The average American household likely has some savings, but not nearly enough. So how do you start saving if you’re not in the habit?
According to a report from Bankrate.com, which analyzed data from the Federal Reserve, the typical American household has about $8,860 saved at a bank or credit union. But most advisors, according to the report, recommend that people tuck away 20% of their income in retirement plans, savings accounts and other places where money can be protected and grow.
Savings are an important part of anybody’s overall financial strategy. Saved money ensures we’re ready for retirement and are prepared for a job loss, prolonged illness or other emergency. But saving money is easier said than done when earnings grow slowly, if at all; budgets are tight; and expenses add up.
Here are 5 ways you can start saving
Participate in your employer’s 401(k) matching program
Not every worker has access to a retirement plan, but many do. According to the Pew Charitable Trust, about 65% of private-sector workers age 22 and up work for an employer that offers a plan. And if your employer not only offers the benefit but also will match your contribution up to a specific limit, it makes great financial sense to take advantage of it. If you don’t, you’re essentially walking away from free money.
Here’s how it works: The average employer contribution, according to Fidelity, is about 4.7% this year. So, if you put 4.7% of your pre-tax income into your 401(k) plan, your employer will contribute the same amount into your account. If you contribute nothing, your employer will keep the money for themselves.
How much should you start saving for retirement? The general rule of thumb, according to Fidelity, is 15% of your pre-tax income, which would include that match you get from your employer.
Make advanced plans for major purchases
Buying a new car — or even a new refrigerator — can be exciting. And it’s easy to get carried away as you shop for that next big purchase, contemplating all the new features and extras that are available in today’s newer models. But making a quick decision on a major purchase can end up costing you more money.
Instead, carefully consider your needs as you contemplate all your options. Do you really need the leather seats in a new car? Would a used version work just as well? Will your life truly be changed with giant touch screens on your new refrigerator doors?
Once you determine what you truly need and can afford, shop around for the best price — and wait for sales if you can. Shopping smart will ensure you get exactly what you need for the best price available.
Consider certificates of deposit
If you already have some money socked away in a savings account, that’s great news. But it’s likely growing very slowly, no thanks to a very low interest rate. It might be time to put at least a portion of your savings in a certificate of deposit, or CD.
Unlike a savings account, which lets you withdraw money at any time, with a CD, you agree to keep your money in the bank for a specific period of time — usually about three months to five years. In return for keeping your money in the bank for a number of months or years, you earn a higher interest rate.
How much more? For a savings account, the average rate is 0.06%, according to the FDIC. But some rates for five-year CDs hover above 1%. It might not sound like much but, over time, it can add up.
Automate your savings
Does this sound familiar? With each paycheck, you promise yourself that you’ll start saving and pull out a little money to put in a separate account, but you never get around to it. Before you know it, it’s been months — maybe years — since you’ve squirreled any money away into savings. You can save more by simply automating it.
Most banks allow account holders to automatically transfer money between their checking and savings accounts. Often using your bank’s app or website, you can set when the money will be transferred, perhaps timing it to when you get paid, and how much you’ll move to your savings account. Once it’s automated, it’s no longer up to you to remember to get it done.
Evaluate your spending habits
Have you started ordering pizza twice a week instead of once? Is the Amazon app on your phone getting a workout? Habits are easier to start than break. But it’s always a good time to take a careful look at your spending to see if there is room for improvement — and opportunities to start saving more money.
The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!
