Putting money away for a rainy day (or a sunny one, for that matter), will give you added security in case of emergency, and will help you avoid financial pit-falls like high credit card debt. Understanding the different savings options available arms you with the knowledge you need to make the most of the money you save.
Making Smart Savings Decisions
Set-up an emergency fund: You’ve probably heard this one before. An emergency fund is one of the most important things that you can have in-place to protect your finances. Your ultimate goal should be to have 6 months’ worth of living expenses saved. That number can feel overwhelming, so don’t let it stop you from starting a savings plan. It’s not an all-or-nothing proposition, and even a few hundred dollars will help when unexpected car repairs, tax bills, or home repairs come up.
For example, say you charge a $1000 car repair. If you have a high-rate card, like one that charges 23% interest, and you pay $50 per month it would take you 26 months to pay it off*. You’d also pay $300 in interest. Even a small savings account will help so you don’t have to pay interest charges. It’s better to earn interest than pay interest! Also, look into a lower-rate credit card to have on-hand as well. Rivermark has great, low-rate credit cards that won’t break the bank and will help you build good credit. Good credit will help you to secure a lower rate when you’re in the market for a loan for a house or a car. A lower rate can mean big money savings.
Protect your assets: Just as important as an emergency fund, is making sure you’re properly insured. Not having enough home or auto loan insurance might leave you open to a lawsuit where your personal assets are on the line. Rather than cutting coverage to save money on insurance policies, consider bundling your auto loan insurance with your home owners and life insurance to get a better deal. Check out Rivermark for auto, home, and life insurance. As a member, you can get great rate advantages over other providers.
Maximize your rate of return: Any savings is good, but don’t let your money get lazy. Look for the best rates you can. For example, instead of regular checking open a Free Checking Plus account to earn interest and cover some of your monthly ATM charges. Make sure to select accounts that offer compounding interest on a regular basis (such as monthly). The beauty of compounding interest is that the next time interest is calculated, it’s calculated based on the new account total…which includes your initial investment (and any additional funds that you add) PLUS the interest that you earned during the previous cycle.
If you have some funds that are currently sitting in a regular savings account that you would like to keep somewhat liquid, you might also consider starting a CD ladder. Unlike opening a single CD with a large balance, instead you keep your funds more liquid by dividing your available CD funds into CDs that mature at different times. For example, if you take $15,000 and divide it equally into 3 CD accounts—12-month, 24-month, and 36-month—your funds will become available every 12 months. As each CD matures, you would roll those funds into a new 36-month CD. Within 3 years, you’ll have 3 CD accounts that are earning at the highest, 36-month rate but your funds will be available every 12 months because the maturity dates are staggered. While CD ladders are beneficial, they are subject to the ebbs and flows of the rate environment, which you should take into consideration.
If you’re looking for a longer-term savings strategy, an IRA account will typically earn a higher rate of return than any traditional savings or certificate account. If you choose a traditional IRA account, the funds you invest are pre-tax and are taxed only when you withdraw the funds. However, if you choose to withdraw funds before you hit age 59 ½, there are some pretty hefty penalties. To avoid those, a ROTH IRA is a great choice. The funds you invest in a ROTH IRA are taxed initially, so you don’t have to pay taxes when you withdraw the funds. In addition, you can withdraw the funds at any time for a qualified purpose (for example, education expenses, first-time home purchase, etc). However, you have to be cautious that your withdrawal reason meets those qualifications so that you don’t end up paying a penalty. It’s always wise to consult with a tax professional before you withdraw funds from an IRA account so you know all the potential ramifications.
Save for retirement: No matter how old you are, start working on a retirement plan if you don’t have one already. If you’re starting in your 20’s, then you have a head-start and time (and the magic of compounding interest) is on your side. Consider pursuing a more aggressive strategy since you have more time in the workforce to ride-out any lows in the market. If you’re starting later, don’t worry—there’s still time to play a little catch-up. Starting at age 50, the maximum amount you can sock away in a tax-deferred account increases. Regardless of age, make sure to take advantage of any matching funds that your employer’s plan might offer.
Wherever you are in the planning process, you don’t have to go it alone. As a Rivermark member you have access to our Money Concepts Advisors who can meet with you to discuss your personal retirement goals and come up with a plan to get you there. To set-up a free consultation with no obligation, call 503.526.5606. If you already have a plan in place, our Money Concepts Advisors can review it for you and let you know if you’re on-track. For more retirement tips, visit our ‘Plan for Retirement’ page.
Put a name to your savings: As you start to build your savings, it might become more and more tempting to dip into those funds for a vacation, new gadgets, etc. To help you resist the urge, think about putting your funds into a savings account that you name (like, ‘Vacation’, ‘Emergency’, etc). When you name your savings accounts, you might be less likely to use those funds for a different purpose, because you’re not just spending dollars, you’re spending your ‘Vacation’ dollars.