Most people agree that saving money is an important part of a wise money management plan. However, they often disagree about how much to save or what to spend it on at some future point. A savings account of any type or amount is better than none at all. However, there are several saving mistakes to be avoided that may lead to more problems than benefits.
Saving too little
Starting a saving plan is an important step in the right direction for managing your money. When you set aside money from each paycheck to be used for a designated purpose like a household emergency or college tuition, you can rest assured that expenses like these, planned or otherwise, will be covered without dipping into the regular monthly budget. However, saving a small amount per month may hardly be worth the effort in the event a major expense should occur.
Many financial experts recommend saving ten percent to twenty percent of the take-home paycheck, if possible. If that is not feasible at present, work toward that goal by saving whatever you can and increasing that amount when you get a pay raise, a bonus, or unexpected income.
Saving too much
Some savers become zealous in their quest to quickly save up thousands of dollars. Although their intentions are good, the logic may be faulty if they end up saving so much that it cuts into the monthly expenses to cause a shortfall. If that happens, the saver may end up borrowing money to cover living expenses in order to avoid reducing the savings account. It is best to establish a reasonable budget that includes a savings account that won’t take away from regular expenses.
Easy access to savings
Having savings funds readily available can be tempting. If someone runs short of regular income or finds that money is needed for a variety of needs, tapping the accessible savings account might be the response. Unless the withdrawn funds can be quickly replaced, it is likely the savings account will remain low and may continue to be drained sporadically rather than building up consistently. A better strategy might be to invest the savings funds in an account that cannot be immediately accessed without a penalty.
Consumers who are trying to avoid credit card debt while protecting the regular monthly budget may decide to use savings for any number of unplanned purchases. This might include when an item goes on sale, a special limited offer, a getaway weekend, holiday spending, and other expenses that are not automatically built into the monthly budget. Using the savings account for incidental costs may prevent it ever reaching an amount that will be truly helpful in an emergency or for a major expenditure, like a new furnace.
However, establishing a savings account just for incidentals can be helpful, unless it encourages people to buy more than they can truly afford and drain the savings while doing so.
Additional saving mistakes are related to the type of savings account a person chooses. A no-interest or low-interest savings account is not putting the money to work while waiting to be used. If the savings are to be used for a long-term purpose like a new car in a few years, for example, a money market account that pays a low but reliable interest rate may be a safe, low-risk investment option. If funds are withdrawn early due to a specific need, the penalty may not be significant.
Investing personal savings in a high-risk investment account is questionable. The rule of thumb for investing is never to invest more than you can comfortably afford to lose. Putting a substantial amount of money over a period of months or years into a high-yield and high-risk account could result in a total or partial loss. It is probably best to use a more secure savings venue for funds that will be needed eventually than to place all available funds in a venture that may one day fail.
Long-term vs. short-term savings
Starting a savings account is a great way to prepare for the future. However, those funds should have a specific purpose that is part of the overall household budget. Because unexpected costs pop up frequently, some people decide to start two savings accounts, one for short-term unexpected costs and another for long-term planned purchases. These may be set up at different institutions or in varying accounts since the long-term savings may be able to generate interest while building up for a specific purpose.
Saving vs. paying bills on time
Although saving money on a regular basis can almost be addicting to some people, it should not come at the expense of paying regular bills. For example, if $100 per month is designated for saving with a routing heating bill of about $75 per month, what happens if during the winter the heating bill shoots up to $150? Rather than pay just $75 while putting $100 as planned into savings, it is better for your credit rating to pay $150 on the heating bill and put just $25 into savings.
Many families live on a tight budget while saving large amounts of money for the future. While this is commendable in many ways, generally it is not advisable to live on such a tight budget that everyone is miserable or there is a constant scramble to save money or do without as the savings account continues to build. Obviously, the frugality of a household budget depends on their comfort level and savings goals. But you don’t necessarily want to turn into Ebenezer Scrooge.
Collecting coins in a jar, opening a bank account, cutting household costs, or investing in long-range mutual funds are just some of the ways people can save money in a responsible way. It is a good idea to balance a savings plan with common sense and everyday comfort to enjoy a quality of life that can rapidly disappear if the savings plan dominates the monthly budget.
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