Saving 101: How to Master the Art of Saving Money
Saving money is something that everybody knows they should do, but only a few do. You may have been told by your parents or grandparents to save your money when you were young. They try to tell you that it will gain interest and compound over time, but you never saw results other than a measly 6 cents earned every month.
Savings accounts, in general, are not what they used to be, which was a mechanism for earning money. If you are banking with a big bank, you can expect much less than a 1% interest rate. Luckily, some high-yield online accounts offer over 2 percent! However, this will not even beat inflation. Unless you have millions and can live off your monthly interest, saving money is not a great way to make money.
Saving money is, however, a great way to build safety in your financial life, retire, get your children through college, buy a house, and get ready to invest money.
If interest rates are bogus, why should people save money? Saving money is just as important as earning it. There are many reasons why people must save money, but the three most important are to have financial safety, to save for a house, and to keep you from spending it.
There is nothing worse than not having financial safety. It causes stress, it keeps you stuck in a job you hate, it steals your independence, and it keeps you living paycheck to paycheck. What happens if your car breaks down one day, you lose your job, or if a great opportunity arises, but you cannot afford to jump on it? These are all extremely possible, and if you are not prepared financially, they will eat you alive.
Having an emergency fund of at least three months worth of your expenses (you should use a budget to determine this) will keep you feeling safe about your finances. It will help you when things turn for the worst, if there is a true emergency, or if you come across an amazing opportunity.
For example, if you have $2,000 worth of expenses every month, you should have at least $6,000 saved in a high-yield savings account. Ideally, you would even want six months worth of expenses in your emergency fund. In this example, that would end up being $12,000. It seems like a lot of money, but you can achieve your goals a lot quicker than you think. The more you save, the faster your financial dreams become a reality.
This emergency fund will continue to build as it gains interest, will eventually become part of your retirement, or go toward a down payment on a house as long as you do not touch it. The key is that you do not ever want to have to touch it unless you have to!
Saving for a House
The second reason you should be saving money is for a down payment on a house. Usually, you have to put at least 20% of a house’s value down to buy it. Ideally, you would want to put even more down to lower your mortgage, monthly payments, and mortgage’s interest rate. You want to do what you can to stay out of more debt. However, most people cannot do this, and some will never be able to buy a house because they will never have that 20% to put down. (We know that there can be lower down payments for first-time homeowners, but we want to keep this simple for now.)
To get this down payment, you have to save. The more you save, the less you are going to owe on your house and the closer it is to become yours completely. Most people dream of owning a home, but these days, people are opting toward renting more and more. Why would you pay monthly to make someone else rich when you could pay monthly toward making yourself rich?
Saving to Stop Spending
The more you save, the less you spend. It is a simple concept, yet few do it. Most people spend, spend, spend, and hope they have some leftover to save. You should figure out your expenses and save first. This way, the money is already ‘gone.’ It forces you not to spend as much, and that is one of the most powerful aspects of saving money.
When you save first, you will learn to live with a little less. This action causes you to think more about how you spend your money and make better financial decisions. Over time, you will learn that you can save more and still live comfortably. Saving will become like a game, and you will continue to find ways to save more and more.
How to Save
The way a lot of people learn to save is when their parents set them up with a savings account. This account can be the extent of their learning. There are much better ways to save than by going to your local Wells Fargo, stuffing money under your mattress, or putting it into a piggy bank. By doing this, you allow your money to sit and lose value over time. This loss comes from inflation. Think of when someone tells you that gas used to be 30 cents a gallon. That is because the dollar was worth more. The dollar loses value every day, so the only way to keep up with it is to earn money on that same dollar that is at a rate higher than inflation.
When it comes to saving money, there is not much that you can do to beat inflation. However, there are steps that you can take to make sure that the dollar you save is worth the dollar you earn.
Open a High-Yield Savings Account
The first thing you need to do is find a savings account. Don’t go to your local bank, look online! Many great options will give you a higher interest rate and be simple to access. Most big banks will give you an interest rate that is less than 0.20%. Credit Unions will usually give an interest rate that is a little better. Online banking services are where you can find interest rates that are the highest. Many will give you an interest rate that is over 2% and some are over 2.5%.
The best way to find a high-yield savings account is by visiting Bankrate. This free service will compile data from all the different savings accounts and show you which is the best. Bankrate updates every month as banks compete with each other and interest rates change.
If you do not find what you are looking for with Bankrate (note that not all banks and services are listed on the website), there are a few savings accounts that we have used and recommend.
- Wealthfront is what we are using right now and as of this writing is offering a whopping 2.57%. The service also allows you to view your average monthly savings, the percentage of your income that you are saving and has an automatic investment service for a meager fee. As of this writing, there is nothing that can beat it. That is why we are using it.
- Marcus by Goldman Sachs is another service we have used, but they recently lowered their interest rate which caused us to switch to Wealthfront. However, Marcus is a great service and we still have our account open.
- The last savings account we have used is from Ally Bank. They probably offer the best checking account and Roth IRA available, so it makes sense to keep your savings with them as well to keep everything together. They also have a very competitive interest rate at 2.10% as of this writing.
The account you choose is completely up to you, but as a rule of thumb, you should probably not settle for anything that is under 2.00% at this point in time (2019).
Dedicate a Set Percentage of your Income
Going back to paying yourself first and saving your money before you even get the chance to spend it, it is important to set a certain percentage of your income that you are going to save. It would be optimal for you to save at least 20% of your income. This percentage includes any investments, savings, 401k, etc.
For some people, this seems like a huge number, and it is easy to believe that you can’t possibly live without 20% of your income. Unless every penny you earn goes toward your rent or mortgage, we promise that you can live without that 20%. You will find it easier than you thought it would be. There are also many ways to make more money so that you can save more.
The key here is to dedicate this set percentage and take it out before you ever get the chance to touch it. The easiest way to do this is through automatic transfer, but if that is not possible, pull out your calculator and put the 20% into your savings.
In the long run, you will cost yourself thousands if not millions if you don’t put away some money. If you literally cannot save 20% of your income, start at 10%, even 1% is better than nothing. There are no excuses to not putting away a portion of your income, and if you don’t, you will truly regret it.
Three Months of Expenses
Now that you have opened your savings account and dedicated a percentage of your income to it, your first savings goal is to save at least three months worth of expenses. We went over this earlier in the article. Having an emergency fund of at least three months worth of expenses is your safety net. You should never touch this unless there is an emergency. Hopefully, you never have to touch it, and it will continuously build interest over time while you focus on saving for other things such as a house.
As your emergency fund continues to gain compound interest, it will provide you with extended time in case of emergency. Ideally, you never have to touch this, and you can watch the power of compound interest set you up for a comfortable retirement.
Open Another Account
After you have reached your emergency fund goal, it is time to save for something else. Maybe you want to start saving for a down-payment on a house, for your wedding, for retirement, college, or investing? What you save for is completely up to you. However, you should try to put a little bit more into investments now that you have your safety net.
You can play around with different accounts to see which bank or platform that you like best, but you should continue to look for the highest interest rates around. You can have multiple different savings accounts with the same bank, and you can name them different things. For example, we have one account called “Savings for a Rainy Day,” and one called “A Chunk Out of the Mortgage.”
Investing your money is going to give you a better return on your money than saving will if you do it right. For example, that measly 2.10% interest that you are getting on your savings could be upwards of 10% in the stock market.
Not enough people in this world save money, but it is time for you to take action. Saving money is one of the most important things that you can do for your financial well-being and your journey to financial freedom. Don’t fall in line with the average American; spending all that you can and living paycheck to paycheck. It is a sad and stressful life, but it does not have to be your life. It is not going to happen overnight, but with dedication and patience, you will see that it makes a huge difference. Financial freedom is achieved one step at a time. Savings money is how you learn to crawl before you learn to walk. It is that important.