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 firstname.lastname@example.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.