Saving money can seem so hard with all the commitments, liabilities, and challenges of life. You may have asked yourself “what should I be saving for?” because it is important to know the answer to this question. The more I look into it, the more individual I can see this topic being. Everyone’s situations are different, not everyone needs to be saving for the same thing or even want to save for the same thing, but there are some great guidelines that almost anyone can follow to know what they should be saving for.
If you are wondering what you should be saving for, then you might be entering the world of savings without a specific goal. First, you need to realize what the point of saving money is for. Everyone needs to have emergency savings to protect themselves in a crisis. Having SMART goals will keep you on track when it comes to saving money. Where you put your money is also an important factor to consider. Lastly, automation will most certainly make saving money effortless.
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Why Save Money?
Being able to save money is an important part of becoming financially competent. Savings are one of the biggest components that should make up your budget. We save money in order to make large purchases. “Saving” is building up enough money to spend on a large ticket item. The large-ticket item could be a planned expense or an irregular large expense that is not in your monthly spending budget.
If you are not saving for your goals then you could end up spending money that you do not have, and that is called acquiring debt. Most debt is not good for our financial situations and thus, saving money prevents us from going into debt. Not everything we buy needs to be saved for, but if it does not fit into your monthly spending, then you should probably be saving for it. There is however a savings goal that you do not want to spend unless you really have to…
Save For An Emergency First
The most important thing to save for when first starting out is for an emergency. Saving for emergencies is known as developing an emergency fund. You should have an emergency fund because they prevent you from getting into financial disarray. Focus all of your savings efforts into fully funding an emergency fund first because it will be your financial cushion in a crisis.
The general consensus on how much you should have saved for an emergency is 3 to 6 months of living expenses. Whether you choose closer to 3 or you choose closer to 6 all depends on your individual risk tolerance and personal financial situation. This is all your monthly spending, so the emergency fund could be quite large depending on your monthly spending amount. The overall intent of an emergency fund is to protect you in worst-case scenarios such as completely losing work income. If you do not have a properly funded emergency fund then it could lead you into taking out a loan or using a credit card for all of your expenses and carrying a large credit card debt balance. Once you have the fund established and fully funded you can move onto saving money for other reasons.
Have SMART Goals
SMART goals are those that are Specific, Measurable, Attainable, Realistic, and Time oriented. This acronym is widely used in goal development and savings are no different. Here is an example of developing a savings goal that is SMART:
“I want to save $20,000 for a down payment on a house in 5 years.”
- Specific
This is a specific goal because I know exactly how much money I want to save and what that money is being saved for. It is important to have a specific goal because it will keep you on track to reaching that goal. Saving money just for the sake of saving money will probably lead you to prematurely spending it. So first figure out what exactly you are saving for.
- Measurable
This goal is measurable because it has a $20,000 numeric goal. I can track my progress month by month and year by year to ensure that I am on track to reach it. If for some odd reason I am not on track, I can adjust my savings rate in order to still reach the goal. Savings goals are naturally measurable because progress can be seen by the number in your savings account.
- Attainable
Saving $20,000 is attainable for me because of my level of income. This feature is extremely dependent on your own financial situation. What might be attainable for me might not be attainable for someone else. Know your own financial situation and you should know what you can attain.
- Realistic
I have five years in order to save $20,000. Given that there are 60 months in five years I can divide the $20,000 by 60 months and see that I need to save about $334 each month. This is a very realistic scenario for me because I have room in my budget to save that much per month for this particular goal. “Realistic” is another feature that is a case by case basis based on the individual. In order to make a goal more realistic, you can adjust the goal savings amount or adjust the time frame to make the monthly savings rate more realistic for your situation.
- Time-Oriented
This goal establishes a 5-year time frame for me to reach it. It is important to give yourself time frames and deadlines for savings goals because it helps keep you on track and be responsible for yourself. All goals should be time-oriented or else you may run around in circles and never reach your goals.
Use A Good Savings Account
You should not feel limited to choosing a savings account at your primary banking institution. There are a plethora of different accounts that you can find online that would be advantages for you. The best savings account for you will be one that pays you the most in interest while you pay no fees. Many online banking businesses offer superior interest rates to those of traditional brick and mortar banks, so check online for what fits you best.
Another thing to note about savings accounts is that your savings should be held in low-risk accounts separate from any other investments you have. The intention of your savings should be highly accessible and very low in risk. Once you have found the perfect account for you, it is time to finish your savings plan with one last thing…
Automate Your Savings
Put your savings on autopilot. This could include having an automatic transfer from your checking account into your savings account, or it could even mean splitting a direct deposit straight into your savings account. Either way, you want your savings to be done without you having to manage it yourself. This principle is in line with paying yourself first, which means that you do not give yourself the opportunity to spend that money that is already dedicated to your savings goal. Automation of savings means that saving for your goals is effortless.
Recap:
- Know why you need or want to save money.
- Make saving for an emergency your first priority when saving money.
- Create SMART savings goals.
- Find the best savings account for your situation.
- Automate for effortless savings.