How to Step up Your Savings
Humans tend to be overconfident and act on emotion when it comes to many decisions, including saving money. A study done by Sheldon Garon, a professor at Princeton University, showed that even after the 2008 financial crisis, the savings rate in the United States only increased by 5.5 percent. By 2013, it was back down to 2.6 percent. In addition to Americans' poor saving habits, other life factors like unforeseen medical expenses, job loss, or having a sick relative can quickly deplete financial supplies.
Many people know that it is wise to save rather than spend, but it is still difficult to do. Fortunately, with some discipline and conscious effort, people can use several strategies to save money for larger expenses, like purchasing a home. However, before putting money away, identify your financial goals and keep them in mind. There is a difference, economists say, between saving more and saving more with a goal or focus in mind. Saving with an end goal helps you understand what you are doing and how it directly affects you.
The best way to save, experts say, is to get savings out of sight and mind. This method, devised by Richard Thaler, was created help people boost their 401(k) savings, but it can apply to savings of all kinds. The principle behind Thaler's "Save More Tomorrow" program is to have employees make automatic and regular payments into their personal 401(k) savings accounts. Over time, they will significantly increase their retirement savings. By setting up automatic withdrawals from a payroll or checking account into a savings or retirement account, you can easily put away savings of all kinds, and any bank can do this. Ideally, participants in the program save money for big life expenses like emergency medical and home expenses, college, retirement, and other financial endeavors.
It can be difficult to put money into savings at the end of each month instead of spending it, but financial planners have several tips to start. First, make it a habit to put away money each month, even if it's not a lot. The point is to start (and continue) making the commitment to work towards a healthier financial future. Before committing a certain amount of money for your savings account, set a budget that includes savings as part of your overall spending plan. Prioritize saving over spending for other things. Making automatic payments makes saving easy and convenient. At the bank, you can typically set the date for automatically transferring your paycheck into a savings or checking account.
Regular payments aside, here are a few tips to stash away extra cash. Compensation from a tax refund, a raise, or a bonus should go to your savings account. If you are searching for a new job, look for an employer that offers good benefits like health insurance, matching retirement savings plans, life insurance, and reimbursement for transportation. The less money you have to pay for these benefits, the more money you'll be able to store away. At the store, remember to use coupons. By setting aside 20-30 extra minutes each week to find your store's special deals and coupons, you can plan a menu accordingly and save up to 40 percent off a grocery bill each week. At the bottom of each receipt, most stores tell customers how much money they've saved in coupons. On a weekly or monthly basis, experts recommend tallying this amount and putting into your savings account. Mobile banking is a great tool for this, as it lets you transfer the money even before leaving the store. With coupons, you can easily put hundreds, if not thousands, into your savings account each year. You can also accumulate extra money by collecting spare change around the house and cashing it in at the end of each year. Then, simply put it into your savings account. If you have a credit card with cash back, get the cash and save it in your savings account.
Another way to save money is to get rid of old biases. According to Forbes, studies have found that people think they know more than others. People are also overly confident and think they can predict the future. In the financial world, these biases can result in losing money. A good example is the stock market; when people think they can predict stock behavior, they act accordingly. As a result, they tend to ditch stocks when they should be buying. To avoid that problem, experts suggest not making sudden moves. The stock market naturally cycles through highs and lows, so money that stays invested over time tends to be safe. To keep up with current stock trends, you can invest monthly in global stock index funds. This can be done through an IRA, retirement plan, or a mutual fund. Next, forget the media hype. Each day, people hear about market downturns and bad economic signs. As a result, experts say, citizens are roped into thinking they should take immediate action. However, acting on fear does not bode well for financial decisions. If you feel the need to invest, economists say, buy constantly and hold onto stocks instead of getting caught up in looking at return rates and stock averages on a daily basis.
Financial planners also say that people become overly confident when they choose a stock or mutual fund that perform exceptionally well and makes money. Instead of sitting back on your heels, experts say, keep investing in large pools of stocks and bonds. You can diversify a portfolio by investing in stocks of small, medium, and large companies around the world. This way, you'll be less subject to impact from a sudden change in a stock's performance, or the performance of stocks in a particular group or industry.
As you invest, keep an eye on money market yield funds. Rates have increased in 2017, but they're still below internet savings account rates. You can also divide your savings into a short-term and a long-term account to take advantage of high returns. This way, you can move your short-term money into a high-yield checking account. Keep in mind, however, that your accounts must usually have high balances to generate interest. Therefore, this might be a good option for when you have a larger financial base. Money in a long-term account can be set aside into CD, which can provide high yields over a period of time. Most CDs require you to keep your money in them for a set period of time, such as three to five years. Before going with this option, look into the penalty fee for withdrawing your money ahead of schedule.
Sometimes, it is impossible to predict financial losses that come your way. For that reason, you can plan ahead for the unexpected with an emergency fund. Experts recommend opening a separate checking or savings account and titling it "Emergency Fund." An account that earns interest is a plus. The emergency fund should be treated just like any other account. You should budget for the savings account, and put money into it before you pay other bills. Make a point to put any extra money into the emergency fund instead of spending it on other things. Then, if you have an emergency in the future like car repairs and high medical bills, you can tap into the emergency account without suffering financially. If you don't use it immediately, financial planners recommend letting the account's money sit and grow. The account does not have to equal your entire life savings – just putting $500 in to start makes a big difference in your financial well-being. Your goal should be to have three to six months' worth of living expenses set aside. Making small monthly contributions can help you reach that point.
Before opening an account, evaluate banks and credit unions to find the best price. Lenders offer different rates, and some may be more valuable to you than others. To get the highest returns on savings, it's a good idea to spread your finances out among accounts at different financial institutions. The highest-yielding accounts are usually found online, and they're typically updated on a daily basis. You should always have a savings strategy in place. Money that you need on a monthly basis should be put into a no-fee checking account. You may even earn interest on this money if you're eligible. Longer-term money that you won't need right away (say three months to a year) should go into a money-market fund. This type of money includes taxes and home maintenance. As you look for a fund, try to find one that carries FDIC insurance.
By paying yourself first each month, you won't be earning much on your savings, but you will still have a cushion to protect against unforeseen expenses and tough times.