How important is saving money? Saving money is vitally important. In fact, it is one of the single most important steps to achieving most of your financial goals in life and becoming financially free. The sooner you begin to save the better off you will be later on.
Having a savings in place can also serve as a form of protection during a financial crisis. A financial crisis would include any of the following:
- Job Loss
- Unexpected expenses (i.e. auto repair or medical expense)
- Death of a family member
At the core of having an adequate savings is debt avoidance. A savings serves as your cash reserve or safety net when you need it. The key is to have it in place before you actually need it.
How Much Should You Save
The rule of thumb is to save a minimum of 10 percent of your gross income or take home pay, in addition to your retirement planning contributions. By doing this on a regular basis you become used to it and you learn to live below your means. If you are able to save more then 10 percent you should do so.
It is also recommended that you have three to six months worth of expenses saved up as your emergency fund. This amount includes all expenses, fixed and unfixed. For example, if in January you spent a combined total of $2900 on mortgage, car note, utilities, insurance, food, credit card bill and other expenses then you would need to multiply $2,900 x 3 at the minimum. This means you should have between $8,700 and $17,400 saved up for emergencies.
Unfortunately, the sad reality is that many people live paycheck to paycheck with little or no savings. This is not good. You should work to build your reserve as fast as possible.
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Automate Your Savings
Most payroll providers, such as ADP® and Paychex®, provide an auto transfer feature directly to your savings when you get paid. For example, if you elected to transfer 10 percent of your after income to your savings, on payday 90 percent of your after tax dollars would go into your checking account and the remaining 10 percent would go to your savings account. It's that simple. You eliminate the guesswork and don't have to worry about it.
Start As Early As You Can
In order to truly become financially free you will have to start saving at some point in your life. Ideally, you should start in your twenties. Understandably, your income levels at that age will not be as much as someone in their fifties. The key is to simply start where you are. As time progresses, your income levels will increase in direct proportion of your experience and educational advancement. This means that your ability to save more will increase as well. It is recommended that you start out saving 10 percent of your after tax income. As you receive raises and bonuses, if you stick to the same 10 percent savings, over time your savings levels will grow and grow.
There are several benefits of starting to save at an earlier age. The primary reason is that you have time on your side. The sooner you begin, the more you will be able to accumulate over time. This protects you when emergencies come. By building your savings now you will have a larger safety cushion available when you need it.
There are three primary factors that determine your savings accumulations levels:
- The amount you save;
- The interest rate of return;
- The length of time you save.
The sooner you start the better.
Final Tips on Saving
Growing your savings can take time; therefore, start as early as possible. The amount doesn't matter in the beginning. Just start somewhere and be consistent. Condition yourself into not missing or needing the amount you save. Overtime, your savings will grow due to your diligence. Here are some tips on saving to get your started:
- Save a minimum of 10 percent of all after tax income;
- Use a direct savings account deposit feature offered by your payroll provider;
- View your savings as another bill that has to be paid;
- Whenever you get a raise, increase your savings amount by a half percentage point or more;
- Save 10 percent of all cash gifts you receive over the years;
- Once you pay off a line of credit (car note, credit card or mortgage) continue to pay that same amount toward your savings.