How is a Savings Account Most Useful?
As a child, you might think of a savings account only in terms of a place to sock away your birthday and Christmas money to keep it safe. Your parents probably explained that you would earn interest on it and that might have made sense and it might not have.
As you got older, growing your savings probably made more sense. You might have started exploring ways to use savings to more quickly increase your wealth.
Perhaps you stuck with a savings account but sussed out the high yield options. Maybe you moved to using a money market account. Perhaps certificates of deposit (CDs) became your thing. You might have purchased life insurance with a cash value account. Investment accounts could have become your thing. However you use a savings account or whatever type you chose, you need to maximize the usefulness of your savings account.
Since we’re talking savings, our discussion revolves around building a nest egg. Building wealth one deposit at a time proves much easier than trying to do so through a handful of lump-sum deposits.
Before you scoff, hear me out. If you rely on a scattering of deposits made at disorganized times, you reduce your overall earnings. You earn interest each month on your balance. Many accounts compound interest daily. You earn a guaranteed annual percentage rate of earnings or APY. When you make regularly scheduled deposits to a savings account, you increase your wealth in two ways.
You build the account and the bank contributes the interest.
As you add to the account each time, you also grow the amount of money on which you earn interest.
Essentially, you pay your future self twice with each deposit. You want to be nice to yourself, don’t you?
You lose that if you simply dump in $1,000 each quarter or annually, such as a deposit to an individual retirement account like a 401(k). You have reduced your daily balance, thereby reducing your monthly balance and your APY earnings. You do not earn money on the amount you have in the bank on one specific day of the year, but on what is there all along. That means:
You Need a Budget
Gasp. I know. I discuss those a lot, but budgets help you spend more effectively. A budget places in front of you how much you have coming in and where you need to spend it. It lets you build wealth by organizing your expenses and creating an effective method of spending that makes your money go further.
The practice of budgeting can actually get you more of the stuff you love because, during the process, you find the places you waste money on things you do not really care about instead of the things that you do love.
Make a budget. Include every expense. If you find yourself without money each month, you probably need to figure out where it all goes. You do not need to be a financial genius for this. You just need an expense tracker.
There Is an App For That
Whether you use Android or Apple mobile devices, you can install an expense tracker app. You link your credit cards and debit cards to the app and each time you spend money; the tracker dumps it into the right category. Rent goes into housing. Starbucks goes into dining out. Movie tickets go into entertainment. Groceries go into food.
These trackers let you set up your own custom categories or you can start with the generic ones. If you just started with financial management, you can stick with the generic ones and use that in your budget, too. Your tracker categories become the ones you use in your budget.
Mad Kernels’ Expense Manager Money Manager Expense Tracker
The clunky name gets you daily expense reports, monthly reports you can download as a .pdf, and an integrated look at all of your accounts. It also has amazing rating on Google Play and it has been downloaded over 1 million times!
Mint
It earned 4.4 stars out of five but provides one of the best-known apps with more than 10 million installations. Some people have had a tough time getting the app to let them add their credit union or hometown bank, but otherwise, it has rave reviews.
Fudget
Those looking for an option for the iPhone can budget and track as an individual or family of up to six members using Fudget. No one can fudge their spending though since this lets the financial manager of the family see every person’s expenses as they get made. Gone are your teen’s complaints that they just do not know where their money went or that such and such cost more than they thought it would. Choose from a free or pro version. This app earned 4.8 stars out of five.
Stick To Your Budget
You need to see it immediately improve your life to make you want to do it more often. The easiest habits to stick with are those that let you see quick improvements. That is why weight loss programs like Weight Watchers teach people the 64 ounces of water a day trick the very first meeting. Just by drinking the right amount of water each day, they lose a couple of pounds in the first week. When combining that with five servings of vegetables per day cooked a healthy way, they typically increase that first week’s weight loss to five pounds.
That instant pay-off helps them stick to the new eating plan. That program designed its eating plan so that each participant typically loses at least a pound per week, often more than that. That helps people stick to it.
Learning to manage money works the same way. You need an instant improvement in your life to help yourself stick to the new way of budgeting, managing, and tracking. You need to find a way to treat yourself without spending money, but in a way that ties to the money you saved.
How Is a Savings Account Most Useful? Goal Setting
Pick a goal, any goal. You need one short-term and one long-term. You can choose an item you want to own or a vacation to fund or the home you want to own when you turn 50. (You will someday although as you read this it probably seems wildly far away and unlikely, especially if you beer bong and hit the beach on spring break. It’ll happen though and you need to be ready.)
Short-Term
This goal should take you six months or less to reach. Perhaps you want to purchase a new stereo or a washer and dryer set. It could be a new TV you desire. You set the goal and divide by six to learn how much you need to save each month. Divide the monthly amount by five, so you have the weekly amount you need.
If you work as a day laborer, you can further divide to get the amount you need to save each day to reach your goal. (Day laboring is more common than you think, from temp work to migrant workers to house cleaning services.)
Long-Term
This goal should take you between two years to ten years to reach. You can set longer-term goals than that, but start with this length. You want to set something that lets you see regular progress. This might be a fabulous vacation you want to take like summer in Europe after college graduation or purchasing a brand-new car. Maybe you want to build investments and you know that it will take you a while to purchase what you want.
If you can save $1 per day, in just more than three years, you can purchase a CD or a significant amount of stock in a company. Each dollar goes into savings and you earn interest on it, so you build wealth a little at a time. The CD pays you greater interest. The stock can significantly increase. All the while you save, you have an emergency fund to turn to should something happen.
$1 a Day
Many people fail at their goal because they set something lofty immediately that in their current situation, they cannot conceive of earning or saving. You have to set goals in the context of your current situation. If you have no job and no savings then a viable goal would be to find a way to earn $1 per day.
That may sound silly to a US citizen of average income because that person earns $70,000 per year. My overseas readers can envision that easily though, especially those living in Third World countries, also called developing countries. In those locations, apps like Acorns and Stash provide a viable method of saving since they provide a way to earn interest on pennies per day.
Your context decides your initial goals and as your context changes, so do your goals. Once you reach one, you set another, always building upon the prior goal. You should never say you are “done” because the day you stop setting goals should be the day you die. As long as you live, you should have a goal to make your life better.
How Is a Savings Account Most Useful? Savings Calculators
Enter the wonderful world of savings calculators. Perhaps you work hard but suck at math. Budgeting on your own would create a fiasco. That’s fine. Use a savings calculator.
These snazzy online gadgets let you type in the amount of money you earn and your bills and figure out how much you can save. Others do the reverse math for you. You enter the amount you want to save and the date by which you want to save it. The calculator does the math for you.
You can play with the amounts you want to save and the date by which you would achieve it. This lets you decide on a savings plan that lets you reach your goal in a comfortable manner by a date you choose. You can save just a little bit each day and build your savings.
Know Your Money. Take Care Of Your Money.
How Is a Savings Account Most Useful? Assets Accumulation
Once you reach the stage of assets accumulation, you have saved in a regular savings account or a high-yield account. You move into the place in life where you purchase CDs or open a money market account. Perhaps your assets become stocks you purchase.
You Have a Lot of Choices
Many good ways to save money exist. The word savings relates to many assets besides a traditional account. You might purchase a property or a house. You could purchase a rental property. Perhaps your assets tend toward the traditional though and you want a multitude of accounts with actual money in them, so you keep only liquid assets.
Liquid Assets
A liquid asset you can access immediately as cash. You could sell stock in one day, so that qualifies as liquid. You can withdraw money from a bank account, so that also qualifies as liquid. You should keep the majority of your savings liquid, so you can easily access them in an emergency.
To Conclude
You can easily start saving today. Even if you do not have access to a bank account, you can save, then open one. Some accounts online, you can open without immediate deposit. This lets you deposit via your new paycheck electronically. You just provide your employer with your account information and direct deposit your pay. Varo Bank offers this option, so you can open an account online, then deposit electronically. You can also deposit to many online banks via Walmart or other physical loading locations. Some allow you to link a PayPal or Payoneer account, then transfer from it.
Your savings options skyrocket as soon as you begin the process of saving money instead of spending it. While you must pay rent, utilities, and buy groceries, other things remain optional. The sooner you cut out the optional items and redirect that money to savings, the sooner you build wealth.
So, how is a savings account most useful? It provides you a place to store money that earns interest plus a place to integrate your goal setting. It provides a jumping-off place for building assets to accumulate wealth.