The importance of saving and savings accounts cannot be understated. Savings will get you on the path to financial health and financial wellness for your family. Numerous books have been written, all trying to give you their version of a “correct” answer. The fact is, that there is no correct answer other than “it depends”.
There are many famous quotes related to savings. Here are a few favorites:
“You must learn to save first and spend afterward” (John Poole)
“Don’t save what is left after spending; spend what is left after saving” (Warren Buffett)
“Save Money and Money Will Save You” (Jamaican Proverb)
The goal of saving is peace of mind. Life is a bumpy road with both predictable and unpredictable events. With savings, you can prepare yourself and your family financially for both.
The Importance of saving
1. Give yourself the ability to upgrade your life options
We all need a break sometimes, and the ability to change direction. You may be stuck in an unbearable work situation or a struggling relationship that needs to come to an end. You may find yourself living in an unsafe neighborhood and wish to move your life and family elsewhere. There can be significant costs associated with this these “upgrades,” which do not fit into your daily budget.
2. Prepare for the next stage of your life
Adult life moves us through a series of stages with big changes, dreams, and decisions in-between. It starts with education, then moves into family life, home ownership and, finally, retirement. Each stage requires significant planning and financing.
3. Funding of life events
Many life events can be predicted accurately. Some may never happen after all, but nevertheless, you should prepare for the most likely events just in case. School and college tuition for your children, continued education for yourself or your partner, braces for your children, weddings for yourself and your children, large family get-togethers, elderly dependent care for parents, or funeral costs for elderly family members – just to mention a few. This list should be specific to you and your life and should be given a lot of attention, so you can plan for worst-case or most-likely scenarios.
4. Realize your life dreams
What are your dreams? Give yourself the ability to fulfill some of your dreams such as trips, sabbaticals, starting your own business, an expensive hobby or early retirement.
5. Expect unexpected events
Unexpected events will occur throughout your life. You may not be mentally or emotionally ready for them when they occur, but with proper savings, you can reduce the stress by being financially prepared. These events can include unexpected surgery for a beloved family pet, un-timely break-down of a vehicle, accidents or disasters not covered by insurance policies, surgery or other clinical treatments for yourself or a family member, and periods of short-term or long-term disability with reduced income.
6. Manage emergencies
We consider “emergencies” different from “unexpected events.” Emergency savings carry the more popular names “Emergency Fund” or “Rainy Day Fund.” This is a highly liquid stash of funds that are supposed to pay for ordinary living expenses such as rent or mortgage, car payments, gas, insurance policies, groceries, utilities, memberships, etc., during tough times without regular income to support you and your family. Ultimately, it serves to prevent unnecessary use of high-interest credit cards to pay for living expenses.
Do not try to cover all these at the same time. The likelihood and approximate timing of most of these events, as well as rough estimates of funds needed, can be predicted so you can plan and prioritize when and where to focus. Priorities, as well as the amount of savings to put aside, will change throughout your life based on need. Start with a plan and a budget and be ready to change it.
Find the Best Savings Account and Institution
Start Saving for Your Basics Needs
The emergency fund should always be your first savings priority, especially with dependent family members. It becomes your safety net, preventing you from having to make unpleasant life changes and choices in case of an emergency. It is also a work in progress. As your lifestyle and needs change, so should your emergency fund. As a rule of thumb, you should keep enough in the fund to support your family and lifestyle for a period of up to 6 months. The entire balance does not all have to be readily available to withdraw. Liquidity refers to the immediate availability of the funds. The more liquid, the less return you will earn on your savings. Keep enough for the first month or 2 in a highly liquid account type such as a bank savings account. Let the rest earn higher interest in a different investment type with a longer time horizon until you need it. Keep the funds separate from your regular spending budget and set up automatic monthly transfers.
Do Your Research and Shop Around
Do your research. Know what savings products you are looking for. If you do not know where to start, ask an expert such as FH Educators or a financial planner.
The bank down the street might be convenient, but it may not be the best option for you. Different banks pay different interest rates, have different fee structures and different account terms for similar products. Compare banks and accounts and pick the right financial institution to ensure that you do not shortchange yourself.
Unless you are looking for a face-to-face relationship with your banker, online banks often offer higher rates compared to brick-and-mortar banks. While you may be concerned about the safety of online financial institutions, these are not fly-by-night operations. Their accounts are insured with FDIC, just like other banks.
To make it easy for yourself, find an institution that offers multiple savings products for your current and future needs. As consumers, we tend to stick with one or two institutions once we find one, we like.
Avoid Bait and Switch
Some financial institutions may offer enticing rates to get people to use their savings account, and then decrease the interest rates after just a few months. Though financial institutions can increase or decrease rates on savings accounts over time, just be sure the rates you are looking at are not just introductory.
You should have a good understanding of the importance of saving and savings accounts. The earlier you start saving and investing, the more time you have for accumulating the savings and wealth you will need. If you save and invest wisely, you can reach your goal of “peace of mind” with your saved money working for you. It is never too early or too late to get started.