We all know building our savings is important, but a lot of us don’t just follow through. Putting a part of your hard-earned income aside every month is often easier said than done.
But saving is one of the best habits you’ll ever develop. It can take some discipline and sacrifice, but through the magic of compound interest, you’ll lay the foundation for financial security now and in the years ahead.
Why is it important to save?
It’s hard to save now for something far off. It’s much too easy to put saving off but the sooner you start saving, the more prepared you will be for all of the expected and unexpected things that come along in life.
But with a nest egg, you’ll have money for emergencies, and with targeted savings, you can spend with more confidence and bypass high-interest credit cards.
What is compound interest?
Compound interest is the truly magical part of saving. It describes the effect of regularly adding the interest you earn to your savings – and in turn, earning more interest based on the resulting higher amount.
When you regularly deposit more money in your savings account – and also add the interest you earn month after month – not only do your savings grow, but the interest you earn also increases every month, based on the increasing amount in your account.
While regular deposits can take discipline and sacrifice, your compounding interest is like magic, automatically adding more to your savings month after month.
The younger you are, the stronger the magic of compound interest. The more time you can spend compounding interest, the bigger your reward will be, snowballing over the years ahead.
What are common savings goals?
Saving is all about setting goals, ones that often involve larger sums than most of us can afford in our monthly budgets.
But saving goals can also come in all shapes and sizes. They can be as small as a weekend fund – a special time when you want to splurge and need to save up to make it happen. Maybe a seasonal shopping fund requires putting aside money a few months in advance.
Savings goals can also be big – like a car or a wedding fund or a down payment. These goals can take several months or even years to reach. But with regular deposits and the magic of compounding, big savings goals can pay off, especially with the satisfaction when the goal is reached.
Savings goals can be a good way to beat expensive credit card debt too. When you save for something now and only spend it when you have it, you’ll avoid using your cards and paying high interest on the balance you’ll carry.
What is a targeted savings fund?
A targeted savings fund is a way to tag and track your savings, a separate deposit account defined by a specific goal. Like a college fund or a holiday fund. Not every bank offers them, but they’re a good way to divide your savings for the different goals in your life.
How do I find my savings goals?
It’s a whole lot easier to set money aside if you’re working towards a goal. Along the way, you can remind yourself what you’re saving for, and in the end, it’s almost like being rewarded for doing such a good job saving money.
Start with your monthly budget. Are there things or experiences that you wish you could afford? Try setting up a goal for each one.
Review your credit cards. Are there charges that could’ve been paid with savings instead? Set up a savings goal for it now. Then spend it when you have it, instead of relying on high-interest credit cards.
You’ll also need a realistic timeline. Take a look at your monthly savings budget and divide it as needed between your goals. When one goal is reached, move the savings you were dedicating to it to a different goal.
Prioritize your goals as you go, tracking your progress and shifting funds as needed. This is when a savings goal calculator comes in really handy.
Should I use a savings account or a checking account?
A checking account and savings account are both bank accounts that can store your money. The main difference is in how the accounts are used.
A checking account offers easy access, ideal for everyday transactions. Checking accounts are typically used for paying bills, groceries, or other everyday spending. They’re good for tracking your spending and managing your budget, but they’re not always great for savings goals.
A savings account is designed for saving money, and when they earn interest, they deliver the magic of compound interest. They’re ideal for savings goals of all sizes, from a special night out to an emergency fund to goals like a car or a down payment on a house.
How can I use my savings account for my goals?
Most savings accounts offer automated deposits. Set yours for your allotted monthly savings and try doing it on a weekly basis, using smaller amounts, so it doesn’t feel so painful at the end of the month.
If your bank offers targeted savings funds, set up several for each of your goals, then monitor your allotments, making sure they grow according to your timelines and your priorities.
Savings accounts can also keep your money out of easy reach. While your checking account can be used for everyday savings, the extra steps required to access your savings account can keep you from spending it on things other than your goals.