Tools for Smart Savings

Written by: MoneyPrime Staff

Saving should be undertaken as habitual behavior. Making it a habit will enable you to consistently save. By being consistent with your savings behavior, you are likely to amass a reasonably substantial amount over time. Start out by deciding what you must spend to sustain your quality of life. That of course is based on whether you know the difference between a want and a need. If you feel confident that you do, create a monthly budget. Upon completing it, determine what money you have left over.

Know What You Spend Monthly

Be sure to list all your expenditures for the average month. List costs associated with housing and the maintenance of your home. List other expenses like food, transportation (car note, insurance, parking, car washes, car maintenance, gas), utilities, cell phone, internet, babysitters, maid services and dog or pet sitter. Do not forget educational expenses for yourself and or your children. And include bills such as loans and credit and store cards. Miscellaneous expenses such as hair stylist’s visits, nail salons, uniform purchases, general clothing should also be included. Now, what is left over, can be saved.

If you are not able to afford your monthly expenditures, saving money is not an option for you presently. Cut your expenses if possible or consider a second job or a better job, so that you can have enough of an income to start saving.

Know the Difference Between Saving and Investing

There is a marked difference between saving and investing. Saving is done with a longer-term outlook and the expectation is that the progress will be somewhat slow, but no losses are expected. Investing also generally has a long-term outlook, but not always and losses have to be anticipated.

Choosing How to Save

How and where should you save your money depends on what the savings goals are and when you hope to reach those goals. Short term savings are usually for things such as emergencies. When your car breaks down and needs a new alternator, you will need a few hundred dollars. There are many times you might choose to help a family member is desperate need of help and an emergency fund could save the day. The average emergency savings are funded with 10% or less of your monthly take home pay.

Medium term savings are for college savings for a child or an adult, purchasing a car, putting a down payment on a house or anything that might be needed in a few years. Long term savings would include retirement and a long-awaited goal like traveling around the world. Before deciding how much to save for retirement, estimate how much you will need to live the life style you envision for yourself. Use a general guide of between 10% to 30% of income, based on your remaining monies after necessary expenses.

Each one of these savings, short, medium, and long term should be executed with the right vehicle. Savings account are available in a wide variety of options. You will need to select one based on the time frame offered by the Certificate of Deposit, 401K, etc. You will also need to consider the interest offered as well as any limitations that would alter your savings. Pay close attention to any penalties charged because of withdrawing your money before the maturity date. This is especially true for certificates of deposit (CDs).

Short Term Savings Vehicles (Money Needed in 6 Months to Three Years)
Money Markets are short term loans to financial institutions and businesses to allow them to obtain working capital and general financing. The investor that saves in a money market has chosen a safe vehicle that will pay out more than the average CD.

Traditional Savings Accounts at the bank or credit union pays the customer a small percentage of the return earned by the bank for that institution’s investments with your money. The interest rates tend to be the lowest of all savings vehicles.

Certificates of Deposit (CDs) The term for a CD can range from as low as 10 days to 12 months, 24 months, 36 months, and 48 months. These all usually come with a penalty for early withdrawal of funds. There are No-Penalty CDs offered by some institutions as well. Today’s CD rates range from 1.35% to 2.75% for 12 month or longer CDs.
Online Savings These accounts offer higher yields than bank savings, but they still tend to be lower than the rates of a CD.

Medium Term Savings Vehicles (Money Needed in Three Years to 10 Years)
Money Markets are excellent savings vehicles as they pay higher interest rates than a traditional bank or credit union savings account and are just as liquid. The only drawback is the minimum deposit often required. These minimum deposits can start as high as $5,000-$10,000.

Mutual Funds are more prevalent today than ever before. Now, mutual funds do offer money markets and CDs to their customers.

Cds or certificates of deposit always have a maturity date. This maturity date must be adhered to if you wish to avoid early withdrawal penalties and locking your money into one investment vehicle for months to years.

Long Term Savings Vehicles (Money Needed Anywhere From 15 Years and Up)

An Annuity is a retirement account has no maximum initial deposit making it the perfect vehicle for 401K and IRA transfers as well as deposits of lottery winnings. However, there may be minimums. The only drawbacks with annuities are the numerous rules and penalties for withdrawals. Study your annuity before purchasing it as your retirement option.

Individual Retirement Account (IRA)-$5,000 contribution limits for 2020 with additional contribution of $1,000 if over 50 with an annual income no higher than $285,000′

SEP IRA-Simplified Employee Pension-this is a profit-sharing plan with special rules. Employers can contribute up to 25% of employee’s compensation to the plan. Maximum contribution for 2020 is $57,000.

ROTH IRA-Unlike the traditional IRA, your contributions are not tax deferred. Because you pay taxes in advance, you can generally forego taxes in retirement. Contribution limits are the same as the traditional IRA.

401K-contribute tax deferred as much as $19,500 annually if you are under 50, without taxes until retirement between the ages of 59 1/2 and 70 1/2. Over 50 as much as $26,000 annually.

Solo 401K-for sole proprietors and their spouses. Contribute tax deferred up to 57,000 if you are under 50 and up to $63,500 over 50 years old.

403(b)-public education employees, self-employed ministers, non-profit employees, and cooperative hospital employees use this retirement plan. This plan is often referred to as a tax-sheltered annuity.

457(b)-government employees and the government’s independent contractors can defer compensation on a tax deferred basis. There is no 10% penalty for early withdrawal prior to age 55.


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