WHAT ARE SAVINGS? (AND HOW TO INCREASE YOURS!)
Overview
I remember very clearly my grandfather’s advice every time he gave me a gift of money growing up. “Alex,” he’d say, “it’d be a good idea to save some of that.” I’d promptly spend it all. But, he was right, because savings are a key piece of the wealth building puzzle. Exactly what are savings though?
Savings are money you intend to use in the near future, or are using as a type of protection against emergencies. This money is kept in some sort of savings account for ease of access and protection from the risk associated with investments.
Let’s take this definition and address some of the key points individually.
Where Should Savings Be Kept?
When I think savings, I think cash. Or, if not cash, something nearly as liquid, like a money market account.
Basically, I want my savings at a bank or credit union. And, I want them in an account that allows me near immediate access to the funds with no penalties. However, I do not want my savings in my checking account where I may be tempted to dip into them impulsively.
Different banks will offer different options for savings accounts. As an example, our bank offers an eSavings account as its most basic option. This is a great option for smaller savings because there are no fees and no minimum account balance requirement. However, the interest rate is on the lower end in comparison to other options.
We personally keep our emergency fund in a High Performance Money Market Account. This is our largest cash fund, and so the balance is high enough to avoid any fees we might incur by dipping below the minimum account balance requirement. This gives us access to the higher interest rates associated with this type of savings account without costing us anything.
Again, that’s just two examples from one bank. Every bank is going to offer different savings solutions.
What Is The Purpose Of Savings?
We keep this cash in savings accounts because the purpose of savings is typically either to achieve a short-term financial goal or to provide some sort of financial security.
Let’s begin with the goals. Say you know you’re going to buy a car sometime within the next year. You’re going to need to start putting aside some money on a regular basis to avoid going into debt for that purchase. Now, it may be tempting to throw that money into some sort of investment every month and “let it grow.” But here’s the issue. While the stock market definitely has a good track record over longer periods of time (5 years, 10 years, etc.), you never know when it’s going to take a short-term dive (2020 anyone?). You need to buy a car within one year.
When you know you have a fixed time frame for a purchase, you really can’t afford the risk associated with investment. Hence, this is a savings goal, not an investment goal.
Savings also function as a type of security blanket. The largest and most stable of these types of funds should be your emergency fund. You need this to be available in case of, you guessed it, an emergency. That’s it’s only purpose.
Emergency funds are not supposed to make you wealthy. They’re supposed to protect the money that is.
When Should Savings Become Investments?
There may be a point when you do want to go ahead and let some ‘savings’ cross into investment territory. This decision will primarily be related to the timeline of your goals.
For instance, if you’re saving for a downpayment on a house and you plan to make that purchase within the next three years, I’d probably keep that money in a savings account, away from market volatility. But, if you’re thinking of holding off on your home purchase for five years or more until you settle into your career, at that point you may be able to safely cross into investment territory.
Historically, the longer money is left in the stock market, the less likely the investment is to decrease in value and the more likely it is to actually increase. But, I would definitely choose some type of well diversified strategy. Don’t get caught up in the latest single stock or crypto. You don’t want to gamble away your future home’s downpayment by putting all your eggs in one basket.
Essentially, the longer you have to save, the safer it is to consider moving savings into investments.
Increasing Your Savings
So, savings are critical for building wealth. They provide a strategy to avoid blowing your budget and a buffer between you and financial disaster. Considering their importance, how can we increase our saving?
This really boils down to 3 things:
By paying off your debts, you’ll essentially give yourself a raise by freeing up money in your budget each month. You can then redirect a portion of that to savings.
Look for more room in your budget by finding ways to cut costs. Just figuring out a way to trim back on your groceries and utilities each month can go a long way here!
And finally, it’s very easy to earn some side money with a very flexible schedule with the introduction of app based delivery gigs and even online teaching.
We have tons of articles related to each of these three ideas. Check some of them out to start upping your savings game!
Conclusion
To review, savings are money you intend to use in the near future, or are using as a type of protection against emergencies. This money is kept in some sort of savings account for ease of access and protection from the risk associated with investments.
And remember, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!
Savings are money you intend to use in the near future, or are using as a type of protection against emergencies.
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Do you have any long term savings that you keep in an investment vehicle? What do you use?
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