Saving regularly is one of the most important ways you can create financial security. But how do you do it strategically?
Here are some tips to get started and put your money to work in all the right places.
Know Where You Stand
Laying the groundwork for a savings plan starts with figuring out how much you can realistically save each month. Even if you don’t have a lot to start with, developing the discipline of setting money aside will help you develop good saving habits.
Revisit or create a budget and track your income and expenses, including fixed costs like rent or mortgage, utilities and insurance, and expenses like groceries, entertainment and transportation. Look for places you can free up funds. Allocate 20% of your after-tax income to savings and paying down debt.
To make saving consistent, set up automatic transfers from your checking account to a dedicated savings account.
Emergency Fund First: Your Safety Net
Relying on your emergency fund instead of credit cards for unexpected expenses is great for your finances. The recommended amount to save varies depending on your circumstances and financial obligations. A good rule of thumb is to aim for at least three months of living expenses using liquid accounts that offer easy access to your money. High-yield savings accounts work well because your money can grow without risk. In 2024, average savings accounts range between 0.45% and 0.59% while some high-yield savings accounts offer rates of 5% or more.
Short-Term Savings: Saving for a Specific Goal
When it comes to savings, short-term goals are just as important as long-term aspirations. These are the tangible objectives can bring immediate gratification and a sense of accomplishment, ranging from a dream vacation to a new appliance or even a down payment for a car or home. To effectively save for these goals, create a plan.
Start by defining your specific short-term goal. What do you want to achieve, and by when? Once you have a clear target in mind, calculate the amount you need to save. Break down the total cost into smaller, manageable chunks and determine a realistic timeline. This will help you stay focused and motivated throughout the saving process.
Next, set up a separate savings plan specifically for your short-term goal. This will help you keep these funds separate from your regular expenses and avoid the temptation to dip into them.
Share Certificates
There are plenty of ways to save besides a regular or high-yield savings account. For instance, Share certificates offer a way to earn more on your savings without the risk of investing. Share certificates are like certificates of deposit (CDs). CDs earn interest, while share certificates earn dividends — over a specified time. When the term ends and the certificate matures, you can withdraw the balance or renew the certificate.
Share certificates offer better rates than regular savings if you're willing to leave your money untouched for a set time period. Terms range from 30 days to 60 months.
Retirement Saving Solutions
One of the most common retirement options is the 401(k), offered by most employers. The 401(k) plan lets you contribute a portion of your pre-tax income to a retirement savings account. A great perk: Employers usually match contributions, typically from 2% to 8%.
But there are other options to consider, especially if you don’t have access to a 401(k).
Roth 401(k)
Another popular retirement option is the Roth 401(k). It’s like a traditional 401(k) with one big exception: Employees use after-tax — rather than pre-tax — income to make contributions. This means you won’t receive a tax deduction for your contributions, but your withdrawals in retirement are tax-free. This tax-free growth potential can be beneficial for individuals expecting to be in a higher tax bracket during retirement.
Roth IRAs
Roth IRAs are individual retirement accounts funded with after-tax dollars, but qualified withdrawals are completely tax-free. This means that you don't get a tax break on your contributions, but you won't have to pay taxes on your withdrawals in retirement. Roth IRAs have the same contribution limits as traditional IRAs.
Learn more about these retirement solutions.
Make Savings a Part of Your Life
If you haven’t worked savings into your budget, take the time to do so. Commit to saving more this year. Regularly review your progress and adjust your savings plan as needed. Life circumstances can change, and your financial priorities may shift. Stay flexible and adapt your plan accordingly to ensure you're still on track to reach your short-term savings goals.
By following these steps, you can effectively accumulate funds for your desired short-term objectives and enjoy the satisfaction of achieving your financial milestones.