Ken Remsen, founder and Chief Financial Coach of WalletWise, LLC, a financial coaching company, says the most important part of starting a savings plan is to create a personal budget. If you don’t know how much money you are spending compared to your income, then you don’t know how much you can afford to save. Control your spending to become a saver. The second tip is to pay yourself first. This means after you set the amount to save, make it automatic. This means set up an automatic withdrawal from your checking account to your savings account.
Starting a savings plan is important for several reasons. It removes the stress of having to wonder how you will pay for inevitable emergencies. Savings gives you an opportunity to save for your big dreams. Dreams like owning your own business and early retirement. Maybe purchase other income-producing assets lie real estate or dividend-paying stocks.
The first part of a great savings plan is to establish an emergency fund. This is typically 3 to 6 months of your expenses saved in a bank passport savings account. These savings accounts are easy to open and it’s easy to set up automatic deposits. I recommend opening this account at the same bank you have your checking account. You will not earn a big return because your money is not at risk. That’s OK, because we want that money to be there in case of emergency. It is not an investment. An emergency savings account prevents unexpected job losses, surprise auto repairs, or a home maintenance emergency from becoming a financial crisis requiring high interest debt to solve. Another savings vehicle for the emergency fund is a money market account at your local bank. Many banks require a minimum of $1,000, but these accounts offer additional flexibility as they provide you with checks and pay slightly higher interest than a passbook savings account. The FDIC insures both types of accounts up to $250,000.
When you open your passbook savings or money market account be aware of monthly fees that can eat away at your savings. Avoid these fees by opening your savings account where you have your checking account. Most banks waive monthly fees if you have your savings and checking accounts at the same bank. I recommend doing business with your local credit union. Their fees are lower and they are up front with their policies. I do not recommend holding your emergency fund in a Certificate of Deposit (CD). If you close it before its term, you may incur a small penalty of your interest earned. I do not recommend keeping your emergency fund in cash at home. There is the risk of theft and loss. (See the movie “It’s a Wonderful Life”)
The next big part of your savings plan is saving into your employer’s 401k or 403b plan. Take advantage of your employer’s 401k or 403b savings program. Many employers deposit a monetary match into your account tax free. Don’t miss out on this “free” money! Please check with your human resources department for details.
If you do not have access to an employer 401k or 403b, then your next step after funding your emergency account, is to open an IRA or Individual Retirement Account. Don’t let retirement saving intimidate you. It’s never too early to start or too late to save for retirement. You can open an IRA at your local bank to keep it simple. There are two types of IRA’s. The traditional IRA allows you to lower your immediate tax liability and the ROTH IRA which allows after-tax dollars to grow to retirement. Open your IRA at your local credit union.
In summary, one of the best places to secure and increase your financial literacy is at your local credit union. I opened the website to my credit union and clicked on the savings tab. Listed in order is:
· Savings Account
· Savings Goal Accounts (Passbook savings account with a specific goal in mind)
· Money Market and CD
· IRA
· Youth Advantage Savings (A great tool to teach your child about savings!)
If you are a newbie at savings, you will do well to reach out to your local credit union. Many credit unions supply their customers with helpful money management tools. Their deposits are insured and their focus is local. Their staff is ready to serve you, the new saver.
Ken Remsen
Chief Financial Coach, WalletWise, LLC