Tips on how to start building your savings
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This article originally appeared on MoneyLion.Saving money sounds easy enough, but many of us still aren’t doing it. One recent survey showed that nearly two-thirds of Americans have only $1,000 in savings and that one in five of us don’t even have a bank savings account.What’s behind this? For many adults, the Great Recession in the last decade was a financial back-breaker: people who lost jobs or were underwater on mortgages were forced to rip through savings and retirement funds to make ends meet.
But there’s also a portion of the population – many of them younger adults – that never got started in the first place. For them, the chances of a huge financial hit may seem small. But it’s worth remembering that without a rainy-day fund any sudden financial obligation could siphon funds away from where you really need it – your credit card payments, retirement savings, or money you’re building for a major purchase like a house or car.
After choosing one or more types of account to save your money, it’s time to make it happen.Here are some tips to help you start saving successfully:
Make it automatic. If you haven’t signed up for direct deposit, do it. It’s a great way to earmark some of your paycheck to go into savings without any of the temptations when you have cash in your hands. Setting a direct deposit - and forgetting it – establishes a saving habit that you don’t have to track or think about going forward. Many banks also allow you to set up sub-accounts so you can save for more than one thing at once, such as an emergency fund (generally viewed as six months of your normal expenses) and money for a car purchase or a vacation.
Track your spending. Many financial experts say you can’t put a savings plan into motion until you know where your money is going. Track all of your spending over a three-month period to gain visibility about your income and expenses. There are also online tracking tools that you can use, from MoneyLion mobile app tool that you can download for free or using one of the other online tools such as Mint’s.
Make a budget. After you’ve looked at your spending, it’s time to make a plan that allows you to decide how much of your money is going to expenditures that are necessary or unavoidable, how much is a luxury that you still must have to get through the day, and what spending is simply excess. Yes, a budget can still allow for "fun" items – you just need to decide when those cross the line into wastefulness. Many people are often surprised to find they can get by on a lot less – thereby putting more of their income toward other financial goals. Read more about how to get started with a budget.
Use cash. It’s easy to promise yourself that all of your credit card spending will get paid off at the end of the month, thus avoiding a monthly finance charge. But that’s harder to pull off, especially when unforeseen expenses happen (as they always do). Consider using cash for more of your day-to-day spending. Studies suggest that people often spend less money when they have to see it pass from their own hands, as opposed to swiping a card or holding up their phone for a "mindless" transaction.
Go pre-paid. If you’re new to credit cards, one option for building your new credit history is to use a pre-paid credit card, which lets you "pre-spend" a set amount of money that deposit into the card that you can later charge against. Since you’ve already spent the money and it’s limited up to that amount, there’s no danger of you getting over-leveraged with debt.
Several options exist for savers. The best one for you depends mostly on how much money you can afford to have tied up, how much you want to earn in interest, and whether you’ll be penalized for early withdrawals.Here are some savings alternatives to consider:
Savings accounts. Once the backbone for consumers looking to build a nest egg, the old reliable bank savings account still exists and is as safe as any federally insured account. Access is as easy as your closest ATM, but interest on these accounts are very low. Policygenius' partner Fiona can help you compare savings accounts and get the best rates.
High-yield bank accounts. Many banks, especially the newer online-only varieties, offer both savings and checking accounts that pay higher interest rates. They’re also federally insured, but you may also encounter other hassles like fewer ATM options and teaser-only rates that fall after an introductory period. As of August 29, 2016 bankrate.com shows the highest annual percentage yield for savings accounts to be 1.05%.
Certificates of deposit. These are savings instruments that will pay you an annual interest rate that increases depending on how long you hold the CD without redeeming it. Most CDs can be bought at your current bank for as little as a three-month commitment or up to five years. They’re federally insured, but you can’t access your money without a penalty until the CD comes to maturity. As of August 29, 2016 bankrate.com shows CD rates from 0.81% for a 3 month CD to 2.00% for a 5-year CD.
US Treasury bills and notes. Generally considered the world’s safest investment, these debt instruments can be bought for up to 10 years and the interest is exempt from state and local taxes. Like CDs, however, you may not get back all of your money if you need it before the notes mature. For a primer on treasury bills and notes, learn more about bonds.
Money market deposit account. This account, usually offered by banks, allows for a very liquid, federally insured deposit that lets you make a set amount of transactions per month. While access is easy, you’ll probably have to heed a minimum balance requirement. CDs will usually offer a higher rate of interest. As of August 29, 2016 bankrate.com shows the highest annual percentage yield for no minimum money market accounts to be 1.11% from EverBank.
Money market funds. These accounts are offered by brokerages and mutual funds, and usually provide a similar access as money market deposit accounts, with check-writing and ATM privileges. They also often pay higher interest rates, but these funds, which do invest in safe securities like CDs and government securities, are not federally insured, meaning in theory you could potentially lose money with a money market fund.
It’s never too late to start saving. Use the tips above to begin the saving process, and then open up an appropriate savings account so that you can begin earning some interest off of your growing savings balance.
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