(MP) Savings is the best practical way to meet your goals and build wealth. Whether you’re aiming to reach a comfortable retirement, a house down payment, or buy a new car, you get there by setting money aside.
Although, we understand it’s important to save money for hard times, often it can be a daunting task. Perhaps you’ll feel as if you don’t have enough extra money for a savings account, or that managing your savings will be too complicated. But, bear in mind, you don’t need a lot of money to save —every little bit adds up…
So, “How big should your savings fund be?” Well to answer that, first I’ll need to emphasize growing your cash.
5 steps to growing your savings fund
1. Pay Yourself First
Most of us are programmed to pay our bills first – be it our mortgage, utilities or cable bills. However a vital part of growing wealth is paying yourself first by saving money. Allow me to explain, your bills aren’t going anywhere, believe me, the your creditors are waiting to be paid. However, by committing to saving money first you’re growing an investment pool of funds. Don’t worry. You’ll likely have plenty surplus to cover all your expenses.
After you make a considerate contribution to your financial well-being, then divide your funds to cover your bills. Employers and banks make this easy for you by automatically transferring money from your own checking account to your savings account, money market, and mutual funds. Below listed are the various accounts you should allocate your money before anyone else gets paid…
a. Passbook or statement savings accounts: Pays low interest and give you immediate access to your cash.
b. Now accounts: Checking accounts that pay interest, provided you maintain a set minimum balance.
c. Money market deposit accounts: Pays slightly more interest that savings or Now accounts but limits your withdrawals to a few per month.
d. Certificate of deposits: Pays more interest and guarantee preservation of principal, yet funds are obligated for specific term, and penalties are charged for early withdrawal.
2. Make a budget and stick to it
Begin with dividing your net income into 2 broad spending categories: fixed expenses and variable expenses. A number of your expenses, such as your mortgage, are fixed because they stay the SAME each month. Other expenses, such as entertainment or gas for your car, are variables that change from month to month. One good thing about creating a budget is that you may customize it to fit your own needs. Once you have determined what to put aside for your fixed expenses, you can alter the amount earmarked for variable items. The variable category gives you more wiggle room in how much you choose to spend and where, allowing you to prioritize as you see fit.
3. Keep track of all your purchases
The third step is to create a budget to track your expenses for at least a month, using your mobile phone, tablet or app. Be sure to record every purchase, no matter how small, including ATM fees. Once you know where your money is going, you can make an educated decision about how best to allocate money to your savings. Begin by moderating your expenses. If you’re eating out every night, and you really enjoy doing so, try eating out once a week instead. It’s not about cutting out everything that gives your life joy –It’s about better allocating your money.
4. Money for an emergency fund
Everyone needs an emergency fund, a savings account with readily accessible cash to be prepared for any contingency. The question is: How much should you keep in that rainy-day fund? With more than 5.5 million Americans unemployed for 27 weeks or longer, according to the Bureau of Labor Statistics, the rule of thumb of three to six months’ worth of expenses may no longer apply. I together with tons of experts agree that everyone should keep nine months to one year of income in an emergency account in case of job loss. I know this seems an impossible task but let me assure you it’s possible. A year’s emergency fund allows you the security of your family staying afloat while your next job or business rebounds.
5. Pay with cash
Once you’ve determined how much to set aside for savings, spending and investments, it’s time to make those numbers stick. The growing popularity of credit cards and debit cards makes it all too easy to overspend. Except for your mortgage and auto loan, most you should implement a strict policy of paying with cash for groceries, clothes, vacations and other nonessential items.
6. How much pay should you save?
According to the 50/20/30 rule, your monthly budget ought to be divided into three distinct categories of expenses: 50% should go to essentials (housing and food), 30% should be allocated for lifestyle expenses (like evenings out and 1200 channels of cable), and at least 20% should go toward what we call “financial priorities,” including debt payments, retirement contributions and, of course, savings.