5 Ways To Save For the Future When There Are So Many Things To Save For
Most people have no emergency savings or barely enough to cover even the most modest unforeseen expenses. Millions more lack a retirement nest egg or have one that’s painfully inadequate. The same goes for housing, car loans, college and the rigors of day-to-day life, all of which cost too much for the typical household to afford at the same time.
With so many ever-growing expenses and finite incomes, how can anyone keep up with it all? They can start by prioritizing their savings obligations and creating a plan for each.
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Emergencies Are Inevitable — Save For Them First
An emergency fund is the savings goal that makes all other savings goals possible because, without one, credit cards are the only remedy for the next blown alternator, dead water heater or fried laptop.
“Aim to save for three to six months’ worth of expenses,” said Kendall Meade, certified financial planner at SoFi.
When building emergency savings, resist the urge to chase growth at the expense of FDIC insurance.
“Many people are tempted to invest their emergency fund, but this can be a big mistake as those funds could be inaccessible or could have lost money when you need to use them,” said Meade. “It is important to make sure your emergency fund is safe and accessible. This can help you get through tough times such as unemployment, emergency home repairs, car repairs or economic downturns without having to rack up high-interest debt.”
Learn More: Nearly Half of Americans Struggle To Pay Their Utility Bills: 5 Ways To Save
Automate Your Savings and Forget the Money Exists
The best way to build emergency savings is to remove the potential for human error, particularly if you’re not strong on willpower or organizational skills.
“Automatic transfers to a high-APY savings account are a great way to save money without having to do much work,” said Bethany Hickey, a personal finance expert with Finder.com. “Keep the auto transfers small, such as $10 per paycheck, so it won’t break the bank or put you at major risk of overdrafting. If you have more available cash, you can simply transfer it manually.”
There’s No Such Thing as Retirement Loans — Start Saving Now
After your last day of work, your nest egg will be all you have to keep you from surviving on Social Security alone. Retirement might feel a long way off, but success requires time-based compounding. The earlier you start, the better.
“The standard rule of thumb is to target 15% of your gross annual income toward retirement savings,” said Meade. “But keep in mind that this assumes you start at a young age and plan on retiring at normal retirement age. Those who started later or plan to retire earlier may want to increase the amount.”
Meade stresses the importance of building your nest egg in a tax-advantaged account like an IRA or Roth IRA. If your employer offers one, a 401(k) is best of all — but remember the golden rule.
“Always take advantage of any employer match offered,” she said.
Downsize Your Life Now, or Reality Will Do It for You in Retirement
Saving for retirement is a lifelong process that requires cautious and deliberate spending as your personal finance mantra.
“Be intentional about what you truly need and value at this point in your life, and prioritize your savings goals to focus on what is most important,” said Maggie Tucker, host of the “Inside Out Money” podcast and former co-host of the “friends on FIRE” podcast.” “Housing, transportation, and food are often people’s largest three expenses, so focus on these for the biggest bang, but pay attention to the smaller things that can add up. For example, cut your yard service and take care of your lawn yourself, stop paying someone to clean your home and do it yourself and quit eating out as much, and those three things combined could save you thousands.”
If You’re Not Prepared for College Costs, Prepare for Student Loans
According to the Education Data Initiative, a single year of in-state public college costs $26,027 — tack on another $30,000 for private schools. That’s enough to land it the No. 3 spot on your list of financial priorities.
“Saving for college should fall after your emergency fund and retirement savings,” said Meade, who recommends starting a 529 account early.
“A 529 plan is an investment account that offers tax advantages when used to pay for qualified education expenses for a designated beneficiary,” she said. “As long as the funds are used for qualified educational expenses, you are not taxed on any growth in the account. Some states may even offer a state income tax deduction for contributions.”
Ask Your Family To Give Your Kids the Gift of Education
After you set aside money for emergency savings and retirement, you might feel like there’s not much left for a college fund. The good news is that, unlike the two primary priorities, your loved ones might jump at the chance to chip in for your child’s education.
“When your kids are younger, suggest your family and close friends give money to your child’s college fund instead of buying your younger kids toys and stuff they do not need,” said Tucker. “Most 529 plans have a custom link to give to family and friends to allow them to make a direct deposit into your child’s account. You and your child will thank you in 18 years, and they won’t even remember or realize all of the extra stuffed animals or toys they never had.”
Use Buckets for Big-Ticket Items Like Down Payments and Vacations
After you’ve built up your emergency, retirement and college funds, it’s time to save for other big-ticket items, like a new car, dream home or family trip. In this case, the secret to success is giving each savings target its own home.
“Start a bucketing approach with your savings,” said Deborah Cartisser, senior wealth advisor with Twelve Points Wealth Management. “Allocate money to a car, house, etc., and use separate accounts for each savings goal. Prioritize what’s most important and reevaluate the allocation with each raise.”
Save for Short-Term Buckets and Invest for Distant Ones
For big-ticket goals, base your savings strategy on your target date.
“If you plan on making that purchase in the next three years, I recommend a high-yield savings account,” said Meade. “For goals more than three years away, this is a longer time frame so you can consider investing this money based on your risk tolerance.”
Remember the Fundamentals
No matter what you’re saving for, healthy personal finance habits will always pay off. Stick with the basics and the rest will fall into place.
Live and Spend According to a Budget or Brace for Failure
It will be harder and take longer to reach any savings goal if you don’t account for your income and expenses.
“Put a practical budget in place and keep it simple so you can easily stay on top of your finances and increase your odds of success,” said Meade. “One of the most simple and effective budgets is the 50/30/20 rule. With this rule, you should be spending 50% on essential expenses, like rent/mortgage, insurance, minimum debt payments, etc., 30% on discretionary expenses like dining out, entertainment, etc., and 20% on your goals, like retirement, emergency funds, investing, etc.”
Save Found Money
Money you weren’t banking on belongs in the bank.
“I recommend putting aside ‘found’ money,” said Thomas Racca, manager of the Navy Federal Credit Union personal finance team. “Invest birthday or holiday cash gifts, work bonuses and tax refunds directly into your savings account and see how quickly you can reach your goals. Since this money isn’t part of your typical spending, it’s easy to save it without missing it.”
Don’t Give Your Lifestyle a Raise When You Get One at Work
If you escalate your mission to keep up with the Joneses with every pay increase, you’ll never earn enough to save for what you truly need.
“It can be easy to get caught up in what I like to call lifestyle inflation,” said Meade. “This is when your expenses increase as your income grows — a bigger house, nicer cars, etc. This is a double whammy because not only are you not saving, but your expenses are growing, so the lifestyle your are accustomed to will cost more in retirement.”
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