Am I That Dumb About Money? Part 2: Saving Money

The title of this series may come off a little rough (or hit close to home); if it does, I recommend reading Part 1, as it may make you feel a little better.

Sometimes I get ahead of myself when talking to people about different financial topics. Through years of working with clients of all age groups and demographics, I’ve learned that it’s best to start with the basics.

Bank Accounts. Most people already have them. Cash held in bank accounts in the US is generally (not always) FDIC insured and can earn interest. Many financial transactions, including Venmo and PayPal, require bank accounts. In recent years there has been an uptick in online bank accounts vs. traditional brick-and-mortar banks.

The three most common accounts are:

• Savings: They generally offer some interest, albeit low, on the money in the account and are a great source for short-term savings. There are legal restrictions on the number of transactions out of savings accounts per month, so it’s not an everyday use account.
• Checking: We’re all familiar with these accounts because this is where our paychecks are deposited. They generally earn little to no interest and do not have restrictions on the number of outgoing transactions. This account is where you pay your bills, hopefully in a timely manner (there will be more on that topic in a future blog).
• High-yield savings accounts: This is another type of savings vehicle that generally pays higher interest rates than the traditional savings accounts. These accounts may require larger initial deposits, minimum balance requirements, and higher fees. Online banks (vs. brick-and-mortar) tend to have higher interest rates, and their emergence has reduced the minimums and fees for many high-yield savings accounts, in my opinion.

Now that we know what type of accounts we’re dealing with, what are we going to do with them?!?! As I alluded to earlier, your savings account is for short-term needs. Think upcoming vacations or paying for a repair on your vehicle since it sounds like there’s been a gremlin under the hood for the past month.

This is where you keep your {cue the financial buzzword} emergency savings. If you’re currently not retired or nearing retirement, you should try to keep enough money in this emergency account to cover 3-6 months’ worth of expenses. Obviously, that varies based on your personal situation, but it’s a great place to start. This account is NOT for paying your everyday expenses; it’s called “emergency” for a reason.

This is where you keep your {cue the financial buzzword} emergency savings. If you’re currently not retired or nearing retirement, you should try to keep enough money in this emergency account to cover 3-6 months’ worth of expenses. Obviously, that varies based on your personal situation, but it’s a great place to start. This account is NOT for paying your everyday expenses; it’s called “emergency” for a reason.

If you’re employed, and your employer has a 401(k) (or other retirement savings vehicle), put as much money into your 401(k) that doesn’t impact your cash flow to a point where you are putting items on credit cards and not paying them off monthly. If your employer offers a match, do whatever it takes to save enough to get the match, even if that includes eating Ramen every night. If you don’t take advantage of the match, you are literally giving away money.

If you have money left over after you have sufficient emergency savings and you have maxed your match at your employer, you have several savings options depending on your specific needs, such as: IRA, Roth IRA, brokerage account, 529 accounts, UTMA accounts, savings account for a large upcoming purchase in the near future, where “near future” is 5ish years). They (whoever “they” is) say you should save 15-20% of your income to savings and investing (more to come on investing in the future). Don’t get me wrong, this is a great goal, but I don’t know many people who can/have achieved this at the beginning of their savings journey.

What I dislike about the financial services industry is that we throw these numbers out there, and if someone thinks it’s not even remotely attainable, they don’t save anything at all. This outcome is obviously far worse than only saving a “measly” 5% of their income. My challenge for you is to forget what “they” say and just start somewhere. Take small steps to change your behavior to allow you to save a little more. I don’t care about your $5/day daily coffee habit. You know what’s important to you and where you can trim, just stop making excuses and start now.

Tips and Tricks: Look for checking accounts with little to no fees and savings/high-yield accounts with low minimums and fees. They’re out there, I promise. If you get a raise at work, put a little more into your employer-sponsored savings. If you get a 2% raise, increase your savings in your employer’s retirement plan by 1%.

I’m starting my first kids’ corner with a BOLD statement. You cannot help your children learn good savings habits (very important word here! If you make savings a habit, it is not this monster, daunting, dare I say Herculean thought) if you do not have good savings habits yourself. I know, not what you wanted to hear.

When your child gets money (hello birthdays and holidays), make them split it into 4 buckets: saving, investing, giving, and spending. It might actually help to have four separate piggy banks.

When your child gets their first job, offer a Car-01(k), or really an Anything-01(k) that they can begin saving towards. Whatever money they put aside for a specific purpose, offer to match it. This will entice savings and get them into the habit (there’s that word again!) of saving when there is a match, very beneficial when they get their first “real” job that offers a 401(k).

About that first “real” job, make sure you tell them they must save into an employer-sponsored plan if one is available with a match. I know, I know, they don’t have to, but as their parent, you should tell them that they have to! I can promise, they will not come back to you when they are 5 years from retirement and tell you that you were wrong for telling them to save/invest early.

As always, if you have any questions, please feel free to reach out. The topic of the next series is “Budgeting and Spending,” and you certainly don’t want to miss that blog!