So you are on your way to controlling your money and you are thinking about the topic of savings and you hear people talk about putting money aside for various things. But the question is, what should you save for and why? There are several types things to save for and they all deserve your attention. I know it might seem boring to set money aside instead of spending it, especially when you can think of legitimate things to spend your money on. How much to set aside is a topic of much debate, but the key is to start saving.
Emergency Savings – This is probably the most important area and for good reason. Most Americans are one emergency away from financial disaster. We live paycheck to paycheck and an unexpected calamity is devastating! Emergency savings give you the breathing room to handle what life throws at you, especially the big one of losing a job. The general recommendation used to be to have enough emergency savings to last 3 to 6 months of expenses. However, with the soft job market, the recommendations have increased to 6 to 8 months. I know the thought of saving 6 to 8 months of expenses seems daunting, but the important thing is to get started on your emergency savings and make it a goal that you work towards. My friendly advice is to get an emergency fund of at least $1,000 as quickly as possible as an important step to gaining control of your money.
Buffer – I am a big believer in living with a buffer so that when unexpected things happen, I can deal with them rather than having to panic and stress out. A buffer is money set aside so that you don’t have to touch your savings to deal with many of life’s unexpected issues. It can be money that you keep in your normal bank account, or cash that you keep in the house. The thing you have to remember is that life can be rocky and a buffer evens it out. For example, when the boss says that your paycheck won’t be good for another week or so, your vehicle needs repair, or some other event happens that makes need funds quickly to keep life flowing. A buffer allows your family to keep going without feeling the effect of every wrinkle of life. A word of warning, the money you set aside as a buffer needs to STAY set aside as a buffer. This means it is not used for vacation, it is not used to buy that (insert your desire here) that you have always wanted. My friendly advice is to use cash stashed away so that you don’t see the money available in your bank account.
Large Purchases and Expenses – A very important reason to be setting money aside is for those larger expenses that are fairly predictable like buying a different vehicle. If you have been putting money aside, you can save thousands of dollars by not having to get a car loan, not to mention having more buying power when dealing with a salesperson. You know that at some point you will have to buy new tires for your vehicle and they aren’t cheap so it is nice to already have money set aside. What about your appliances? They go out and it’s usually not at a convenient time and a new fridge or washer is not cheap. Your water heater is a nice thing to have, not to mention your A/C. By having funds set aside in savings it takes so much of the stress off of you when these thing need replacing, not to mention that you are in the position of power when it comes to making decisions.
Retirement – While I cannot talk specifically on how to prepare for retirement, I can make some extremely important points that you need to know regarding saving for retirement. The first is that the best time to start saving for retirement is yesterday. Literally. Seriously, no matter your age you need to be working on it. Saving for retirement is one of those things that when you are younger you think you have plenty of time to do it later, and then later you want to smack yourself for not starting sooner. The truth is that you need time and money and your age determines how much of each you need. The older you are, the less time you have and therefore the more money you need to put towards retirement. This might sound heartless, but you need to put saving for retirement ahead of saving for your kids college fund. Here is the harsh truth – your kids can get scholarships and students loans to pay for college but your retirement is totally dependent on what you do now! For those who just raised their hands and yelled “what about Social Security?” I have to answer that even the most positive views on SS admit that major changes are coming, and even in its current state those that live strictly on their monthly check have a low quality of life. My friendly advice is to start now, even if it is just a small amount a month, and get into a habit of saving specifically for retirement. We have a Retirement Budget where you can start getting an idea of what you need to set aside for your retirement.
College – Despite what I said in the retirement section, I do think that saving for college is important. As the cost of a college education increases and more employers consider a college degree to be a minimum requirement, your kids’ appreciation for assistance increases. The key is to start saving now, even if it just a little at time. There are many options to choose from when it comes to saving for college and savingforcollege.com is a great place to start understanding ideas.