Saving is considered one of the important financial habits that individuals should adopt to ensure financial stability in the future. However, there are many Americans who do not save money and struggle to achieve financial stability. In this article, we will explore the main reasons why Americans do not save money and the smart financial steps that can be taken to overcome these difficulties and start saving.
Paying Off Debt
Paying off debt may not seem like saving, but it actually is. When you eliminate debts such as student loans and credit cards, you lay the groundwork you need for achieving financial stability in the future. Once you can pay off your debts, you can redirect the amount you were paying toward debts into savings, where it can grow. Instead of paying interest, you will earn interest. If you have multiple debts you’re trying to pay off, use the snowball method to make your plan work. In this strategy, arrange your debts from the lowest balance to the highest. Put any extra amount toward the lowest balance debt and pay the minimum on everything else. Once that debt is paid off, apply the amount you were paying on that debt to the next debt, and so on.
Building Emergency Reserves
Emergency reserves are funds set aside for real emergencies. This is the money you’ll use if you get sick and need to visit an urgent care doctor or if your car breaks down. The ideal target amount is three to six months of expenses, but if that seems overwhelming, you can start by saving enough for one month. From there, you can continue to build your emergency reserves through regular monthly contributions. Set up an automatic deposit from your paycheck to your emergency account or an automatic transfer from your checking account to your savings account.
Splitting Short-term and Long-term Savings
When you save money for emergencies, you might place it in a savings account, but long-term savings goals, like buying a home, can be achieved through a different type of savings account. Determine whether your savings goals are ones you’re working toward in the near future or if you have several years to plan. Then, decide whether to incorporate a money market account or a certificate of deposit into your savings mix. Money market accounts are similar to savings accounts but allow you to write checks or withdraw money directly from the account using a debit card. Certificates of deposit are also savings accounts. You deposit your money into a certificate of deposit for a set period, and at the end of that period, the certificate matures, and you can withdraw the money plus interest. You can withdraw money from the certificate before it matures, but you will lose some or all of the interest earned. Certificates of deposit are good long-term savings options if you want to earn a little interest but need quick access to your funds when necessary.
Maximizing Retirement Plans
Take advantage of the 401k match if your company offers it. Getting the full company match is free money, and it’s best not to leave it on the table, especially if you’re behind on saving for retirement. If your company offers a 401k plan, increase your 401k contribution amount to at least match what the company provides annually. After that, consider how you can benefit from additional retirement savings accounts. For example, contribute to a traditional IRA if you want a tax deduction or a Roth IRA to enjoy tax-free withdrawals in retirement. Supplement these tax-saving options with contributions to a Health Savings Account (HSA) if you have a high-deductible health insurance plan. Once you reach age 65, you can withdraw money for non-medical expenses without penalty.
Investing
In a Brokerage Account
Put money in a brokerage account as soon as you benefit from tax-advantaged retirement savings accounts. It is an account that allows you to invest in stocks, bonds, mutual funds, and other investment instruments. There are no tax advantages to a brokerage account, but it is useful for building additional savings.
Getting Started with Saving
Where to start saving depends on your current financial situation and goals. Many begin by building emergency reserves. Even small emergency reserves can help cushion the shock of unexpected expenses. After that, consider paying down high-interest debt like credit cards. From there, you may want to add more to your emergency reserves or start building your retirement savings. No matter where you decide to start, the important thing is to begin. Even if you set aside a little money from each paycheck, it can add up over time.
Remember that The Balance does not provide tax, investment, or financial services or advice. The information is provided without regard to the investment objectives or risk tolerance or financial circumstances of any particular investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the risk of losing capital.
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Sources:
– AARP Public Policy Institute. “Unlocking the Potential of Emergency Savings Accounts,” Page 1.
– IRS. “Health Savings Accounts and Other Tax-Favored Health Plans,” Page 10.
Source: https://www.thebalancemoney.com/overcome-excuses-and-save-money-4129534
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