Heather Murray’s Good Question: Examine spending to start saving

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Question: I’m evaluating my savings goals. Any suggestions?

Answer: We all rec­og­nize it’s im­por­tant to save money, but how to save and where to save can be dif­fi­cult ques­tions. Some think the no­tion of sav­ing money can be an un­re­al­is­tic ex­pec­ta­tion within a cur­rent monthly bud­get. How­ever, for most of us, if we honestly look at our spend­ing, we can find ways to set some money aside in sav­ings.

To de­ter­mine how much you want to save each month, the first place to start is set­ting a sav­ings goal. Iden­tify what ex­actly you’re sav­ing for. If you don’t cur­rently have an emer­gency sav­ings fund, make that your first goal. The amount you should have set aside in your emer­gency sav­ings should amount to at least one or two months of your rent or mort­gage.

If you have an es­tab­lished emer­gency fund, con­sider other sav­ings goals, like a va­ca­tion. Set an amount that you will feel com­fort­able set­ting aside on a reg­u­larly sched­uled ba­sis. Here are some cal­cu­la­tions:

• Save $5/ week = $20/​month = $240 an­nu­ally

• Save $10/​week = $40/​month = $480 an­nu­ally

• Save $25/​week = $100/​month = $1,200 an­nu­ally

Next you want to de­ter­mine where in your monthly bud­get you can come up with $20, $40 or $50 a month. Ex­am­ine your ex­penses to de­ter­mine if there’s any­thing you can cut back on. If you buy cof­fee a cou­ple times a week, cut back and put that money into sav­ings. The same can be done for lunch or din­ners out. Reduce spend­ing in those ar­eas to in­crease your sav­ings. If you’re still not sure how to find ex­tra money to set aside for sav­ings, track your ex­penses for one month to de­ter­mine if there’s any spend­ing you can re­duce in fa­vor of sav­ing more.

The next ques­tion is where to save your money. If you have an emer­gency sav­ings fund, you want that money to be ac­ces­sible to you, but not too ac­ces­sible. With emer­gency sav­ings, you want to de­fine what con­sti­tutes an emer­gency, such as an un­ex­pected ex­pense over $200 or a car re­pair you weren’t plan­ning on. A new pair of shoes on sale is not an emer­gency. A tra­di­tional sav­ings ac­count may be an ap­pro­pri­ate place for an emer­gency sav­ings fund.

If you’re sav­ing goals are more long term and you want to see your money grow over time, you may want to con­sider al­ter­na­tives to a sav­ings ac­count. Most sav­ings ac­counts are earn­ing less than 1 per­cent in in­ter­est an­nu­ally.

What’s the al­ter­na­tive to sav­ing ac­counts? There are sev­eral. If you are sav­ing for re­tire­ment, a Roth IRA may be an ap­pro­pri­ate op­tion. Long-term CDs also usu­ally yield higher in­ter­est rates than a typ­i­cal sav­ings ac­count. Money mar­ket ac­counts also usu­ally have a higher in­ter­est rate.

How­ever, with any of these types of ac­counts, it’s im­por­tant to un­der­stand the terms. With­draw­ing funds be­fore re­tire­ment from a Roth IRA comes with heavy tax pen­al­ties. Tak­ing money from a CD early could be costly be­cause of early with­drawal pen­al­ties. It’s im­por­tant to know the fi­nan­cial ram­i­fi­ca­tions of pull­ing money out of an al­ter­na­tive sav­ings prod­uct be­fore in­vest­ing money there.

Regard­less of where you save your money, tak­ing steps to build your sav­ings is what’s im­por­tant. Start­ing some­where and see­ing it grow over time will help in­crease your fi­nan­cial sta­bil­ity.

Heather Mur­ray is man­ager, reg­u­la­tory com­pli­ance and ed­u­ca­tion, for Ad­van­tage Credit Coun­sel­ing Ser­vice (dba Con­sumer Credit Coun­sel­ing Ser­vice). For more in­for­ma­tion about the agency’s ser­vices, please visit www.ad­van­tageccs.org or to ac­cess the free on­line bud­get­ing tool go to www.on­line­bud­ge­tad­vi­sor.com. If you have money or credit man­age­ment ques­tions, you can email Ms. Mur­ray at hmur­ray@ad­van­tageccs.org. Please pro­vide your name, ad­dress and day­time tele­phone num­ber with all in­qui­ries. Ms. Mur­ray tries to re­ply to all in­qui­ries but, be­cause of the vol­ume of ques­tions she re­ceives, she can­not al­ways re­spond.

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