A number of financial tools aimed at helping you learn how to manage your money are available online and via traditional modes. One of the best tools you can have in your personal finance arsenal is a good, old-fashioned savings account. Here’s how you can better manage your money by opening a savings account.
5 Ways to Manage Your Money Better With a Savings Account
Using a savings account the right way can help you reach your financial goals. Here are five ways you can manage your money better with a savings account:
1. Pay Yourself First
The first line item in your budget should be savings. After you’ve put away a certain amount in your savings, pay your bills. If you can’t pay your bills with what’s left, pare down your bills — but don’t cut out your savings. When you get a raise or a bonus, make sure part of that goes to savings, as well.
You can start out by saving 10 percent of your income and work toward the goal of saving 20 percent. Begin with a realistic amount and then increase it when you can. If you try to save too much at the start, you could be tempted to pull it out to cover the essentials.
Pro tip: Have your savings directly deposited into your savings account by your employer. You can have more than one account for direct deposit, so have your paycheck split between savings and checking so they money’s allotted before you even see it.
2. Keep Your Savings Separate
Have your savings account at a different bank from your checking account. Doing this makes it more difficult to move money from one bank account to another, and you’ll be less tempted to spend what you should be saving.
Pro tip: Look for online, high-interest savings accounts. In addition to typically paying higher interest rates, online-only banks have no retail branches. Without a physical location, you cannot access your funds by walking into a branch, making it even easier to keep your savings in your savings account. Interest rates on savings accounts can vary widely, so shop around for the best savings account for your needs.
3. Set Up an Emergency Fund
Your first goal should be to set aside three to six months’ worth of living expenses as an emergency fund. An emergency fund is money that you can use if you have an unforeseen expense or if you lose your job. But, make sure that you have a true emergency before you dip into it.
Pro tip: If you’re single or the sole breadwinner in a family, you should aim for six months’ of living expenses in your emergency fund. If you are part of a dual-earner couple, three months’ should do.
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4. Save for a Specific Goal
Once you have your emergency fund set aside, you can start saving for specific goals, whether that’s a special vacation, your wedding, continuing your education, or something else. Whatever your goal, saving a small amount every week or every month will help you get there.
Pro tip: Keep this goal-specific money separate from your emergency savings. Having this money in a different account will prevent you from dipping into that emergency fund if you’re just a little short of your goal.
5. Start Saving for Retirement
The bulk of your retirement savings should be done through your retirement plan at work, which might be a 401k, a 403b or a 457 plan, or some type of employer-sponsored IRA. Contribute at least enough to take advantage of any employer match — that’s free money. But you might be able to save more in a savings account, especially if you’re close to retirement and don’t want to take too much risk. Savings account interest rates are still low, but having some of your retirement money in savings isn’t a bad idea.
Pro tip: If you’re maximizing your contribution at work, or if you don’t have a plan at your job, you might be able to save additional funds in a Roth IRA. Income and contribution limits apply, so check with your tax or financial advisor.
Use a Savings Account as Part of Your Financial Plan
Think of your savings as part of your overall financial plan. “Savings accounts can play both offense and defense in your financial plan,” said Bobbi Rebell, personal finance expert and best-selling author of “How to Be a Financial Grownup: Proven Advice from High Achievers on How to Live Your Dreams and Have Financial Freedom.”
“One key, of course, is an emergency fund for protection against something unexpected. That’s defense. But just as important are the fun kind [of expenses]. Think of that as offense,” she said. “Saving for experiences that you will enjoy, whether it’s a dream vacation or a major life event like a wedding, should be part of the plan, too.”