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You frequently hear about how vital it is to save money. Your family tells you, friends tell you, even advertisements tell you about the importance of saving. But why is it so crucial? Let’s explore why you should save money, what you can do to make saving easier and how Mission Federal Credit Union can help.
In this guide you’ll learn about the importance of saving money for short- and long-term goals, how to create a budget you can stick with, budgeting tools available to you, retirement planning at an early age, good money habits and saving accounts for kids. Your success is our bottom line and that’s why we created this guide.
Why is it important to save money?
One of the most important things you can do for yourself and your future is to begin saving money early in life and continue the habit. Saving is essential for a variety of needs, including emergencies, large purchases, down payments, retirement and more. However, life costs money, and there will be times your expenses don’t allow you to save at all. This is why making saving a habit early on is helpful. When saving becomes something you just do, whether you have an upcoming need or not, you’re more likely to have the money you’ll need when you actually need it. Even if there are times when you can’t save anything, the savings you’ve already accumulated can grow in your savings account. Then, when you can reserve a little extra, it really adds up. Saving 5 percent of your income or saving all cash gifts should give you at least enough to cover a full month or two of expenses. Make saving a priority in your life and you’ll reap the benefits for years to come.
How to set up a budget
Create your first budget using the following five steps. Learning how to set a budget and stick to it requires a bit of time and resolve, but you’ll be glad you did it.
- Review your bank statements and catalog all your expenses.
- Be honest about where and when you spend money.
- Explore where you’re spending more than you need to.
- Determine your average monthly expenses.
- Commit to putting a percentage of your income to savings.
You might need to make small changes in your spending habits, but this is more about shifting your mindset than anything. Even when your finances feel too tight to save, you’d be surprised at where you can make small adjustments to save big. When you’re determining how to set a budget that’s realistic, be practical. Think about daily changes that will help you save:
- Instead of the weekly coffee you grab before work, make coffee at home.
- Instead of dinners out with friends, invite them to gather at your home.
- Instead of expensive holiday gifts, try homemade gifts for a personal touch.
You can cut costs without negatively impacting your life. Most people who struggle with budgeting make the same mistakes. They either struggle with committing to the budget and overspend, or they make their budget so tight it’s impossible to maintain. Living on a budget shouldn’t be miserable. Ultimately, it’s about learning and adjusting spending habits, paying attention to your spending, living within your means and saving what you can.
Finally, make financial goals to finish your budget. Even if you only save $10 a month initially, you’ll begin the habit of tucking money away and building your savings. Make separate savings goals for each financial milestone that lies ahead of you. Whether you’re saving for emergencies, college, a car or your first house, use your financial goals as motivation to avoid overspending.
Budgeting tools can help
When you first create your budget, consider starting with a flexible budget, which allows you to tweak your initial budget as necessary once you’ve tried it for a while. This can be more realistic than imposing a rigid budget that may be too strict, causing you to feel like a failure. Allowing for adjustments ultimately helps you stick to your budget long term.
Try using a budget spreadsheet or a budget app to help you keep track of all your costs and make sure you’re honest with yourself about your spending. Let’s explore the pros and cons of budgeting spreadsheets and apps to help you choose the right tool for you.
|Many are free||Easy to ignore|
|Receive notifications about bills, spending and saving||Requires regular logins and maintenance|
|Can carefully categorize and track your transactions and expenditures in real time||The app won’t do the work for you|
|Some provide perks like a free credit score check, rounding transactions up to the next dollar and investing the change, access to field experts, etc.||Requires you have your technology with you to use|
|Can customize your spreadsheet to your unique needs and savings goals||One more thing to update and keep track of|
|Easy to quickly find and view the information you want||Must be comfortable with spreadsheets|
|Easy to check and update without constant notifications||Must remember to review the spreadsheet|
|Easy to adjust and fine tune as you learn what you need||No additional perks associated|
Ultimately, you know which budget planning tools are likely to be most successful for you. If you’re a pen and paper person, a monthly budget spreadsheet can give you that hands-on experience you enjoy, allowing you to look closely at your spending and understand how you’re using your money. If you prefer programs that keep track of the details for you, a budget app is likely to fulfill your needs while helping you track bills and expenditures. No matter which budgeting tools you use, finding ways to help you keep track of your money can help you break bad spending habits and maximize your efforts. You’ll save money faster, and have an easier time keeping up the saving habit.
Mission Fed’s Calculators are additional tools to help you reach your savings goals faster. Try these Calculators to help you reach your financial goals.
How to stick to a budget
You might be wondering how to make and stick to a budget that works for you long term. It’s important to be realistic about what you can and cannot live without. If you cut costs everywhere, but know you don’t actually have to, you’ll feel deprived and if your budget feels torturous to maintain, you might abandon it altogether. Alternately, if you’re reasonable about setting a budget you can maintain without feeling deprived, you’re much more likely to stick with it. Here’s how to set a budget and stick to it.
- Watch how you spend your money. Track a few months’ spending by looking through your bank and credit card statements and categorizing your expenses.
- Take note of what surprises you. Note categories in which you’re spending more than you thought.
- Evaluate your spending. Make cutbacks in any category where you’re overspending
- Cut strategically. If you get too strict with your budget, you might want to quit. Cutting your spending on movie tickets is easier to handle than cutting your grocery budget.
- Make savings goals. Having an end goal in mind makes it easier to stay motivated to save.
- Plan on flexibility. Leave room for adjustments in your budget. After a month or two, you might find you need to ease up on some cuts, or you may discover you can cut back a little more.
- Reevaluate. Review your budget a few times a year and decide if it’s still working for you. You might need to make adjustments to meet your savings goals. Adjust as necessary to find the right balance of spending and saving for you.
Planning for retirement
Retirement planning might not be first on your list when it comes to saving, but it should be an essential part of your savings goals. Paying into your retirement fund is like paying yourself first, and if you start early, you won’t have to stress about it down the road. No matter when you start saving, there are several ways to make saving for retirement a part of your financial habits. Here’s how to make sure you’re saving for retirement regularly.
- Start early. The sooner you start saving, the more your savings can grow. Open a Savings Account just for retirement.
- Choose an account that pays dividends. Whether you choose a Savings Account with a great interest rate, an IRA, a CD or another Retirement Account, make sure you’re earning dividends so your savings grow even faster.
- Look into employer matching. Many companies match employee contributions to 401(k) or 403(b) accounts. These are part of your benefits, so take advantage of the highest employer match percentage possible.
- Sign up for direct deposit. Have a portion of your paycheck deposited directly into a retirement account from the start. You won’t miss the money and it’ll be easier for you to consistently save.
- Consider hiring financial advisors. Whether you start saving early or need to make up for lost time, a financial advisor can help you choose the right retirement savings plan for you.
There’s a lot to take into account when you’re estimating how much to save for retirement. While experts recommend saving at least 10 percent of your income, that can change depending on when you get started. You’ll want to consider:
- The age you started saving
- Your anticipated future income needs including living expenses, entertainment, medical and more
- Your estimated life expectancy
Then, try using a retirement calculator to help with your retirement savings plan. Mission Fed offers the following Retirement Calculators to help you explore financial planning for retirement:
Build good money habits
Once your budget and financial goals are in place, it’s time to establish good money habits so you can stay on target for all your short- and long-term savings goals. Try these smart money habits to get on the road to savings today.
- Save soon and save often. Start saving money as early in life as you can, and save as much as you can.
- Apply the 50/30/20 rule. 50 percent of your income should go toward necessities, 30 percent should be applied to discretionary spending and 20 percent should go into savings.
- When you have extra, save extra. Get in the habit of saving any extra money that comes your way. If you get a bonus, a cash gift or a raise, put it in savings.
- Save for different purposes. You should be saving for at least 3 categories: Retirement, emergency fund and large purchases/expenses.
Establishing these money-saving habits and being transparent about them can be beneficial for your kids, too. Have them practice the 50/30/20 rule to create healthy money habits. They’ll be proud of their savings, and they’ll have a good head start when they need it.
Open Kids’ Savings Accounts
Teaching kids about money helps them understand how to spend and save properly as adults. Model your own smart spending and saving, and open Savings Accounts with your kids, including them in the process, to get them started on the right financial foot. Here are the benefits to helping your children open a kid’s Savings Account of their own:
- Once they’re old enough, they can manage their own account
- They can learn smart spending habits
- Understanding how various financial interactions work
- Ability to make mistakes before the stakes are high
- Saving and watching their savings grow with dividends
- Learning to apply the 50/30/20 rule to their own money
A Youth Savings Account requires a small initial deposit, and since children don’t have a regular income, children’s bank accounts typically require no minimum balance and don’t charge maintenance fees. They often offer good interest rates so kids can watch their savings grow. Find an account that gives you access for a while so you can help your kids learn how to use a savings account. Teaching kids financial literacy early helps improve their chances of future financial success.
How to save for college
Financially literate kids are likely to be better prepared to pay for college and pay off student loans. Still, it’s important to have family conversations about the cost of college before it’s time to pay for it.
Parents should start thinking about how much to save for their kids’ college as soon as the babies are born, but kids can start saving early, too. If you’ve helped your kids open Savings Accounts, they could already be saving for college. Teaching them how to save for college, and why, is essential.
When you’re exploring how to save for your child’s college, research your savings options, including what happens to accounts if your child opts not to attend college. To cover four years of college, plus inflation, you’ll need to save about $200,000 to cover the estimated $50,000 per year cost of college by the time your child is 18. What kind of account will help you reach that financial goal? Here are your options:
- Roth IRAs: Roth IRAs can be used for both retirement and educational costs. After-tax contributions can grow tax-free and you have flexibility with what you invest in. There are annual maximums on contributions and income restrictions, but you can withdraw from your Roth IRA, penalty-free, for qualified educational expenses.
- 529 plans: The proceeds from 529 savings plans investments can be used for any qualified educational expenses (nonqualified expenses are taxed and accrue a 10 percent penalty). After-tax contributions grow tax-free, and your home state could offer tax breaks, resident credits and possible matching. 529s have higher contribution rates than Roth IRAs, and there’s beneficiary flexibility, which could be helpful if your child doesn’t attend college.
- Certificates of deposit: CDs can be a great option for conservative savers. There’s flexibility when it comes to both investment and cash flow since the portfolio doesn’t mature all at the same time.
- Trusts: This is money invested on a child’s behalf, which is then transferred to the beneficiary once they reach the designated age. There are tax advantages for the donor, and the beneficiary can use the money however they choose once it’s received.
- Savings Accounts: Most Americans use a regular bank account to set aside college tuition money. A Savings Account offers the most flexibility and can be used for needs outside of tuition. There aren’t any tax benefits, but earned interest helps your savings continue to grow.
Helping your child graduate without a heap of debt can have lasting and lifelong benefits, allowing them to begin their adult life on the right financial foot.
If saving money for purchases, emergencies, college and retirement simultaneously sounds overwhelming, remember it’s really just a matter of sticking to a few smart money-saving tips:
- Make a realistic budget
- Make savings goals for each purpose
- Use tools to help you stick to your budget and save
- Establish good money-saving habits
- Save as early, as often and as much as you can
- Adjust your budget as necessary
- Choose the right accounts to help you save efficiently
Be consistent with your budgeting, use these tips for saving money fast and you’ll build savings in no time. Stop by Mission Fed and find out more about how we can help you with your financial goals. At Mission Fed, your success is our bottom line.
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