Introduction to Savings/Investing
Saving Basics Savings is the portion of current income not spent on consumption. Savings accounts provide an easily accessible place for people to store their money to meet daily living expenses and to have money for emergencies. Financial experts recommend individuals keep a minimum of three to six months of salary in a savings account.
Savings Account Uses Emergencies Expenses Future Purchases Future Investing
Reasons People Should Save Emergencies It is recommended individuals have a minimum of three to six months of salary in savings accounts for emergencies. Examples of emergencies can include illness, losing a job, or immediate need to replace a large item such as a washing machine. Expenses Savings accounts can be used as a budgeting tool to manage monthly expenses. Future Purchases Money can be used to meet future goals such as a college education, new car, down payment on a home, or a new stereo. Investing After an individual has established a savings account, money should be invested monthly for future income.
Saving vs. Investing Saving The portion of current income not spent on consumption. Place to store money for daily expenses and for emergencies. Liquidity is how quickly and easily an asset can be converted into cash. In an emergency, cash needs to be easily accessible. Savings accounts are more liquid than investment accounts. Generally yield a low interest rate, often barely meeting inflation.
Saving vs. Investing cont. Investing The purchase of assets with the goal of increasing future income. Develop and implement a savings plan before beginning an investment. Investments are not as liquid as savings. Rate of return, or annual return on the investment, varies, but is usually higher.
Why People Don t Save People are not having their current consumption needs and wants met. People do not know how much they need to be saving or investing for future goals. Money in savings accounts earns such poor interest rates. It barely (if at all) keeps up with inflation. Investing usually gains higher interest rates. Individuals justify not needing money for emergencies because they have credit easily available. People feel they have adequate insurance and job security; therefore they do not need money for emergencies.
Developing a Savings Plan Track spending for one month to determine where money is currently going. Evaluate spending and determine where money can be saved. Decide what amount will be put into savings per month, put decision into writing and stick to it! Now you have a Savings Plan. Be willing to make adjustments. If the savings plan is not working evaluate why.
Pay Yourself First Put money away into a savings account or investment BEFORE you pay other bills or use for spending.
70-20-10 Rule Spend 70% of money you earn Save 20% of money you earn Invest 10% of money you earn
Conclusion Savings accounts provide an easily accessible place for people to store their money. Savings accounts can be used for daily expenses, emergencies, future purchases, and future investing. It is recommend that individuals keep a minimum of three to six months of salary in a savings account. Investments generally have a higher rate of return but are harder to convert to cash than savings. Pay yourself first. Develop a savings plan, write it down, and stick to it!