Managing your savings is a skill developed over time. As with all things, it’s always best to start small. What exactly is saving? A savings account and the act of saving are not quite the same. Saving — the verb — is the act of setting aside income for future use. You might use these funds to build an emergency fund, make larger purchases, or even invest further. Savings — the noun — are the tools you use to accumulate this money. Examples include traditional savings, CDs, or money market accounts.
Sure, saving may seem out of reach when you first begin, but building this practice can improve your overall financial wellness. Everyone has a different relationship with their savings goals. Understanding your options helps you spend and plan with confidence.
What Are Savings and Why Are They Important?
For the most part, spending can be broken up into several categories: essentials, lifestyle, debt repayment, and savings. A balanced budget should allocate about 20 percent of your monthly income for some form of savings and/or debt repayment.
Larger, more expensive items seem more practical when their cost is spread out over a longer period of time. Each person uses their savings for different purposes:
- Large purchases like vacations, a wedding, or the down payment of a home
- An emergency fund in the event of a job loss or sudden expense
- Retirement accounts like IRAs or employer-sponsored plans
Savings are purposely less accessible than your checking. This money isn’t meant for everyday expenses; you shouldn’t be able to dig into your savings on a whim. Savings should build up over time without the interruption of impulse purchases.
Most accounts also feature some level of annual percentage yield with either a set or variable interest rate. This is one of the reasons why it’s important to move savings into a designated account. Otherwise, you may be missing out on passive income.
What are the Different Types of Savings?
How and where you store your savings can determine how much it grows over time. The “yield” of your savings account is the standard rate of growth over time. Typically, the less accessible your savings, the higher the interest rate.
Let’s take a look at some of the most traditional types of savings, keeping in mind that they have different limits to the number and kinds of transactions you can make.
- Savings accounts: A traditional savings account is ideal for the quick transfer and withdrawal of monthly savings allocations. These accounts are ideal for emergency funds, travel savings, or for other large purchases. The current national average of savings account interest is one percent according to the FDIC, the lowest of these options.
- Money Market Accounts: Money market accounts offer higher yields and fluctuate with the market itself. Banks may require a minimum balance to open and maintain the account or charge transaction and maintenance fees. In some cases, higher balances could unlock higher interest rates as well.
- Certificate of Deposit (CDs): Customers can buy insured Certificates of Deposit from banks and credit unions. This option tends to have the largest yield. Customers lock in their money for a set period of time and receive both the balance and interest when the CD expires.
Helpful Tips to Grow Your Savings
How can you make the most of your savings? It all comes down to what makes sense for you. Set aside larger amounts over time based on your monthly budget. If you feel like you’re rarely left with any money at the end of the month, a little organization could go a long way:
- Set Savings Goals: Budgets shine a light on where your paycheck goes each month. Transfer your surplus into a savings account at the same time each month. There’s nothing wrong with starting small. Even setting aside $20 builds the habit. Schedule gradual increases to your savings allocations until you reach your ideal amount.
- Save 20 Percent of Your Paycheck: Specialists recommend the 50/30/20 rule for budgets. In this setup, 50 percent of your pay goes toward essentials like housing costs, transportation, and monthly bills. Lifestyle choices like restaurants, bars, and shopping expenses should not exceed 30 percent. The final 20 percent goes into your savings account or to pay down debt.
- Organize with Savings Apps: Budgeting apps like Mint help you organize your money both in the present and future. Make informed decisions before increasing your savings allocations using charts and projections to see how it will affect your long-term costs.
Savings are a way to create your own safety net. It allows you to look ahead and take control of your finances. Whether you choose to invest in a CD or open your first savings account, saving opens the door to new possibilities.
Sources: FDIC | FiftyThirtyTwenty