While saving money on your purchases can make your budget feel like it has a lot more room, saving money for your future is going to make you breathe easier at the end of every month. Now I am not going through all the trouble of saving money just to make ends meet. I want to spend some of the money I save bit on fun purchases as well.
No that is not my child. My children are WAY cuter than that.
Now I know some of you are going to feel like this is very basic but I want to make sure we don’t lose ANYBODY. So if you do not know what a savings account is head over to my post – What is a Savings Account? I get this question a lot from teenagers and people just out of school whose parents didn’t teach them anything about money.
From here on we are going to assume you know what a savings account is and go through the four broad items that my family saves money for and then take a minute to look at where you want to store that money until you need it. So our four topics for this post are:
- Saving For Emergencies
- Saving For Known Big Expenses
- Saving For Retirement
- Saving For Fun Purchases
- Where Do I Put All This Money
For those of you whose eyes are already starting to glaze over I promise each of these topics will be brief. Each section will have links out to more in depth discussion for those of us who live and breath this stuff.
No matter whether it is Dave Ramsey, Larry Burkett, or some other personal finance guru telling you about an emergency fund the principle is always the same, “YOU NEED AN EMERGENCY FUND”.
If you currently have consumer debt (cars loans, credit cards, student loans, etc.) then you will want to have $1000 in your emergency fund and $2500 for an emergency fund if you have kids or a house (because both of those manage to come up with extra special expenses).
Once you have paid off all consumer debt (that’s everything except for a home loan) you need to work on a full out protection emergency fund. This means having six months of expenses in a savings account.
Just so we are all on the same page let’s narrow it down on what qualifies as an expense. I am not talking about gym memberships and gymnastics lessons. I am talking about if everything fell apart and you just had to survive on as little as possible what would you need to spend money on? That means cutting out any fun, entertainment, or anything extra.
For my family that would mean that subscription services like netflix, cable, and the gym are GONE. I would consider cutting internet because three is a library and public wi-fi just down the road from me. Since you aren’t making money there is no saving or giving to charity.
Just cut that budget down to the bare bones multiply by six and you will have your number.
There are things we need to save for because if we had to take care of them out of our monthly budget they would break the budget, force us to spend money out of our emergency fund, or turn to debt. So we want to be saving for very big purchases. These include:
- Cars – You know you are going to have to replace that care some day. So start saving for that next car purchase.
- Taxes – You don’t want to get on the bad side of Uncle Sam or any other taxing entity so make sure you are setting enough back to take care of your tax bill.
- Weddings – the Lord has chosen to bless me with two beautiful little girls (age four and one right now). Unfortunately I expect that they will one day leave their dear old dad and get married to some guy that I managed to not kill. You need to be saving for a wedding and if you are working on one now you should see my post on how to plan a wedding on a budget.
- Insurance – You can get a lot better rates on insurance if you pay in annual or semi-annual payments instead of monthly.
- College – Saving for college is a big stress on so many parents. Learn all the predictable and sneaky ways that I use to save for my kids college in my guide to saving for college.
- Lump Sum Discounts – My kid’s preschool gives me a 20% discount if I pay for the entire year up front. Now this wasn’t much fun when we paid for that up front cost out of pocket the first year but subsequent years we saved a little each month to be able to make that payment. This adds up to big savings and the principal applies to any situation where you can pay a bunch up front for a large discounted rate.
Whenever I bring up the topic of retirement with my 20 and 30 something friends I mostly get a yawn and a nod. When I bring it up with my MUCH older brother’s friends they ask extensive questions (they are all getting close to 50).
If only we as a population start planning for retirement as soon as we are able to vote. No matter what your financial situation you need to be saving for retirement and the sooner you start the better. Whether that is just $25 a month right now or $2,500 a month what you need to be aware of is that the longer your money is sitting gaining interest the better off you will be when you hit retirement age.
The most common questions I am getting right now are:
Common Questions about Saving for Retirement
|How Much Money do I need for Retirement?||What is an IRA?||What is a Roth IRA?||What is a 401k?|
|What is a SEP IRA?||Roth IRA vs 401K||What is the Best Online Brokerage for Retirement Investing?||What is a Self Directed IRA?|
OK, you’ve done the hard work of spending less, getting your budget and finances under control, and saving for all the stuff that needs to be saved, NOW is the time to save up for those big audacious purchases.
What is it that your heart desires. Is it a really nice car? A vacation house? A taco truck that you run with your friends near the beach?
Whatever it is you have done the hard work and it is now time to save for those dreams that you have been thinking of when you were supposed to be working.
There are two reasons you are going to save for these big purchases instead of taking out a loan that you can afford right now:
- You want this to continue to be a dream and not turn into a night mare. By taking out a loan if life were to take a turn for the worse that loan could saddle you with real problems.
- You can get an amazing deal on dream purchases when you have cash. Someone else probably had the same dream and when it turned into a nightmare they are ready to get rid of that former dream FAST. That means when you step up with cash in hand they will unload it to you at a steal.
Dream big, save big, spend big, HAVE FUN. You’ve earned it.
Now that you are making a real effort to save money each and every month you are going to need a place to put all that money.
Emergency Fund Savings – The key to your emergency fund is not only having enough money in it but that money needs to be accessible… but not TOO accessible. This means when you need the money you can get to it quickly but you don’t have it sitting somewhere you could just spend it on a whim. You best bet that includes a reasonable interest rate is an online savings account
Right now I am using a Capital One 360 account but there are other good options and you can see everything that is out there on my best online saving accounts page.
Upcoming Expenses – Once again I like to keep this separate from my main checking account, but because I know these expenses come up more regularly I tend to put them into a high interest online checking account.
Retirement Savings – Since these are savings that will be invested for a long period of time I put them into a Roth IRA. All of the major brokerage firms have an online presence. I have used several over the years with different employers and for personal use and you can see my review on the best online brokerage companies.
Big Fun Savings – I keep track of this one very well but I tend to put it in the same account as my Emergency fund. If you don’t feel like you can trust yourself moving money out of that account then set up a second online savings account where the money doesn’t mix.
Overall this is what my money saving looks like on a monthly basis
I hope this helped you get a grasp on saving money for the future and if you have an thoughts or questions, contact me on the contact page or leave a message in the comments.