Many of us know that we should be saving but aren’t sure where to start or even how much to save. And it can be challenging to motivate yourself to save without a clear goal in place.
Saving money is one of the best ways to prepare for the future by building an emergency fund, preparing for retirement, and setting financial goals that excite you.
Personal Capital Chief Financial Literacy Ambassador and Financial Hero Baron Davis spoke with us about the significance of saving. Baron’s grandmother taught him the importance of saving from a young age, and those lessons turned out to be critical when an injury forced him into early retirement from his basketball career.
“I always stuck by what my grandma taught me,” Baron shared. “No matter how much money you make, save and invest what you earn. Stay humble.”
Why it’s important to save
To prepare for an emergency
Financial emergencies are practically inevitable. No matter how much you plan and prepare, something is likely to go wrong eventually. The car will break down, you’ll need an unexpected medical procedure — you know how it goes. And yet, only four in ten Americans report having enough in savings for a $1,000 emergency.
And your emergency fund doesn’t just protect you in the case of those unforeseen expenses — it also acts as an income replacement if you lose your job. 2020 has shown us the importance of having an emergency fund to cover your expenses in case of a layoff. More than 50 million people lost their jobs in 2020, most through no fault of their own. Having emergency savings in place is essential.
If you plan to retire someday, you likely have to start saving decades in advance. And while retirement may not exactly be top of mind in your 20s and 30s, you get the most bang for your buck when you start saving earlier.
Thanks to compound interest, those who start saving when they’re young are rewarded the most. But don’t be discouraged if you’re no longer in your 20s and 30s — you can still retire comfortably if you start saving today and prioritize it in your budget.
To reach your goals
We’ve all dreamt of what our futures could look like: the dream house, dream car, dream vacation. But far too often, we assume that some of those goals are just too far-fetched. Or we hope to reach them someday, but don’t put any specific plan into place to get there. Consistently saving is the best way to ensure you’ll reach your financial goals.
To reduce your stress
Money is one of the most significant sources of stress for many Americans, and it’s one of the greatest areas of conflict in many marriages. Having money in savings can create the peace of mind necessary to reduce your stress around money and focus on the good things in your life.
How to start building a savings
Pay yourself first
Most people save what they have left at the end of the month after spending. And often, there’s nothing left when the end of the month rolls around. The concept of paying yourself first means that you save first and then spend what you have left.
To pay yourself first, just follow these steps:
- Determine how much you need to live on each month
- Find the difference between your income and your expenses
- Determine how much you want to save versus spend each month
- Transfer money to savings at the start of each month
Automate your savings
Do you tell yourself that you’ll save next month but somehow never seem to get around to it? Automating your savings is the perfect solution to that problem. Simply set up an automatic transfer from your checking account to your savings account or your retirement account. You won’t have to think about it, and it will take extra work on your part not to save because you’ll have to cancel the transfer manually.
Build an emergency fund
An emergency fund helps cover any unforeseen expenses that come up and pays your monthly bills if you lose your job. Financial professionals generally recommend having between three and six month’s worth of expenses in your emergency fund. Some people start with a starter emergency fund of between $1,000 and one month’s worth of expenses while paying off debt.
Don’t leave free money on the table
If you have a full-time and are eligible for an employer-sponsored retirement plan, you may have access to free money. Many employers match their employees’ retirement contributions up to a particular percentage of income. For example, your company might match 401k contributions up to 3% of your salary. You end up saving 6% of your salary instead of 3%, and half of it was free money.
Maximize tax-advantaged accounts
The federal government has plenty of tools in place to help you save for the future while also saving money on taxes. A few tax-advantaged accounts you can use are:
- 401k and IRA: Retirement accounts that allow you to contribute with pre-tax money
- Roth 401(k) and Roth IRA: Retirement accounts you contribute to with post-tax money, but then your money grows tax-free and disbursements are tax free.
- Health savings account (HSA): A tool for employees with high-deductible health insurance, offering a triple tax advantage
- 529 plans: Save for your child’s college education without paying taxes on your earnings as long as you use them for education expenses
Set specific financial goals
Having a specific financial goal in mind can provide the extra motivation boost you need to follow through on your savings plan. It’s hard to set aside a big chunk of your hard-earned money each month. But when you know that money is going toward your dream home or a comfortable retirement, you may be more inclined to stick with it.
Not sure how much you should be saving toward your financial goals? Personal Capital’s Savings Planner helps you figure out how much you need to save each month for your retirement savings, emergency fund, and more.
Track your progress
Savings goals aren’t set-it-and-forget-it. Have a system in place to check in regularly on your progress and make sure you’re on the right track. For example:
- Personal Capital’s financial dashboard can help you track your net worth and savings progress.
- Personal Capital’s Investment Checkup will analyze your investment portfolio and past performance to compare it to a benchmark and make recommendations.
Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Featured individuals are paid spokespeople and not clients of PCAC and do not make any endorsements or recommendations about securities offerings or investment strategy.