The Power of Purposeful Savings
Throughout our lives, we’ve often been advised to save money. Yet, the key to successful savings isn’t just accumulating a stash of cash; it’s about understanding why we’re saving in the first place.
There are two primary reasons to save: safety and security and achieving our goals. But there’s a third, equally important reason that ties into both – to keep us out of debt. Consider those unexpected moments when we lose our job, our car needs repairs, our beloved pet falls ill, or when we yearn for a well-deserved vacation. These situations require savings. Without savings, we may have to resort to credit cards, leading to debt.
We often face a common challenge when trying to save – good intentions but no money left by month's end. That’s where one of the most effective financial strategies comes into play. “Pay yourself first”.
Start by creating three distinct buckets for your savings.
Emergency Fund: For unforeseen emergencies such as a job loss, unexpected medical expenses, or sudden car repairs.
Needs: This category encompasses known non-monthly bills like insurance deductibles and irregular expenses with no fixed amount, such as home maintenance or out-of-pocket vet costs.
Wants: Designed for life’s pleasures this bucket is for things such as holiday gifts, weekend getaways, vacations, or those coveted tech gadgets.
To ensure success, establish your savings account(s) at an institution separate from your everyday checking account. This separation reduces the temptation to dip into your savings. Many banks now offer the convenience of opening a single savings account while allowing you to create multiple virtual buckets, simplifying the process significantly.
Define a dollar amount for each of your three savings buckets. A good starting point is to aim for 3-6 months’ worth of essential living expenses for your Emergency Fund, 10% of your take-home pay for Wants, and 20% for Needs.
Calculate the dollar amounts for each bucket based on your take-home income and then (this is the crucial step), set up automatic transfers from the account where your check is deposited to your new savings account(s).
With this approach, you’ll lay the foundation for a more secure and fulfilling future by building security, achieving your goals, and staying debt-free.