America Saves Week Infographic Series: The Science of Saving, Part 2
In Part 1 of Consolidated Credit’s Science of Saving infographic series for America Saves Week, we looked at the basic formula for saving money ? How interest compounds on different types of savings accounts to make your money grow. Now, here in the second part of the series, we’re focusing on what elements you need if you want to be an effective saver.
Saving money isn’t just about putting money away. It’s about knowing where you need to save and planning strategically for short-term and long-term financial challenges that you face. If you have a rainy day fund but no retirement strategy, then you are shortchanging your future prospects. On the other hand, if you have retirement savings but can’t save up for down payments on things like a new car or home, then you’ll struggle in the here and now.
Where to save… and when
To save up as effectively as possible, you need to think in terms of short-term, mid-term and long-term.
- Short-term savings are things like rainy day fund, where you have money saved up in case something in your house breaks or someone in your family takes a trip to the ER. It’s for those unexpected events that can pop up and cause problems for your budget.
- Mid-term savings includes setting aside money for a financial safety net ? money you can use to cover all of the expenses in your budget in case you lose your job or have your income reduced. It also includes savings for specific goals, like buying a home or taking your family on vacation.
- Long-term savings are for things that you know you’ll want to do in the future, like retiring on time and sending your kids to college without student loans.
If you’re just starting out in saving, short-term savings is the easiest to build up and the best place to start. You can just being setting money aside into an easily accessible account, such as your standard bank-issued savings account.
Once you have the short-term covered, you can move on to long-term and mid-term savings. You want to start a long-term saving strategy as soon as possible because the more time you give your money to grow, the more money you’ll have when the time comes.
Look into setting up an IRA or check into employer-based retirement options like opening a 401(k) through your company. For college savings, consider a 529 college savings fund. If you’re not sure where to start, find a financial planner or advisor and request a free consultation.
Apart from establishing a financial safety net in case of unemployment, mid-term savings is usually focused on a specific financial goal. You want to buy a home, or get a new car, or take your family on vacation without amassing a lot of credit card debt. By planning ahead for big financial goals, you can save up in advance. You’ll avoid debt problems and can even get better terms on loans because you offer larger down payments.
Of course, if you want to make a good saving strategy happen, you have to find startup capital in your budget. If you’re struggling to save because debt is draining your money after every paycheck, we can help. Contact Consolidated Credit for a Free Debt & Budget Analysis or call us to request a free consultation with a certified credit counselor.