How to Successfully Save Money
Saving money is on many people’s to-do list, but it can easily get pushed down the priority list. No matter what you want to save for, whether it’s a new car, home down payment, or going back to school, making a plan and sticking to it is critical if you want to meet your goals.
Setting Savings Goals
No matter what you’re saving money for, the first step toward success is setting a goal and sticking to it. Andrew Novick, a certified financial planner with The Investment Connection in Center Valley, Pennsylvania, starts with the goal of clients saving 10 percent of income. “Of course, this doesn’t address whether they are saving enough for their goals. Many people find out that they are running far behind their goals at the current savings rate. Then I have the conversation about increasing the savings rate, adjusting the goals, or both.”
Anika Hedstrom, MBA and senior financial analyst practicing in southern Oregon, also tailors her advice to the particular client. “In working with clients, I develop a savings approach tailored to the individual, couple, or family. This is based on a number of factors, including risk tolerance, cash flow stability, liabilities, discretionary expenses, and behavioral finance aptitude. In short, there’s more to it than arbitrarily accepting the 3-6 months ‘expert’ standard and moving on.”
Where to Put Your Savings
Where you stash your savings depends on what you’re saving for. “For an emergency fund, consider a small amount in a personal safe or safe deposit box, and the majority in a money market fund,” suggests Hedstrom. “Depending on your liquidity needs and time horizon, a CD would also work. In other words, spread the wealth among various short-term savings vehicles.”
Whether you need separate accounts is a matter of personal preference. “I’m a big fan of separate accounts because it keeps you working toward your goal and remains measurable,” says Hedstrom. “For example, my now husband and I had as many as five going at one time: wedding fund, honeymoon fund, house fund, emergency fund, and “slush” fund. Make it personable and specific, and you’ll knock your goals out in no time.”
Novick isn’t as big a fan of multiple accounts. “Generally, I think having fewer accounts is better,” he says. “Thus, my default is to just keep the extra cash in an operating checking account. However, some people can’t stand to see extra cash in the checking account and spend it down every month. For these people, maintaining separate savings account is worthwhile.”
Automate Your Savings
After the initial excitement of saving has worn off, it can be a struggle to diligently put aside the money month after month without spending it. To stay on track, Hedstorm suggests starting with automating your savings by having your money directly deposited into different accounts. “For one, you don’t even have to think about it. Your money works harder for you while you concentrate on just how good it will feel to put down the 20 percent on your new home (or whatever goal you are working toward).”
Avoid Savings Traps
If you want to be successful in your savings goals, choose to spend your time with people who will encourage you in that pursuit. “Surround yourself with like-minded, goal-oriented people. If you are attempting to save for a down payment on a house, then don’t hang out with your spendthrift friend who maxes out their credit cards,” says Hedstrom. “Chose your company wisely and it will become that much easier with accountability partners.” In addition, having an emergency fund built into your savings plan can help you prevent unexpected expenses from getting in the way of your goals. “Others are unlucky and have repeated big unexpected bills – a car accident, dental problems, or a tree falling through your roof are examples of items that can really take a bite of expected savings,” says Novick. With an emergency fund, you can handle the unexpected without disrupting your savings plan.
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