Ryan P. Cleary
Float Finance 5.1: Savings and Where to Grow Them
Float Finance is an ongoing series breaking down the basics of personal finances and money.
In this article we will focus on what saving is, why it is important, ways to find money to save, and the best places to do so.
Why Save Money?
Saving means setting aside a portion of money you receive or earn from any source of income including gifts, wages, or tax refunds. It does not have to be a large portion. Saving money regularly, even small amounts, adds up over time. It is important to remember that saving only counts if you save what you didn’t spend- if you saved $20 on one expense it doesn’t count if you use that $20 on something else.
There are many reasons why people save money. Common reasons include:
To meet financial or personal goals
To build their wealth
So they have cash for emergencies (we call this an “emergency fund”)
To cover times when they have less income or higher expenses
For peace of mind
For a large expense like a down payment on a house or car
Everyone has personal reasons to save.
Quick Tips for Starting to Save
There’s lots of advice about saving but there isn’t a right or wrong way to get started. At FloatMe, we think of saving as being a habit you build and grow with time. That’s why we encourage people to start small and build a routine- just like when you start a fitness routine. Here’s a list of strategies you can use to get started (we suggest picking 2-3 to start):
ATM Fees: Ask your financial institution what ATMs you can use without paying fees (these are usually a few dollars each time). This can save you a LOT of money if you use cash.
Fee Free Banking: Shop around and open a free or low cost checking account. Bank fees can be $10 or more each month!
Buy Generic: This one of our founder’s favorite ways to save. Instead of buying the name brand product, consider the trying the store brand or a more affordable brand. Sometimes the name brand is worth it if the quality is much better or it saves you money (some name brand cleaning products work much better!) but it doesn’t hurt to try the store brand.
Count Coins: Keep a jar that toss loose change into. It can add up and prevents the coins from getting lost.
Direct Deposit: Talk to your employer about having your paycheck directly deposited into your checking account directly and splitting part of your paycheck into a savings account. This saves money (vs a Pay Card or Check Cashing) and makes saving automatic.
Carry Cash: Some people find that using cash to pay for things helps them save money because they have to physically hand over the money. Others find it just makes budgeting easier.
YNAB: You need a budget, so create one and think about where you spend your money and places where you can reduce spending.
Free Fun: Look for free entertainment and events. This is a great way to try out new things and meet new people while allowing you to save money.
Gift Goals: Set limits on gifts with family and friends; this often is a relief for everyone!
Shopping list: Before going shopping, make a list of what you need and stick to it. This helps you go through the store faster (saving time) and helps you avoid forgetting things (so you don’t have to go back again!)
Coupons: If you have access to a newspaper, cut out coupons for products you use and store them. If stores you normally shop at have digital coupons, use those!
Where to Build Your Savings
There are lots of places to build your savings, but there are pros and cons for each. We’ll go through some common ones and mention some less common or more complex ones.
Something important to remember is that at least a small portion of your savings should be easy to access quickly in case you have an emergency.
At Home (or with Family/Friends)
Saving at home (via cash) can be great since there are no fees, no rules, and it is very convenient! However, it is also very risky since your savings can be stolen, destroyed, and it can be tempting to spend. Asking a friend or family member to help you has many of the same benefits but is a bit harder to access (making saving easier) but can cause a strain on your relationship as well; we usually don’t suggest using family or friends.
These tend to be very easy to get and can often be managed online. They also are very convenient to use and sometimes can have your pay directly deposited onto them. Unfortunately, many have fees and in cases of theft or loss they may not be protected. Some cards also may not be easy to transfer funds out of.
Rotating Savings and Credit Associations (ROSCAs) have many names but at there core are a group of people who agree to meet for a defined time-period to save and borrow money together. These are a little more complex but they create a commitment with a group to save money on a schedule, reduce access to money until you need it. However, since these are just a group of people who know each other well there is risk of theft or mismanagement that you don’t have at a financial institution.
This is what most people think of when talking about “savings” at a financial institution. Up to $250,000 is insured by the FDIC or NCUA, meaning that if the financial institution fails your money is still protected. There are also laws helping to protect you against theft. These accounts allow you to set up direct deposits, often have a debit card for easy access, and the money will often early a little interest. Unfortunately, some of these accounts may have fees (though often a minimum deposit or monthly transfer waives them), the interest can be lower than other options, and rules may limit the number of monthly withdrawals.
Other Places to Build Savings
There are other places to build your savings. However, many of these either take longer to access or have additional rules. You should only consider them once you have at least a month of expenses in your emergency fund.
Money Market Deposit Account
These accounts are available from banks and usually offer a higher rate of interest. Some also allow you to write checks. These account often are more expensive (unless you qualify to waive the fees), require a higher minimum balance, and may limit the number of deposits and withdrawals you can make each month.
Certificate of Deposits (CD)
CDs offer higher interest rates than savings accounts but are more difficult to access the funds. When you open a CD you agree with the bank to keep the money untouched for a set period of time (as short as 1 month and as long as several years!). Often (but not always), banks will offer higher interest rates the longer the length of the CD. If you withdraw the money early you will likely lose some of the interest you earned.
Deposit Insurance and Investments
Most deposits in financial institutions are either FDIC or NCUA insured. This means that if your bank closes your deposits of up to $250,000 won’t be lost. This is one of the reasons why savings accounts are safer than saving money at home.
Some people suggest investing via a 401k, IRA, or other type of account instead of using a savings account. While these can earn higher amounts, they are not FDIC insured, take longer to access, and can actually lose value. While they can be helpful, they aren’t a good choice to build your first savings or keep your emergency fund.