Savings is an important aspect of achieving your financial goals. This is something that most of us agree on. Did you know that many American households are “financially fragile.”? Can you come up with $2,000 in 30 days if an emergency arose? Would you have to borrow the money or sell an asset?
This is important points that can affect the development of our financial stability. Although we cannot control when an emergency may occur, there are a few things that we can control when it comes to saving for ourselves and our families.
Pay Yourself First:
What are some things that you or someone you know purchases on a regular basis? A cup of $4 coffee? Expensive hair products? That glossy magazine at the checkout line? Would you consider these wants or needs? Keep in mind that needs and wants are not “bad” or “good”, but it’s key to recognize which are which.
It can be easy to simply say, “What is $4 really? It is just a few singles and it doesn’t hurt anyone.” It can be even more dangerous to slowly drain your potential savings a few dollars at a time. By doing this, you would barely notice just how much of your hard earned money was leaving your household and entering the pockets of others.
Think about a ‘want’ you could consider giving up in order to pay yourself first? How much would you save in a week? Month? Year?
We can all agree that when we are saving we want to see our money grow. Making regular payments to yourself first, even in small amounts, adds up over time. The amount your money grows depends on whether there is any interest earned on it and the amount of time you leave it in an interest earning account.
Here’s is how interest works. Say you have $1,000 stashed away under your mattress for a year. How much will you have one year later?
- Or nothing if it is lost, stolen or otherwise destroyed
The Moral of the Story:
Your mattress is not paying you interest.
However, if you put $1,000 in an interest earning savings account for one year and don’t touch it, that $1,000 will grow. If the bank pays one half of a percent interest you will have $1,005 ($1,000 + $5 interest) at the end of the year.
It is free money! It may not seem like much at first but, as your savings continues to grow, so will your interest earnings. There are many products offered by banking and investment institutions that can help you maximize your earnings depending on your situation and needs.
Picking a Savings Account
You might be thinking, “Well, I better get a savings account and start saving now. I need to take advantage of free money!”
Here are a couple of things to consider when choosing an account.
- Does the interest compound, and if so, when? Daily, monthly or annually? In our example we gave a simple example where the interest accrued at the end of the year. If the account you choose compounds interest more often, you earn money on the previously paid interest, in addition to the money in your account.
- What is the APY? This stands for annual percentage yield. It takes into account the interest rate and compounding period to give you a single number that represents how much you will earn from that investment in one year. Using this number you can easily compare one account’s offerings to another.
Make sure you ask the bank’s customer service representative for the Truth in Savings disclosures. These disclosures list the APY and other important information that you should know about the accounts available at the bank. You can use these to comparison-shop and help you find the best deal.
Not all savings accounts are created equal.
The Rule of 72
The Rule of 72 is a formula that lets you estimate how long it will take for your savings to double in value. This calculation assumes that the interest rate remains the same over time. Knowing this information can help you plan to achieve your ultimate financial goals in the long term. This information can be great while planning for college education costs for young children.
Here is how you calculate it. Divide 72 by the current interest rate to estimate the number of years that it will take to double your initial savings amount.
For example, if you invest $1000 in a savings account at a 4 percent interest rate, it will take about 18 years for your initial savings of $1000 to double.
Savings Accounts vs. Investments
There are two ways to save money:
- Open a savings account or similar product at a financial institution
An important difference between the two is that a savings account may be federally insured while investments are usually not insured.
With a savings account or similar product:
- You can make money by earning interest on the amount deposited.
- The bank pays you for the opportunity to use your money.
- Your money is safe, and you have easy access to it.
If your money is deposited at a federally insured financial institution, the Federal Deposit Insurance Corporation (FDIC) insures it up to the maximum allowed by law. This means that if your financial institution goes out of business and cannot pay you your money, the FDIC will make sure that you receive it up to the insurance limit.
The FDIC has an online tool called Electronic Deposit Insurance Estimator (EDIE). It lets you calculate the insurance coverage of your accounts at each FDIC-insured institution. You can find EDIE online at www.myfdicinsurance.gov.
Three savings options available at most banks include a CD, Money Market Account, and Statement Savings Account.
A CD, or Certificate of Deposit, is a term account that earns money over a certain period of time. The funds are locked in to accrue interest based on the time frame you select. At the end of the term called the maturity date, you can choose how to utilize the funds. You can either withdraw the money or open another term CD.
A Money Market Account is a savings account with a larger balance. It earns interest on all balances and gives you the ability to write a limited number of checks.
A Statement of Savings Account is a flexible way to save. This also earns interest on all balances in the account with lower minimum balance requirements then that of a Money Market Account.
An investment is a savings option that you purchase for the future. Many banks now sell investment products (e.g., mutual funds) but they are not the same as deposit accounts because the money you invest is not federally insured.
When you invest money, there is also a greater risk of losing it than if you put your money in a savings or other deposit account. In fact, you might lose the entire amount you invest if the investment does not perform well.
On the other hand, your investment may earn and grow more than a regular savings account because of the risk you take when you invest your money.
In general, the higher the risk, the higher the expected rate of return on the investment.
You make money on investments by selling them for more than you paid for them or by earning dividends and interest. The money you earn is considered income, and you may have to pay taxes on it.
Saving For Retirement
Saving for emergencies and education is very important. Are you investing in your own future? After you retire, how will you sustain your lifestyle and support yourself? Saving towards retirement is something that many younger people do not consider. Retirement can seem so far away but think about your monthly bills and daily expenses. When you no longer have regular paychecks coming into your account, how will you handle those ongoing expenses? Will Social Security truly be enough to keep up your current or desired lifestyle?
When considering retirement savings, think about the following key points:
- Start saving for retirement as soon as possible.
- Try to reduce or eliminate debt.
- Cut back on unnecessary expenses, especially if you need to go into debt to pay for them.
- Pay off most or all of your credit card balances and other loans.
IRAs are, Individual Retirement Accounts, the most basic kind of retirement arrangement. You deposit money into an account, which may include a combination of stocks, bonds, mutual funds or Treasury securities.
There are two main types of IRAs: traditional IRAs and Roth IRAs. IRAs can be established at many different financial institutions, including: banks, insurance companies, and brokerage firms.
A 401(k) plan is a retirement savings plan established by an employer that lets its employees set aside a percentage of their pay for retirement before taxes are taken out. This can help lower your tax bill.
Generally, you get to choose how to invest the money in your plan and sometimes your employer may match a certain percentage of the money you invest in the retirement plan; not taking advantage of this match is like leaving free money on the table.
You should talk to an experienced investment professional for help making the best investments for you.
You may talk to your tax advisor for more details and/or review IRS Publication 590, Individual Retirement Arrangements (IRAs).
Ways to Save
But, I Don’t Have Extra Money to Save…
Creating and writing down a personal savings goal and action plan can provide a road map for success.
First, record factors that may affect the steps you take to save, and the savings or investment products you want to use to save.
Next, record the actions you plan to take now, a month from now, and a year from now in order to reach your savings goals.
Try to reduce energy use and save money.
- Use a thermostat with a timer and adjust your settings
- Reduce water heater setting to 120 degrees
- Insulate water heater and pipes
- Use low-flow showerheads and toilets.
- Wash clothes in cold water, line dry
- Find and fix air leaks and consider storm windows
- Change furnace filters monthly
Paige Swan Brown
Assistant Branch Manager – The Woodlands
9480 College Park Drive
The Woodlands, Texas 77384