Saving Money
We all know we should set aside money for later, but without a good motivation it’s hard to resist the urge to spend a growing pile of cash. You might think saving money is very straightforward and simple, but there are still a few details to consider:
Saving too much means your money is not being invested for growth
Saving too little makes you unprepared for unexpected expenses
Where should you put your savings?
We will walk you through the different reasons for saving money, and how much you should set aside for each of them.
Emergency Fund
As we’ve mentioned earlier, some types of debts should be avoided like the plague due to the predatory rates charged for them. These will almost always screw up your finance and one of them can erase years of good financial management. Unfortunately, 70% of Americans have under $1,000 in savings.
These are sobering numbers because that means when hit with a sudden expense like a medical bill, most American will have to take out a payday loan or fall back on credit card debt. We’ve already discussed the dangerous of high interest rate debt, so it’s obvious why this situation is terrifying.
To avoid finding yourself in the same scenario, we recommend you set aside at least 3 months of your income in an FDIC insured savings account (FDIC insured means if the bank goes under, the government will make sure you get your deposit back, up to $250,000). Those of you that are more risk-averse can take that amount all the way up to 6 months of your income. This should help pay for any unexpected large expenses that arise, or pay for your living expenses while transitioning between jobs.
Down Payment
If you want to buy a house you will probably have to borrow money for the purchase. However, while the mortgage will pay for the majority of the cost, you still need to pay the remainder in the form of a down payment which usually ranges between 10 - 20% of the building’s price. Special types of loans like FHA or VA loans might reduce that percentage to 0 - 5%.
If you know you plan to buy a house in a few years and need to save up for a down payment, it is a good idea to work your way backwards to see how much you need to save. If your goal is to buy a $500,000 house in 5 years, then assuming a 10% down payment, you will need to save up $50,000.
These big numbers can be intimidating, and at first glance, it can seem like a challenge too hard to overcome. However, our example of $50,000 in 5 years works out to $10,000 per year, $833.33 per month, $208.33 per week, or $30 per day. That’s a much more manageable and achievable goal.
Wedding
Getting married to the love of your life is a wonderful milestone in life, but it can also be insanely expensive. The average wedding in 2019 in the United States costs an average of $33,900, before even considering the cost of the honeymoon. That’s almost a Tesla Model 3!
Faced with this lofty price tag, a lot of couples decide to finance their weddings with borrowed money. This might seem like a good idea; after all, a three-figure monthly payment looks much more appealing than a five-figure lump sum payment. However, recall our earlier discussion on debt, where we calculated how a high-interest rate loan can be detrimental to your finances. The lowest rate for a wedding loan is around 6%, but since these are uncollateralized loans (a loan that is not backed up by anything tangible), it’s more realistic to expect a double-digit interest rate.
Taking out a $20,000 wedding loan for 10 years at a conservative 10% interest rate means you will repay $264 per month for a total of $31,716. If you were able to plan ahead, you could start set aside the same $264 per month into an investment with a 9% ROI, and take out $20,000 in profit after only 5 years and 7 months.
It’s an understatement to say that marriage is a big deal. As one of the most important decisions you can make, it’s probably a good idea to have candid conversations with your partner about it early on. Draw up a list of all the things to buy for your wedding, and go through each to see which ones are must-haves and which ones are nice-to-haves. Some people might be afraid that not spending enough money is a sign that they are lacking commitment or love, but that’s a rather silly notion. Instead of paying for something neither of you want purely to satisfy social norms, why not use that money on your honeymoon instead and create some extra awesome memories to last a lifetime?
Starting your preparations early and having honest conversations around marriage will not only empower you to better manage the expenses that come with the big day, it’s probably also a good idea in general to have frank and open communications for these joint major life choices.
How to Save Money?
We live in a time of unusually slow wage growth and annoyingly high expenses. A lot of people were employed or re-employed in the aftermath of the 2008 financial crisis and had to accept lower starting salaries due to the economic conditions. Since salaries increase as a percentage of the starting salary, this handicapped income growth for millions of people.
As a result, you might find it hard to meaningfully save up money for a rainy day, or set aside money for your own home. While we can’t help you negotiate a raise (unfortunately), there are tips and tricks to help you fill up the piggy bank.
Record your expenses - every time you make a purchase, record it. This will help you see where you are spending your money and help you understand your own spending habits.
Cut useless expenses - instead of paying $5.48 for Starbucks, make iced-coffee at home for 20 cents per cup; instead of spending $10 at a cafe, make your own avocado toast for $1.5; get ride of subscriptions for services you no longer use but are still paying for. A lot of these small savings can add up over time.
Budget your savings - similar to how we calculated that saving up $50,000 in 5 years means setting aside $30 per day, work backward from your future goals to see how much you should save per month.
Automatic savings - set up regular transfers so you are automatically deposited the budget amount of savings into your savings account (Guardian offers this exact feature for free).
PS: sorry for the #ad, but instead of getting paid next to nothing with regular savings accounts, why not use the Guardian Credit Building Savings Account to improve your credit score while growing your savings?
Up Next…
Debt and savings might not have been the sexiest topic to talk about; unfortunately we have one more section before we dive into investing, stocks, all that fun stuff. Join us as we demystify your credit score, and your insurance (they are boring, but important)…
