Before I started putting every dollar to work my savings strategy was very short term. I only saved money for specific purposes such as an upcoming vacation or a down payment on a new car. The only exception was enrolling in the 401K plan at work which was easy because I never saw the money.
This article is not going to tell you where to stash your money or who has the best interest rate. Those are great topics, but first you need to know why you should save.
Emergency Fund Savings
If you had to replace your washer or dryer this week, how would you pay for it? If you said credit card or didn’t know then you need an emergency fund. The emergency fund is for handling those unexpected expenses without going into debt.
Eventually, most people will want to save 6-12 months of expenses in their emergency fund. That’s once you have your other financial ducks in a row. First, establish a $500 to $2,000 in savings that will cover the majority of unplanned bills.
Sinking Fund Savings
It shouldn’t come as a surprise that cars will need maintenance and the home insurance bill will come every year. These types of irregular expenses should be planned for in the budget.
We pay property taxes twice a year so every month budget for 1/6th of that bill and put it in a savings account. This is called a sinking fund. When the bill comes, I transfer the amount into the checking account and pay it.
When it comes to car repairs, I consider this sinking fund fully funded whenever the amount gets to $1,000. My car is new enough that it would be unlikely to need costly repairs.
Want to go to Europe in two years? Or maybe you want to put a down payment on a home of your own. Unless you are independently wealthy, these types of goals require saving for a few years.
Whatever your goal, you need to budget for it and stash that money away. Typically, short term savings are kept liquid so don’t invest it in stocks or CDs.
If you’re wondering what events are left to save for, it’s the biggies in life. College educations, weddings and retirement to name a few. When you start saving for them they should be so far down the road that investing the money is the best path.
It might motivate you not to cash these savings in by having penalties for withdrawing early as with retirement accounts, CDs and bonds. Plus your earnings over time should be better than a standard savings account.
I have all of these types of funds even if they’re not as “funded” as I would prefer. The important thing is to get started. It’s amazing how much stress is removed when you plan for the unplanned!