This happens all the time… I sit down with a client to help get their finances on track, I look over the most recent paystub and see $40 being direct deposited into savings. I ask what the $40 is for and often get a response like, “What do you mean, I know I’m supposed to save so I save”. Next I ask “How much is in that account right now?” The usual answer is, “Between $1 and $20.”
Saving money with no plan or defined purpose is pointless because it will disappear every time the wind blows “unexpected expenses” your way. It’s like running a race without knowing where the finish line is… you run but never get anywhere because you don’t know what direction you’re heading. Poor planning and lack of goals for your savings is the surest and quickest way to an empty bank account.
Here are six main goals you need to have for your savings. Read them carefully, write down goals that best fit your situation, and begin putting the goals in place so you can finally build your savings!
1) Work with a great bank
Matt’s note: The only banks I recommend in full confidence are Capital One 360 and Ally Bank. I mainly use Capital One 360, but have also had accounts with Ally for years – I’ve always been impressed with both, and they’re the only banks I’ve ever been impressed with.
2) Save money for non-monthly budget items
When doing a budget, it is vital to plan for expenses that don’t occur every month, but do occur one to four times per year. Some of those expenses include:
- Real estate/Property taxes (if not escrowed)
- Auto/Home/Life insurance premiums
- Auto registration/tags
- Christmas gifts
- Home maintenance (furnace and air checks, etc.)
- Kids’ sports/School supplies/Tuition and other child-related expenses
- Medical expenses
There are definitely others as well, but this will get you started on your own list. Make the list and start working it into your budget. Planning for these expenses by putting money aside in a savings account each month (and labeling that account for each category) will greatly reduce your stress level.
3) Save money for large purchases
Perhaps you will need to buy another vehicle sometime. What about a new couch, a new roof, a new furnace, and many other large ticket items – do you have money laying around for these items? Most likely not. If those expenses are coming, how are you going to pay for them? For most of you, debt is the answer: a car payment, a home equity loan, credit cards. I have a different, completely crazy idea: save up for the item and buy it with cash! I know this goes against the culture, but I promise you’ll have less stress if you save for big ticket items now and pay for them later with saved money.
4) Save money for an emergency fund
This is actually very similar to #2 above. If an emergency comes up, most people use debt to cover the costs because they have no money set aside for an emergency. By the way, a new vehicle or even a new roof is not an emergency. Those are things you know are coming, so you should plan for them. Getting laid off from your job is an emergency. When I ask my clients how they got into debt, many of them tell me that they got laid off from their job for a time. They had no savings and, even worse, did not adjust their lifestyle. That “plan” (or lack thereof) will lead a large amount of debt fast! Having an emergency fund of three to six months worth of expenses will prevent debt and help you sleep better at night.
5) Save money for retirement
I am not sure about you, but I don’t plan on the government taking care of me in retirement. Therefore, I have to do something about it. I suggest saving 15% into a retirement account. For the purposes of this post, I won’t get into specifics as far as where exactly to put it. The key is to make it habit to put aside a certain percentage for retirement investing so that you have money to live on and hopefully thrive on when you reach the golden years.
6) Save money for college
This only applies if you have kids, of course. College costs are extremely high and if you do have kids, it’s a great idea to put aside money to help offset those costs. There are many other ways to go to college without debt, so this is not vital. I don’t suggest saving for college unless you are fully saving for retirement, have a fully funded emergency fund, and have no debt (other than a mortgage). These goals are more important than saving for college, but if you can start putting aside even a little for college, it will definitely help.
If you have no savings, now is the time to start. If you have been saving but have not goals or plan for the money, now is the time to start saving with purpose.
This article was included in the 2nd Get Out Of Debt Carnival.
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