I talk a lot about budgeting on this blog—heck, it’s even in the title! But there’s a reason I hold budgets in such high regard, and it’s because they’re the means that help you achieve an all-important end: saving money. Saving is the key to financial freedom and stability; without money in the bank, any semblance of progress is highly superficial.
While the act of saving is relatively simple—all you have to do is spend less money than you earn—figuring out where to start can be complicated. How much should you save each month? Where should you keep your savings? There are several facets of saving that are important to consider; the first is understanding the different strategies and categories and determining how they can be tailored to meet your needs and priorities. There are four broad savings categories that should be factored into every budget, as each category helps you achieve a different set of goals.
Savings #1: Emergency Savings
The first category, and arguably the most important, is emergency savings. This is exactly what it sounds like: a sum of money set aside just in case things take a turn for the worse. The definition of “emergency” will differ from person to person, but it’s important that this money be viewed as a last resort. While it’s appropriate to utilize an emergency fund in situations such as a job loss or a medical crisis, it’s not there to cover a last-minute wedding invitation or a one-night-only concert.
Most financial experts consider an emergency fund to be “fully-funded” when it contains three to six months of living expenses. This number, of course, is only a guideline; some people may feel comfortable with three months stashed away, while others may only feel secure once they have twelve months. The purpose of your emergency fund is to provide security, so choose whatever number puts you most at ease.
Savings #2: Retirement
After an emergency fund, planning for retirement should be at the top of your savings to-do list. While it can be difficult to save for an event that’s so far down the line (or that feels like it may never even come), the best way to ensure you’re prepared for retirement is by starting now. Whether it be through personal plans (IRAs) or employer-sponsored plans (401(k)s, etc.), try your best to make this a priority.
This is especially true if you have access to an employer-sponsored retirement plan that provides any form of company match, meaning your company matches a portion of your contributions. It’s always in your best interest to contribute at least enough of your earnings to receive that full match—otherwise you’re passing up free money!
Savings #3: Short-Term Savings/Sinking Funds
Once you have taken care of the future via emergency funds and retirement accounts, you can begin saving for goals that are more immediate—and, typically, more fun. Sinking funds are individual accounts that you use to save for a specific goal or purchase, and usually involve setting aside a small amount of money each month until you have accumulated enough to pay for your goal outright. Sinking funds can help you save for everything from holidays to vacations to car repairs, and are a wonderful way to ensure that you’re able to afford life events and experiences without relying on debt.
Savings #4: Long-Term Savings
Typically, sinking funds are utilized for short- to medium-term goals (such as vacations), or to create a reserve for events that will happen, even if you don’t know when (such as car or home repairs). Sometimes, though, our goals are longer-term. What if you want to save up to go back to school? Or to purchase a house? These goals should also be factored into your savings plan, but make sure you do some research to ensure that you’re saving this money in the right place. Basic savings accounts at banks or credit unions often won’t generate a worthwhile amount of interest, but investing this money in the stock market can be risky—particularly if your goal is less than ten years off.
Saving money is incredibly rewarding, but it can also be a confusing and overwhelming process. By starting with these four categories, it makes it easier to determine how and where you would like to allocate your money so that you will begin to feel more secure in your financial decisions.
Big City, Small Budget 