A strong savings strategy is a cornerstone of any financial plan. When you know how to save, you can build an emergency fund, set aside money for planned purchases and enjoy financial independence.
Whether you are looking to save your first $1,000 or are saving up for a house or a car, understanding the basics of saving is vital to achieving financial independence.
Start your savings strategy with a plan and a goal
It’s important to have a reliable place to store your hard-earned money. But before opening a savings account, you should think about what your goals are. Are you wanting to set money aside for a rainy day? Or do you want to save up for something big, like a vacation, house or education? Once you have a goal in sight and a clear direction of how you want to prioritize your money, you can set a savings strategy that works for you.
How much can you (should you) save?
Once you’ve decided to start saving, the next step is to analyze your income and expense to understand how much you can reasonably stash away each month. A common adage is “pay yourself first,” which means to allocate your monthly savings before you start paying monthly expenses.
The 50/30/20 rule is a good starting point for many new savers:
- Allocate 50% of your income to essential expenses
- Rent/mortgage, groceries, debt payments, car payments, utilities, etc.
- Allocate 30% of your income for stuff you want to purchase
- Clothing, entertainment, travel, etc.
- Allocate 20% of your income for saving
- Savings account, money market, time deposit, etc.
- Setting up automatic transfers to a savings account around the time of your payday is one tip for “paying yourself first’
Once you’ve used the 50/30/20 rule to establish savings habits, consider adjusting the percentages based on your custom financial goals. Or, research alternate savings strategies to find the right one for the long term.
Understanding savings accounts
A savings account is the foundation of creating a strong financial plan. You should plan to use this account as a place to deposit money to save for as long as you want – but not to regularly withdraw for expenses. Many banks have rules on savings accounts that limit the number of withdrawals and transfers. Plan to use your savings account as a place to deposit and hold onto funds. You can use this account as a place to house an emergency fund and to save up money for other planned purchases
What to know about money markets
Once you have built up reserves in your savings account, or if you are using your account for short-term savings goals, you should consider elevating your savings strategy with money market accounts. This account type offers a lower-risk way to earn interest on your money, which can help you save more money in a shorter amount of time.
Money market accounts are like savings accounts with some key differences. Money markets can offer the potential for higher interest rates (which can help you grow funds over time) as well as higher required balance minimums. Money markets also allow you to more quickly and easily access your funds because they often come with debit cards and checks, similar to a checking account. Take note, however, that money markets also often have monthly withdrawal limits.
Tapping into time deposit accounts
Time deposit accounts (also known as certificates of deposit/CDs) are a type of savings account that allows you to deposit a specific amount of money for a specific amount of time. While time deposit accounts usually pay a higher rate of interest, your money is locked in for longer and it’s therefore less accessible in the event you need it. In fact, some time deposit accounts charge penalties for early withdrawal, so carefully weigh the pros and cons in your savings strategy.