Life is known for throwing curve balls when least expected. From injuries and car problems to new tax laws and job terminations, life is full of surprises. The problem that most individuals encounter is a lack of funds to catch these curves. This is where your emergency funds and savings accounts come into play.
Understanding Savings Accounts
Establishing a savings account and building an emergency fund are critical first steps in your financial planning journey. Savings accounts allow you to set aside money for large purchases, unexpected situations and unanticipated opportunities. Savings are compound interest accounts, meaning the money invested will grow at a faster rate, increasing your savings over time. An emergency fund is a type of savings account that is dedicated for emergency use and unforeseen occurrences. Emergencies are multi-faceted and fluctuate for everyone, so it’s ideal to plan for the worst possible situation; such as losing your ability to earn income.
Start by matching your savings to your short, intermediate and long-term financial goals. Everyone sets different goals and require different finances maintain a lifestyle that is unique to them. And although there is no set formula that works for everyone, the general rule of thumb is to set aside a minimum of 10% for savings for every paycheck you earn, then split that percentage between your personal savings (2%) and emergency fund (8%). Once your emergency fund reaches roughly three months’ worth of expenses (i.e. rent, utilities, food), you can reverse the allocation of savings (2% for emergency and 8% for personal savings). The important part is to never stop saving.
Small Steps, Big Savings
Building a savings account is often an intimidating task. Many view it as an uphill battle that’s tough to fight while, financially speaking, trying to keep their head above water. Truth is, saving in small amounts adds up to big amounts.
Take a minute to think about the discretionary items, like coffee and fast food, that you purchase on a daily or periodic basis. If you saved those expenses and added them into an account that pays interest, you would see the substantial profit gained over time. This is not to say that you need to deprive yourself of the little things in life or that you can’t treat yourself to coffee; rather it’s a call for financial awareness to track your spending and determine where you are needlessly losing money. You can use this to change your spending habits and in turn divert those small amounts into your savings accounts.
Whether you have a financial plan or are looking to establish your first, exercising your savings and emergency funds should always be a priority. Remember, it’s the small actions that will have big results. Start saving now, your future self will thank you later.
Ready to exercise your savings?
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