Savings That Work: Building a Strong Safety Net Without Missing Out on Growth
Unsure how to think about your savings account? How much? What should I account for? Can I save too much? While the concept of savings may seem very straight forward, you can miss out on making your money work for you as well. Let’s discuss some things that help you maximize your savings, but ready to deal with life’s what-ifs.
The general rule of thumb is to have 3 to 6 months of living expenses in your savings account. Much like how we talk about your risk tolerance, what amount helps you sleep best at night? Is your job stable? Do you have an older home or car that may have some unexpected expenses come up? Are the kids possibly going to have some sports, activities, school, or medical expenses? What if you have a medical emergency? Just some other things to consider when thinking how much you want to have in savings.
In addition to thinking about those various factors, are you saving for something else? New home or car? Trip? Starting a business? Some of these “extras” should not be accounted for when thinking about your safety net in your savings account. Some people even take the extra step of having a saving account set up for goals beyond your safety net. The extra account makes it easier to monitor your progress towards your goals as well.
Some people ask, can I save too much? Obviously, the answer is no, BUT! If you do save too much you could miss out on your money, making you money. Whether those are investments, college savings plans, retirement accounts, etc., too much money sitting on the sidelines could also impact on your long-term financial goals. If you think about compounding, the earlier you start putting money into those accounts, the better they will do later on.
What are some tips to ensure I am saving money? Automate where you can so you are putting money away every month. Add that amount to your budget, both for your emergency fund and any other saving goals. Are you getting the best rate that your bank offers for a saving account? The goal here is to at least beat inflation with that rate, so at least 3% or higher. Lastly, don’t mix your savings accounts with your checking account. Too easy to dip into your savings for things you shouldn’t be, that savings account is there for emergencies, not that new shiny toy you’ve been thinking of getting!
Finally, another great chance to include the family! Not only will you increase everyone’s financial literacy, but you can also get everyone working together towards your family’s goals. It is much easier to get where you want when everyone is rowing in the same direction. Imagine having everyone help with less spending when one of your goals is a family trip!? Or new camper for fun weekends exploring.
A savings account is the foundation of your financial security. It allows you to take on many of life’s surprises, and it’s there to be used when it’s needed. But don’t forget to account for your other short- and long-term goals. Whether it is saving for something fun, or ensuring you can retire on your terms, your money ultimately should make you feel at ease with what you are doing with it.
Next month, we will discuss how a financial plan works.
