Savings 101
We all know the importance of saving, so why not start now? Download the financial tools and get saving today!
In this edition of The Personal Finance Project Newsletter:
🧐 Saving is a loaded word... let's define it.
💭 Common understandings on how to save.
🌎 Snap back to reality. How to realistically reach your savings goals.
Saving Money
Saving money, in its simplest form, is setting aside money for some time in the future. Got it? Okay good, let's move on.
Well, it's pretty simple, but maybe not as simple as that. 🤷♂️ When you consider saving money, these questions will naturally follow:
How much money do I need to save?
When will I need this money?
With just this information, you're on the right track to reaching your financial goals. More on this below...
General Savings Principles
🚨 The Emergency Savings Account - Emergencies happen, plain and simple. Without boring you with a lesson on risk management (because financial education can be torturous enough) having an emergency savings account is the first and most important step in being financially responsible. The idea is straight forward, prioritize building up your emergency savings account to your desired amount. When you reach this savings target, forget about this money and (hopefully 🙏 ) never touch it.
But how do I know what my emergency savings target should be? 🎯
Think about what you absolutely need to pay for on a monthly basis... It's probably something like 🏠 rent, 🍎 groceries, and 💳 debt. If you've saved enough money to cover your necessary expenses for 1 to 2 months, you will have more than enough time to find a new job or navigate your financial constraints.
PRO TIP: Keep your Emergency Savings in a completely separate bank account from all other saved money. Before you know it, you'll forget you even put it there.
📊 Savings Funds - Good news is that after you've considered and saved for emergencies, your savings options are endless! When you have just one savings goal (i.e. vacation 🌴), the path to achievement is pretty straight forward. However, life is busy, and many of us have exciting plans that require multiple savings goals. To navigate the complexity we will use the Savings Funds approach.
Fund, in this context, is a fancy word for a way to identify money that is committed to a specific savings goal. Use one savings account for all of your current savings goals. Within this savings account, the balance will be split among different funds that reflect each of your savings goals. Periodically, you will make contributions to this account, and you will need to decide the proportion of money that is allocated to each fund.
Check out the "Resources" tab on the Personal Finance Tool (download below) for a Savings Fund's table that you can easily incorporate into your Financial Tracker.
Enough with the Theory...
🏆 How can I actually achieve my savings goal?
Lets recap the questions that are critical for defining our savings goal:
🏦 How much money do I need to save?
Sometimes obvious and other times not, the answer to this question can depend on many factors. Consider looking into your own financial tracker, talking to friends, inquiring with professionals, and searching the web for answers on the cost of whatever you're saving for. Remember that in cases where the the amount is difficult to define, saving more is always better than not saving enough!
🗓 When will I need this money?
This questions is likely easier to answer, and depending on the item you're saving for, the timeframe factor may add some flexibility to your savings goal. You will recognize that the earlier you start saving, the easier it is!
👇 Consider this
These two questions are important in isolation but provide important and realistic insight when considered together.
By knowing how much you need, and by what date, you can make decisions on how much you should save every period to achieve your goal.
DISCLAIMER: This is Day 1 of our journey to achieving savings goals, thus making the answer to this question practically impossible to lay out in one newsletter. So read on with the understanding that there is more exciting insight to come!
To Be Continued...
This edition is the first of many entries on saving money.
⏰ What's to come in future newsletters:
Navigating common saving scenarios.
Budgeting and how to establish a savings plan.
Saving versus Investing - whats the difference?
The Pay Yourself First Principle
✅ What we've covered today:
A simple definition of saving money.
The Emergency Savings Account - your first step to saving.
Savings Funds - allocating savings across multiple goals.
Defining your savings goals by answering the right questions.