Savings not only reduce money anxiety, but they also allow us to pursue life goals like traveling, owning property, or making a big move. A good overall savings strategy is the starting point to developing your personal wealth and net worth, which is an indicator of your financial health. Net worth is not about riches, but about having a good balance between owning and owing among all your financial endeavors.
There are many ways to approach savings, but I like to pursue my savings goals in three levels.
Level 1: Emergency Fund
An emergency fund is crucial to long-term financial health. We all know that life happens, whether you accidentally crack your phone screen, need to fly home for a family matter, or discover a new expense for your apartment to name a few examples. Having an emergency fund can ensure that you can bounce back from any unexpected surprises.
If you are starting from scratch with your emergency fund (like many of us are), make small goals and work up. After you save one month’s worth of living expenses, aim for two...after you save three month’s worth of living expenses, aim for six...you get the idea!
Level 2: Short-Term Goals
I’ve noticed that my instinct, and the instinct of many peers, was to save as much as possible in one big pot and pull from it when needed. While this may work for some, I realized that a goals-based approach was easier for me to grasp. Short-term goals can include milestones like graduate or professional school, paying down existing debt, or relocating for a career.
Identify one (or two) specific goals, outline the amount of money you expect to need, and work backwards to see how much you need to save per month to get there. If you need help doing this, don’t hesitate to reach out to a trusted source.
Level 3: Long-Term Goals
The last part of your lifelong savings strategy should include long-term goals, such as retirement. Retirement, and other goals like having a family and owning a home, are so important that many sources have developed retirement calculators and other financial strategies to assist in the process.
Most sources will tell you to start saving for retirement as early as possible, and while this rule applies to many people, it isn’t without nuances. If you are continuing as a full-time student, or still finding your first career move, you need to concentrate a lot of your efforts (and money) into the present day. It may not make sense to put away thousands of dollars into retirement as you invest in yourself and your ability to earn income in the future. If you can’t afford to save for retirement just yet, don’t beat yourself up-- develop a strategy for getting in the position to start contributing when you can.
On the other hand, you may be in a situation where starting to save for retirement is advantageous. For example, a full-time job may offer you to (1) open a 401k and/or (2) match your 401k contribution.
How (and where) do I save for these goals?
Your personal savings strategy will differ based on your current priorities, your financial health and flexibility, and your long-term goals. If you need help identifying where you are, and where you’d like to go, with your savings, please don’t hesitate to reach out! In the meantime, I want to share a simplified 6 step process for how (and where) to jumpstart your savings.
1. Create a budget for your essential living expenses (ex. rent, groceries, transportation to work, TAXES, etc.), which should hopefully be around 50% of your income.
2. Examine any additional income that you need to split between non-essentials (ex. restaurants, gym, entertainment, etc.) and your savings goals. On a personal level, I like to examine these together so that I can see how my decisions for non-essentials (like my love of TJ Maxx) impact my savings goals (like my desire to visit 30 countries under age 30).
3. Decide on an overall percentage or amount of your budget that you want to devote to all savings.
4. Prioritize your savings goals based on the amount of money you have to save -- decide whether you will pursue an emergency fund, short term goals, and long term goals all at once or take a step-by-step approach.
5. Open relevant accounts for your savings goals.Level 1: Emergency Fund - I like to house this money in a regular savings account through my existing bank for quick and easy access. Although this account is attached to your existing bank account, it does make a very small amount of money from interest, otherwise known as Annual Percentage Yield (APY). Most banks have an APY of 0.01% for savings accounts, which means that for every $1.00 in your savings account, the bank gives you $0.0001. In simple terms, the amount in this account is almost completely subject to how much you put in it.
Level 2: Short-Term Goals - These goals can be pursued through a number of accounts. You can use a typical savings account (as we discussed above), you can use a savings account with a higher APY (check out recommendations here and here), you can invest the money to potentially get even bigger returns-- the opportunities are endless.
Level 3: Long-Term Goals - There are many accounts you can open here, and two of the most popular are the 401k and Roth IRA. In some cases, these accounts can help achieve other goals in addition to retirement, but be sure to read the fine print and understand withdrawal restrictions.
6. Start saving!
Most people already have the desire to start saving, but they struggle to act on it. As of 2016, some studies suggest that 34% of US adults have absolutely no savings, and 35% have $1,000 or less.
Luckily, you are already ahead of the pack in reading this newsletter and actively trying to lay healthy financial roots. So, while you start to strategize, take a deep breath, give yourself a few pats of encouragement, and know that your decision to start saving is really a part of self-care-- you are ensuring your ability to take care of yourself for years to come.
When it comes to managing your money, how do you avoid the noise, and bad advice, to actually get peace of mind? Chances are your friends, teammates, and colleagues are wondering the same. We curate private, customized workshops to facilitate goal-setting and deep dive on the foundations of money management. Our team is here to help.