What is savings? Ask five different people this question and you’ll probably get five different answers. Most people know the importance of being disciplined and having a savings account. But with regards to the purpose of saving, ideas vary. Maybe you haven’t given this thought much consideration, or feel that it doesn’t really matter what it’s for, as long as there’s money in the account.
There is nothing wrong with this approach, and with sufficient money in your personal account, you can use the cash for anything that pops up. But if all your cash goes in one pot, and this pot is your “go to fund” for all things money, how well are you really planning for your future?
What is Savings?
Savings is income that you don’t spend – your personal cash reserve. It’s money that you use for a car repair, bills, vacations and any unexpected expense. This is you financial backup plan. However, you shouldn’t think of savings as only an emergency cushion. Sure, having a reserve can help you survive a financial crisis, such as a job loss or an illness. But there is more to saving than preparing for disasters.
Not only can savings be your ticket out of financial hardship, it can also be your ticket to a comfortable retirement, homeownership and other life goals. Think about this: if all your cash is reserved for an emergency, how will you purchase a house? Likewise, if all your disposable income goes toward your downpayment fund, how would you handle an unexpected expense?
Have Separate Accounts for Separate Goals
You can have one savings account for all your goals. However, multiple accounts will keep funds separate and help you better track your finances. First thing on the agenda: open additional savings accounts. You might have an account for emergencies, an account for downpayment funds, as well as an account for retirement. A local banker can help you decide the right type of savings account for each goal.
A traditional savings account may work for an emergency cushion, whereas a high-yield savings account or money market account may work better if you’re saving for a downpayment. And if you’re planning for retirement, an individual retirement account (IRA) can help you reach long-term financial goals.
Prioritize Your Saving
Saving for multiple goals can be challenging, especially if you’re used to putting all your cash in a single account. However, prioritizing and careful planning helps meet your goals with ease.
Determine how much you can save each month, and then decide how much you want to stash in each account each month. There are different ways to approach this. You can deposit equal amounts into each savings account, or focus primarily on one goal. Consider your timeframe. What is the most important goal at this stage in your life?
Are you planning on buying a house in the next 12 months? If so, saving for a downpayment is no doubt a priority. Then again, if things are tense at work and you fear a layoff, you might work to build your cash reserve. Not to say you should focus entirely on an immediate need and stop saving in other areas. However, you might temporarily scale back in less important areas and put the majority of your disposable income where there is an urgent need.