We all know that we’re supposed to be saving money. We have to spend less than we earn, tuck money away in investments and tax-free accounts, and prepare for our eventual retirement. But, while we’d all love to retire, this sort of saving doesn’t exactly sound exciting. It’s easy to forget that saving is also good for a reason that’s a little less deferred: big purchases, from your next home to your new favorite recreational vehicles.
How much will you need?
First things first: we need to know how much we’re saving for. Do you want to redo the entire kitchen, or just install some new luxury kitchen appliances? And how soon do you want to get this new kitchen? These questions will set your budget and your timeframe. Balance what you want with what you think you can achieve – do you need three months to save for this new kitchen, or a year? What brands of kitchen appliances will you need?
Now lay out your saving schedule (or a few savings options). Next, we’ll try to fit it into your overall budget.
Paying yourself first
Whether or not you’re saving for a big purchase, you should always have a budgets. Budgets help protect us from running up debt, and they help ensure that we’re saving at least a minimum amount for retirement.
The way to fit savings into your budget is to use a principle called “paying yourself first.” The idea is that the first things we set money aside for always get covered. We know to pay our bills and our rent, for instance, so we tend to pay those first and only then spend money on luxuries and fun. So when we run over-budget on luxuries and fun, those things affect what’s left – which, too often, include savings goals.
So treat your savings goal as an essential expense, like rent or utilities bills. Yes, you should have a lot of other expenses like life insurance as well (if you don’t, check out options from a broker like Our Life Covered), but it doesn’t mean you should be exhausting your budget paying for it all. “Pay yourself first,” and let the rest of your budget work around your savings plan.
Investments and bank accounts
Where should the money you save be going? It should be going somewhere where it earns interest.
Savings accounts at banks and credit unions earn interest, which means they grow over time. In fact, the growth mounts, because each time you gain more interest you’re gaining it not just on the amount you initially invested, but on the total amount you’ve accumulated so far. This is called “compounding interest,” and it means that your interest gains accelerate over time. That’s far preferable to stashing your money under your mattress, where it will slowly lose value thanks to inflation.
For longer-term goals that require lots of money, you’ll want to invest in stocks and bonds. Investments can earn interest faster than bank and credit union accounts. Since investments can lose money in the short-term and since some investment properties penalize you for withdrawing money too soon after investing, investments aren’t always the best solution for smaller, short-term savings goals. They’re key, however, for larger goals and for retirement.
Whatever you’re saving for, you’ll find that you can achieve your goal by paying yourself first and letter your savings grow interest. So save with a goal in mind – it makes saving more fun, and it means that you’ll be able to reward yourself with something great down the line.