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So once you've made your budget and you've figured out
how you're tracking the money coming
into your life and the money going out of it,
the next step is learning everything
you can about savings--
how to do it, why it's important,
what you should be saving for, and the best strategies
to help you reach those goals.
The biggest and most important thing to know about savings
is that the sooner you get started,
the better off you are.
Even if you don't already have specific goals in mind
for your money long-term-- although,
I hope by the end of this series, you will--
just starting to put away that money regularly
will come in handy before you know it and will help you start
to build those really good money habits, where savings feels
like something exciting to do with your money
and watching that number go up feels thrilling rather than
always feeling like savings is the least fun
thing you can do with a little bit of extra cash.
And if you do not have any money in your savings yet,
do not panic because you are very much not alone.
According to a recent survey by Bankrate,
most Americans have fewer than $1,000 saved
and 39% of Americans have no savings at all.
So there is no time like the present to get started.
So let's first start things off with a quick overview
of these savings accounts that everyone needs.
Because, yes, in general, you should have
more than one savings account.
Your first and most important is your emergency fund.
This is money that should be readily accessible to you
in a savings account, although I personally
recommend making sure that you keep
this money in a separate bank than your checking account
so that you can't easily access the money on a whim.
And while you'll hear recommendations
everywhere from putting $1,000 in your emergency fund to
up to a year of living expenses in your fund,
I think aiming for something around three
months worth of minimal living expenses is a good goal.
And your emergency fund is the most important
because it's exactly what it sounds like,
money that you need to have in case of emergency.
If your car breaks down, if you need to replace your laptop,
if you unexpectedly get sick without very good insurance
or without insurance at all, if you unexpectedly get laid off,
this is the money that you need to access
to make sure that you can get by while looking to rebuild.
And this means that an emergency fund is not
to be used for going on vacation with friends
or buying a purchase that's nice to have, but not need to have.
If your money is not there specifically for an emergency,
then it completely defeats the purpose of having it.
And while there are tons of varying opinions about how
much a person should have in their emergency fund,
there are some minimums that experts have generally
agreed are helpful to people, even at lower incomes,
to stave off most of the worst.
For example, economists Emily Gallagher and Jorge Sabat
found that for low income households, about $2,500
in a savings account would stave off most disasters.
So it works as a good minimum savings rule,
although they do stress that more is always better.
And yes, the size of your emergency fund
will grow or shrink depending on life circumstances
or other priorities.
For example, if you know that in a worst case scenario,
you could move back in with your parents,
or you don't have a car that will break down and need
expensive fixing, or you've managed
to minimize other areas in your life
where an emergency expense would have a massive impact,
you may be able to have a bit less in your emergency savings.
But you should always calibrate it
to the needs and expenses of your life
to make sure that unexpected emergencies are not going
to put you in financial ruin.
Once, you've gotten your emergency funds squared away,
the next most important place where
you're going to want to focus your savings
is on your retirement.
And this is the type of savings where starting early can make
the biggest possible difference not only
because your retirement is generally going to be
the longest-term form of savings that you make,
but also because many of the most important retirement
savings vehicles-- or places to keep your retirement savings--
are going to be investment accounts, which accrue
compounding interest over time.
And you may be wondering, why shouldn't I just keep
my retirement savings in a regular savings account
like I would my emergency fund?
And that's because retirement accounts
come with special tax advantages that you'll
want to take advantage of.
And there are two types of these accounts, tax deferred and tax
exempt.
Tax deferred means you don't pay taxes
on the part of your income that you direct or contribute
to your retirement account, but you will pay taxes
when you eventually withdraw that amount from the retirement
account.
So if you have an income of $40,000
and put $2,000 into a tax deferred retirement account,
you would only pay taxes on $38,000 of your income.
Tax exempt, on the other hand, does not
have immediate tax benefits.
You contribute to them with after-tax dollars,
but when you make the withdrawals,
you do not pay taxes on the growth of the account,
as the investment returns grow tax-free.
Both types will save you money in the long run on those taxes.
It's just a difference of when that benefit is realized.
We'll get into some of the different types
of specific retirement accounts in a later video, when we talk
about investing in general.
What's important for everyone to remember,
though, no are the specific types of retirement accounts
you're going to be taking advantage of,
is how much you should really be putting toward retirement
in an ideal world.
If we assume that most of us are going to retire somewhere
around the age of 65--
although I know many people want to try and save
to retire earlier than that-- experts suggest that you should
be trying to save 10% to 15% of your overall income
specifically for retirement, and starting in your early 20s
is the best and most ideal time to start.
Of course, for many of us, that's
not going to be realistic, but do
remember that saving for retirement
has to be a very big priority in your overall savings strategy.
And while you may only be able to contribute a tiny amount
now, do remember that money that will be accruing
compound interest year after year
for such a long period of time between college and retirement
is going to be some of the best work your money can possibly
do for you.
The next category of savings we have is short-term savings This
is the kind of savings that you'll want to keep,
again, similarly to your emergency,
fund in an easily accessible, high yield savings account.
It's important that this money be in these savings accounts
because it needs to be liquid or easily accessible
when you need it.
If, for example, your short-term savings
were put in the stock market, you could be in a position
where you have to take the money out at a very inopportune time
and be hugely disadvantaged for doing it.
Typically, short-term savings are
going to be the things happening in the next year or so
that you want to dedicate an account towards so that you
can be sure to have the money when you need it.
Think about things like you're going to be moving soon
and want to set aside expenses for that,
you have an upcoming trip planned,
you want to potentially even buy something like a new car.
Shorter-term savings goals can vary from the very important
to the more frivolous, but the point
is there are the types of money you're
going to want to have easily accessible.
These are often the savings categories
for which people will have many different savings accounts so
that they can easily put different money
toward different things.
Rather than having one, big account with just a randomly
generated account number that goes
toward all of your small short-term savings goals,
you can have one account labeled New Car, one account labeled
Summer Vacation, one account labeled a Big Move.
For many people, it makes these diverse goals a lot easier
to reach.
Then, lastly, somewhere between short-term savings goals
and retirement savings goals, you
have your long-term savings.
These are things that you will want
to save up for for a while, but usually long before
retirement-- often something like between the next five
and 10 years.
For some, it might be things like saving up
a downpayment for a house or wanting
to go back to school to pursue a new degree.
As I mentioned for your short-term savings,
you'll want to keep them in something like a high yield
savings account so the money is easily accessible.
But for longer-term savings, you can
use a mix of those high yield savings accounts along
with investments.
Financial expert Miranda Marquit recommends
breaking your investments into stocks,
which are more volatile, and bonds, which are less so,
but offer less potential for gains.
She recommends this mix of savings
if you have a healthy emergency fund because it's
a way of putting your money to work without much involvement
on your end.
You do want to make sure, however,
that you won't need the money in your investment accounts
for at least five years.
Otherwise, you run the risk of losing money
in the markets, which is something that actually
happened to her when she had to pull money from her investments
after her house suffered water damage.
For longer-term savings goals that
are even further from that five to 10 year vantage point,
but still closer than retirement,
you can still use something like a high yield savings account,
but do remember that you will run the risk of inflation
outpacing the gains that you will receive on that account.
So you may be better off just investing that money.
You can also consider things like certificate
of deposits-- or CDs.
But do remember that your money isn't freely accessible
when put into CDs.
It has a set maturity date, and you can't use your money
until that date.
The farther away the date, the higher your
expected returns though, as some five-year and beyond CDs
have interest rates around 2.2%.
That means that if you invested $1,000 in a CD,
by the end of five years, you would have earned about $160
in interest.
No matter your goals and no matter your income,
you should always be saving something.
Even if you can only afford to put
$10 a month away into a savings account,
just the act of doing it will help create and reinforce
those better habits and a stronger relationship
with money.
Those economists I mentioned earlier, Gallagher and Sabat,
believe that the most important thing
is the act of saving itself, not necessarily having
some big, specific number in mind.
And if and when you do reach a specific savings goal,
it's healthy to keep saving as if you hadn't.
And as you get closer to your savings goals,
Gallagher says, you feel more motivated to attain them.
It's called the goal-gradient hypothesis,
and it's also why you might find yourself frequenting a coffee
shop or lunch place with a buy nine,
get one free punch card more often the closer you
get to that free drink or free lunch.
Essentially, savings becomes a bit
of a snowball effect, where the positive feedback that you
get from reaching smaller goals, and demonstrating that you can
be diligent, and seeing those numbers tick up
starts to create the feeling of wanting to do more of it.
For me, it's easily comparable to working out.
I used to absolutely hate exercising until I started
to force myself to do it regularly,
and then I got to a place where the inertia of exercising
actually made me want to do it.
I've had the exact same experience with savings,
and now it's one of my favorite things
to do to check those numbers and see how
I'm doing on some of my goals.
Whether you're putting away for your emergency
fund, retirement, long-term, or short-term savings goals,
the point is that you be consistent and start early,
no matter your current situation.
Don't forget to check out the next episode
in our guide to getting good with money
for college students.
And for all things talking about money,
don't forget to check out The Financial Diet here
on YouTube or all around the internet.