Living life without any savings is like jumping out of a plane without a parachute. Setting aside money is key to getting through an emergency, such as an unexpected car or home repair, without going into debt. Having the safety net of a healthy savings account not only helps with surprise expenses but makes it easier to prepare for vacations or save for other big purchases.
Creating a savings plan
It’s not easy to save money if you aren’t living on a budget. Creating a basic budget allows you to see precisely how much money is going in and how much is going out, making it easier to determine how much you can afford to save.
Start by writing down your household income, which indicates the maximum amount you can spend each month without going into debt. Make a separate list of all of your essential monthly expenses, with estimates for regular but varying costs such as groceries and utilities. When you subtract essential expenses from your income, hopefully there is disposable income left over. This money can be used on life’s pleasures, such as dining out, shopping and entertainment, but this is also the pool of money your savings will come from, so you must differentiate wants versus needs.
It helps to designate a specific amount of money to save each month and add that to your budget like any other recurring expense. If you’re likely to forget to transfer money to savings, set up a payroll deduction or an automatic transfer from your checking account to your savings every month. Your savings will add up quickly if you make it a regular habit.
The most common place to put your money is a traditional savings account, which helps you keep the funds separate from your checking account. Financial institutions such as Oklahoma Educators Credit Union offer savings accounts that earn interest on the balance as an extra incentive. Just be aware that unlike a checking account, savings accounts have limits on how many free transfers or withdrawals you can make. Savings accounts are ideal if you want to have an emergency fund or save up for a purchase.
Another option is a share certificate, which works much like a certificate of deposit. These accounts feature higher interest rates than savings accounts, but the money can’t be touched for a set period of time. You also usually can’t add money to a share certificate, so it’s ideal for those who have already saved money and want a safe place to put it while it accrues interest. If you take out the money early, you pay a penalty, but the longer the share certificate’s term, the higher the interest rate. These accounts are ideal if you know you won’t need the money for some time and want to maximize your yield.
Having savings is necessary to protect yourself from emergencies or plan for large purchases without going into debt, and a savings account or share certificate can help you reach your financial goals.
Emily Starbuck Crone, NerdWallet