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A recent USA Today article states that more than 25% of Americans don’t have at least $1,000 in savings and 67% have less than the recommended 6 months of expenses saved. The message is loud and clear that Americans are struggling to save. It really takes a renewed mindset that says you want more peace in your life and you understand that saving and planning lead to “Financial Peace”. The good news is that you can start anytime and there is no time like right now!
In short, you need to bring in more money than you spend to make a savings plan happen. If you aren’t there yet, then that’s a big problem that needs to be addressed. Once you are there, you can start with these 7 types of savings accounts that everyone should consider.
Emergency Fund – Just like it sounds, this is for those unexpected things such as an appliance breaking or a trip you have to take to visit a sick relative. Without an emergency fund, it is a downward spiral because credit card balances increase or bills goes unpaid in order to take care of the urgent need at hand. A good goal for an emergency fund is $1,000.
Short Term Savings – This is an account that would account for the loss of a job. It is recommended to have a 6 month cushion and I know this may sound unrealistic to most people. If you have ever suffered a job loss, you will see the wisdom in having this money. Unemployment does not pay well, often does not pay on time, and is not a guarantee. Your goal should be to have a savings account in the amount of 6 months of your monthly budget. This would give you a 6 month window to find new work. If you are at zero, start small. Build a two week fund, then one month, then 2, and you will find your way to 6 months.
Big Purchase Items – A great way to minimize debt when buying a large item such as a car, home, or boat is to have a savings plan specifically for the item. This would be above and beyond your emergency savings and short term savings, so you might even need to find an additional source of income to make this one happen. If you really want it, you will find a way to make it happen.
Retirement – There are several factors to keep in mind when planning for retirement and I want to highlight two of them.
The first is the fact that we are living longer due to advances in medicine so I encourage everyone to plan as if they are going to live to 100. Even if you don’t you will leave a great legacy for those you leave behind. Just make sure they are financially educated so they don’t waste is away.
The second is figuring out how much money you will need to live on. Some advocate estimating 70% of your current budget, and one thing that can help reduce this is to make sure you plan so you have all of your big ticket items (cars, homes, etc) paid off. This number will be different for everyone, but I want to encourage you to plan ahead so you are not in that 25% that have little to nothing saved as they approach their retirement years. Your monthly income at retirement could also be subsidized by social security or a pension, but I recommend that you get in control of your retirement planning and not leave that up to anyone else (or any other entity.) There are lots of great options out there, and if you know me, you will know that my favorite are those that leverage the living benefits of life insurance.
If you think that planning to live to 100 is too aggressive, consider the financial stress of approaching the end of your retirement money. That alone could reduce your life expectancy as stress is a killer.
Among all of the types of savings accounts you could have, this is the most important, and should be considered at as young of an age as possible.
Christmas (Holiday) – Around Christmastime, people sadly charge on credit cards like they are going to win a prize for it. Having a holiday savings plan can help keep you in the positive when that time of year comes around. Simply calculate what you desire to spend, divide it by 12, and keep making those monthly payments all year round.
Vacation – Do you go into debt to take vacations? You certainly don’t need to. All you need to do is some planning. Make sure to account for all of your expenses including time off if you do not have paid vacation.
Annual Expenses – There are expenses that occur once per year such as license plate renewals, education expenses, and the like. For many, these seem to come as a surprise to the monthly budget, but the fact is that they happen year after year. If you divide the cost of these by 12 and pay into a dedicated savings account every month, these expenses won’t cone as a surprise.
So now you are wondering how in the world to make this happen. Just start! Lowering your expenses is often the easiest way to free up money for savings. If you think you have cut everywhere you can, a crisis can help you find the difference between wants and needs (I’ve been there and I don’t wish that on anyone.) The alternative is having someone else take a look at your finances to help you see where you can free up some money. The usual suspects are eating out and unnecessary monthly subscription services (such as cable TV or extra phone lines). An audit of your utilities and insurance policies can often provide savings opportunities, but in the end, you will need old fashioned discipline and perhaps some accountability.
Also, I highly recommend using an Infinite Banking Account for your savings (especially retirement) as it has several added benefits.
Do you have any other types of savings plans? Do you have any success stories or further guidance for those starting out? If so, please comment below.