the money to take care of it. We refer to that as set aside savings.
As an example, let’s say you want to go on vacation and the cost will be $2000 and you know you are leaving in 10 months. You can divide the cost of the vacation, so in this case $2000, by the 10 month time period and this tells you how much to set aside each month to reach your goal by the time you leave. In this example, you would set aside $200 a month to reach your goal.
You could do this with any kind of expense like car insurance that’s paid every 6 months or annually or a new computer or school tuition. This is a great way to prepare for bigger expenses that you know will come up during the year.
Set aside savings is also helpful for things like maintenance on your home or your car. These are expenses you know will come but WHEN they are needed could be a little tricky. The cost of these could vary as well. Some could come with a pretty big ticket. Things like new tires for your car or when you have things like AC repair or roof repair at your home. You also need to consider those things will probably need replacing at some point just from regular wear and use, never mind if something breaks and is a sudden expense. So having something set aside in a savings account can really be helpful.
Now let’s talk long term savings goals. This may include something like paying off your mortgage or paying for your child’s college tuition, and the really big one, retirement.
Many people don’t think about this one especially while they are young but saving for retirement is important! We really can’t stress that enough. And the earlier you start, the better off you will be when that time comes. It may seem crazy at 20 years old to take part in a 401k at work, but if it’s offered, take it! It’s a great habit to start and you will be grateful in the long run. Often companies will match a certain percentage of what you put into a 401k. If you ever leave the job, the money you put in will always be yours. The company portion may or may not be depending on the company policies but just having what you’ve put away can be huge. We will talk 401k’s in more depth and explain further what it really means in other posts but for now, if you can… DO IT!!
The last type of saving I want to talk about is emergency savings. This goes back to where we began, unexpected expenses. A broken down car, an injury or hospitalization. If you live in an area prone to natural disaster, you need to consider having your insurance deductible in a savings account. Deductibles can be in the thousands of dollars depending on the claim, and you may find yourself grateful for having that deductible in a savings account one day.
“The sad this is saving is often the thing that people put off or sacrifice.”
They think they will do it later or they will be fine. They will figure things out OR that those things will never happen to them, but having that savings when you need it most can make a difference in your life. So I’ll say it again… savings is one of the most important parts of your budget.
One way to make saving easier is to plan what you want to set aside each month. You can have more than one savings account. Consider having separate ones for your different needs. For example, one for emergencies or repairs and another for shorter term goals like upcoming bills or vacations. Some banks and credit unions even have specialty savings accounts for things like Christmas, so see what’s available to you to help.
Also check with your HR department or whoever does payroll at your job. Are you using direct deposit for your check? You can request money from your check be deposited into multiple accounts. This actually is a great way to make sure you actually save the money! When you never see it in your checking account, then you don’t think about spending it. What’s the saying, out of sight out of mind. Then you can watch the money grow. Don’t think that means you can’t access it though. If you are using online banking or the app at your bank or credit union, it’s very easy to make transfers from one account to another whenever you need to.
The key takeaway is, no matter how you do it, make saving part of your plan! And if you need help figuring out how to set up accounts and work with your direct deposit, ask your bank or credit union for guidance. We are always here to help!