The miracle of a savings account is that it can help in so many ways.
If you’re short on income, your savings is there. If you’re heavy on expenses, your savings is there. If an emergency tosses you around, savings can steady your financial life.
Unfortunately, a savings account takes some belief. It’s not quite magic unicorns or conspiracy theories, but it does require some trust in the unknown. Namely, that setting aside money now for a future event, is a better idea than spending it right now in the present.
Pew’s Survey of American Family Finances found that 83 percent of Americans worry about their lack of savings. GoBankingRates found that 69 percent of Americans have less than $1,000 in their savings.
Once you have started saving, that future event doesn’t have to be financial catastrophe, but something fun you can look forward to like a vacation or a major purchase.
The trick is to get started and then let it handle itself. Saving 10 percent of your income, right off the top, is the easiest way to ensure you have money set aside and are continuously putting money away. You can automate your saving. You can restrict access to the account where you’re putting your savings and you can let it grow out of sight to reduce the temptation to spend it.
Starting with 10 percent today can grow an emergency fund in about six months. If you get paid every two weeks, in 20 weeks you’ll have an entire paycheck saved. In about a year, you would have put away a month’s worth of income, plus a little bit extra.
Would you feel better prepared if you knew that whatever happened you had a month before you would run out of money? I would.
In a study of financially fragile households, savings was the most common coping method for a financial emergency. It was most often the only thing needed to handle the emergency and people with savings were more financially stable when there weren’t emergencies.
Using money you have saved makes all those things possible because it has the lowest financial and transaction costs since it’s already your money. It has the lowest social cost and requires the least effort because you don’t have to involve anyone else in finding money to pay for things.
In building up an appropriate emergency fund and saving money for future expenses, you are taking a long-term approach to your finances and aren’t worried about satisfying your short-term thinking.
A study for the Journal of Cognitive Psychology found future plans that are specific and apply to the present situation result in better decision making. Taking the future into account also made people more likely to save. So set a savings goal that is specific and applies to your current situation.
You could start with saving enough money for car repairs or to completely cover one of your insurance deductibles. Once you have that saved, you can start saving for a month’s income. To help make the goal applicable to the present, provide yourself with rewards for reaching the goal or put part of what you’re saving into an account for a vacation or something that feels like a prize to you.
Start saving today with the Mvelopes budget app and you can find even more money in your budget to put toward your goals.