THE BASICS OF SAVINGS
You can hear the audio version of this discussion on my podcast at Lola’s Frugal Life Podcast, on Apple Podcast, and many other platforms!
TYPES OF SAVINGS
In general, there are two types of savings. One type of savings is the kind that you want to be able to access at any given time. This would be for vacations, a new car, emergency fund, etc. The other type is for longer-term such as for retirement or college.
SHORT TERM SAVINGS
Shorter-term savings typically are held in a savings account. You want to be able to access it when needed. In a savings account you don’t have to worry about losing money due to changes in the market. If you have savings in an investment account, invested in something like an index fund, the value will go up and down with the market
I will be doing an upcoming episode on basic investing terms if you are not familiar with index funds. So, be sure to check out that episode.
If you have to take money out when the value is down, you will have realized some of those losses. When you have money in a regular savings account, you can take the money out at any time without the risk of losing any of the value of that money. The goal with short-term savings is not for the value to grow with earnings, it’s just to make sure you have the money for the intended purpose.
EMERGENCY SAVINGS
When it comes to savings, this is usually the one we all start out with. I never really had any savings throughout my life. When I finally got serious about getting in better financial shape one of the best and most exciting things that we did was save up our emergency fund. An emergency fund is just like what it sounds like. It’s a fund to be used only in the case of an emergency.
Typically it is recommended to save up to 3 – 6 months of living expenses in your emergency fund. Having an emergency fund is one of the best tools for keeping out of debt. Rather than charging an emergency on a credit card, you can pull the funds from your account. When that happens, it’s important to work on getting the money back into the account. Just like you would pay a credit card back, you need to pay yourself back.
OTHER SHORT TERM SAVINGS
It’s important to take time to think of things that you would like to be saving up for. Even though we might not think we have enough money available to save up as much as we would like for these things, it’s still a good idea to have a savings plan. That way if additional funds do become available you have a place to put them. If you have no savings goals set, often any found money will just be used up on random things. We have several areas that we like to put money aside for when extra money becomes available. In addition to deciding what we want to save for, we decided on a percentage to go to each area.
So for example, if you were really focused on your emergency fund but also wanted to put some money away for a weekend trip, you might decide that whenever there is any extra money 80% goes to an emergency fund and 20% goes to savings for a weekend getaway. As your emergency fund becomes close to being fully funded, you may decide to change the percentages.
If you are not an over-thinker you might be able to just decide where to put the money when it comes around. But for me, I used to stress out each time to decide the best place to put it. So, by deciding once how the money gets allocated, I don’t have to spend time thinking about it each time. I apply the percentage to any extra money, even if it’s just $5! Don’t discount the small amounts, they all add up over time.
SINKING FUNDS
Sinking funds are savings for a variety of different expenses. I have a variety of sinking funds that I put money into each week out of our weekly spending budget. The way that I use sinking funds is to cover things that come up periodically that we will need to have money set aside for.
In the past, I used to go over budget constantly because expenses would come in for things like pets’ annual vet visits, field trips for the kids, birthday party gifts, ordering pizza, and the annual prime membership fee. Whatever it was, they were things that I knew would be coming, and always assumed I could cover them with the misc portion of my budget. That never happened. There were always way too many misc costs that would come up and they would cause us to go over budget. On the weeks when we didn’t have that misc cost, we would just spend the money on other things.
Now I put aside small amounts of money each week so that when these things come up we already have the money and it has no impact on our current week’s budget. I do this for certain necessities that I know will be coming up, but also for fun things. For example, one of my sinking funds is called family fun. I put $10 aside each week into that fund. When I’m out with the kids and they want to get a fancy coffee or a treat from somewhere, or maybe pick up a new board game, the money gets pulled from that account. Spend some time thinking about what expenses always catch you off guard. Try putting a little aside for them each week.
LONG TERM SAVINGS
Longer-Term savings are usually held in some type of investment account. The money is not needed in the short term. So it can be invested so that the value can grow over time. When you initially open an investment account the money is usually placed in some type of cash account. Basically like a savings account. It is important to make sure you go into the account and choose how you want to invest that money.
The closer you get to the point when the money will be needed, the more conservative you might want the investments to be. Conservative investments do not change in value as much as more aggressive investments do. However, there is also less growth opportunity with conservative investments. Everyone has a different tolerance to risk. So, we all need to decide how much risk we are willing to take when investing our money.
SAVE WHAT YOU CAN
So often people will not save anything because they don’t feel like the amount they have to put aside is enough to make any difference. It really is true that every little bit counts. If you build up an emergency fund of $500 over time and you have an emergency, will you not be glad that you have $500 to help you out? Even if you don’t think that the amount of money you have to allocate to savings is not enough, it’s still better than not saving at all.
We can end up spending those little bits of money that we can save on things that don’t really matter much to us. It feels good to put some money in savings and watch your accounts grow. Even if it’s a little bit at a time. So, I just want to encourage you to do what you can and be proud of the savings that you can accumulate regardless of the size of the account!
Thanks so much for checking in! If you would like to hear the podcast version of this topic to check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!
I would love to have you join my mailing list! Sign up here: