Everybody told you to save for a rainy day. You didn’t. How can you start now? Here are some ideas for where to start and how to save.
Short-term savings plans – your “rainy day” fund
Everyone should have three to six months’ salary in an account in case of emergency. There are old-fashioned savings accounts at banks, and there are many new “fintech” plans online. If you already have a checking account at a bank or credit union, ask about savings plans that offer benefits for existing customers. Many online savings banks may offer higher rates than traditional brick-and-mortar banks. (Bankrate.com has a list.) Then there are the new players like Acorns and SoFi that offer savings and investment plans. (NerdWallet has information about these.)
Long-term savings plans – your retirement fund
If your employer offers a 401(k) plan, take advantage of it. Most employers have a matching program, where the employer contributes a percent to your account for each dollar you contribute. Try to contribute at least the amount equal to the match amount to get the greatest benefit, but even if you cannot contribute that much, save something in a 401(k). The dollars you contribute are tax-deferred, meaning you get a current tax benefit (401(k) contributions are deducted from your pay before taxes) and the money grows tax-free until you withdraw.
If your employer does not offer a 401(k) plan, you can open an individual retirement account (IRA) on your own. Banks and brokerage houses offer individual IRAs. Like a 401(k), the money you put into an IRA is tax-deferred, so you may take a tax deduction for your contribution. NerdWallet as well as Vanguard have information about IRAs.
There are drawbacks to 401(k)s and IRAs: If you need to withdraw money, there are only a few reasons allowed, and you may pay a penalty for withdrawing before you are 59½ years old. But the long-term benefits are rewarding.
How do I fund my savings account?
If you don’t have money right now, how can you find money to fund your savings account?
First, look at your daily spending habits. For one week, do not use your credit or debit cards. Take money from the ATM to cover “necessary” expenses and live off cash. This will make you aware of how you spend money. Keep receipts from everything you buy. Saving requires that you not spend impulsively.
Second, review your monthly credit card bills. Analyze every charge. Did you really need that purchase? Are there recurring charges or subscriptions that you don’t need?
Third, look at your phone plan and cable bill. If you spend most of your time at home or in a location where there is free Wi-Fi, turn off your data when you are there. If your plan includes unlimited data, look at the option of downgrading and using Wi-Fi. Do you use premium cable channels enough to justify the expense?
There is a basic rule for good money management: Pay yourself first. Think about how important you, your family, and your future are, and make the necessary changes to protect them.
By Vicki Whitelaw