Find out how to build a smart savings account without going broke. Learn how much you should put in savings, how to choose a bank, and how to allocate your income to balance savings, spending, debt, and investing.
Most of our parents and grandparents come from a generation that aspired to work hard and save money. As a result, they taught us to save, save, save!
Unfortunately, the save-save-save approach doesn’t work in today’s economy.
For starters, if you put all your money in a savings account, it loses value over time thanks to inflation. The interest you earn from your savings can’t keep up with inflation, so it costs you money to save.
But that’s not all.
No matter how much money you save, it still doesn’t guarantee your financial security. Cash can lose its value, sometimes very quickly, and if the value of the dollar suddenly drops, then your big fat savings account won’t be worth as much.
Even though it costs you money to save money, you still need an emergency fund to protect your family when unexpected things happen.
Strategic saving means making the most of your savings by understanding:
- Where to save your money so you earn higher interest and avoid bank fees
- How much to put in a savings account
- When you should stop saving and start investing
In this article, we show you how to save your money strategically so you can build an emergency fund, then stop saving and start building wealth.
Here’s what you’ll learn:
- Why Saving Money Matters – Why emergency savings is crucial
- How to Save Strategically – Find out why, how, and where to save your money without losing it to fees and inflation.
- When to Save Money, Pay Off Debt, and Invest Your Earnings – Trying to decide whether to pay off debt or save your money? Find out exactly how to balance your savings vs. debt, and when to begin investing.
- When to Save Money vs. When to Spend Money – There’s nothing wrong with enjoying nice things! Learn how much of your income to set aside for spending and enjoying yourself while you’re on the way to building wealth.
- When to Save Money vs. When to Invest When can you start building wealth? Sooner than you think! Find out how to start building wealth, even as you’re just getting started!
- How to Split Up Your Paycheck
Why Smart Saving Matters
“In a typical year, more than one-third of American households (34%) encounter an unexpected major expense such as home damage, financial scams, or health issues.”
Yet, nearly half of Americans don’t have enough cash saved up to cover a small emergency like a $400 car repair.
Thinking like the majority is a dangerous mindset because it puts you at risk of losing your home, your possessions, and even your job when something unexpected happens.
And the unexpected always happens eventually. We all experience “life” at one time or another — no one is immune to financial emergencies.
A healthy savings account, an “emergency fund,” will help you get through those unplanned emergencies so you can keep moving forward and building wealth.
Are you prepared?
How well-prepared are you for an emergency? Could you cover any of the following scenarios?
- Temporary loss of work
- Car repairs
- Cell phone or laptop repairs
- Veterinary care for your pet if they get sick
- Wedding or funeral that requires travel
- Car repair
- Illness, injury, or unplanned doctor visits
Building a savings account equal to six months of living expenses will help you cover most of life’s unexpected expenses, so you can care for yourself and your family without the fear of losing your home and security.
How to Save Strategically
An emergency fund equal to six months of living expenses is critical to your ability to build wealth, and the best place to put that money is in a bank.
However, putting money into a bank account is a quick way to lose money if you don’t know what you’re doing.
That’s why it’s essential to understand the basics of banking and learn how to build a smart savings account that acts as an emergency fund — not an investment strategy.
Savings Accounts Can Be Expensive
The interest your money earns in a savings account is very low — let’s be generous and say 1%. Inflation, on the other hand, often costs about 1 ½ – 2%. This means that while your cash is sitting in the bank, it’s losing value.
For example, in 2018 – 2019 the inflation rate was 1.76%, and the average interest on a savings account was 0.09%. So, if you had money in a savings account that year, you lost 0.76%.
It’s not just inflation that affects your savings, though. Many banks charge unnecessary fees for the “service” of holding on to your money. The $10 – $15 monthly fee charged by many banks adds up over time, causing you to lose even more money.
Saving Is Not A Substitution For Investing
Building an emergency fund is essential to building wealth, and it’s okay to pay a small amount to save your money in a secure bank.
Saving money doesn’t build wealth, though, and it’s no substitution for investing.
Once you’ve saved six months of living expenses, you’ll begin funneling your income toward investments that allow your money to earn real interest, such as real estate and stocks.
Choose Your Bank Wisely
Online banks typically offer high interest rates since they save a lot of money on overhead by not operating brick-and-mortar locations.
Look for an online bank with higher interest rates and zero fees that offers easy access to your cash. Finding the right bank means you can come close to meeting inflation rates so that your emergency fund savings costs very little to maintain.
Putting all of your money into a savings account is a bad idea, because your money depreciates in a bank.
However, saving your money strategically by building an emergency fund and choosing the right bank is one of the best things you can do for you and your family.
When to Save Money, Pay Off Debt, and Invest Your Earnings
Building an emergency fund and paying off debt are essential steps for Minority Mindset thinkers, i.e., people who are serious about building wealth.
When you’re working toward saving, paying off debt, and investing, it can be confusing trying to decide which to do first. If you’re unsure about what to do with your money, or if you continually switch priorities, you’re likely to make no progress at all.
Here’s how to balance saving your money with paying off debt and investing:
1) Build a short-term savings of $2000 first.
2) Next, pay off high-interest debt.
3) Third, put aside $500 to start investing.
4) Finally, begin allocating your earnings, including building the rest of your savings.
Step #1 – Build Your Short -Term Savings
Before you funnel your income toward debt or investments, build a short-term emergency savings of $2000.00.
Your short-term savings is only a portion of your emergency fund and it won’t cover everything, but it will give you a good chance of getting through unexpected financial emergencies.
It may be tempting to use your money to pay off debt, or difficult to consider skipping your annual vacation, to put money into an emergency fund.
However, the consequences of not making those sacrifices can be sobering. If you encounter a financial emergency that you can’t afford, it can prevent you from getting to work or even being able to work.
For example, if your car breaks down and you live outside the city, chances are you won’t be able to get to work.
If you need medication for an illness, but can’t afford it, you may lose time from work or the ability to do your job.
Build a short-term savings of $2000 as quickly as possible, so you’re not left unprotected financially. Along the way, find ways to save quicker by cutting expenses and finding ways to earn extra money.
Step #2 – Pay Off High-Interest Debts
Over half of consumers say they constantly worry about money, but being debt-free is the #1 way they define financial security.
Yet, Americans owed $822 billion in credit card debit in 2019, which is nearly 5% higher than the year before. Despite craving a debit-free way of life, people continue to live above their means, buying things they can’t afford with credit cards and loans.
Living an interest-free life means not wasting your earnings on interest, fines, or fees, but instead putting your money in places where it can make more money.
Pay Off Debt Strategically.
Once you’ve built a short-term emergency savings of $2000, you’re ready to begin paying off your high-interest debts.
If you have high-interest debt, such as credit card debt, you’ll need to take extreme action to pay it off. High-interest debt is expensive, and it can drain your finances in a way that severely affects your lifestyle.
If you’re carrying high interest debt, you should freeze your spending until it’s paid off. This includes skipping any of the luxuries you’ve become accustomed to, such as:
- Eating (or drinking) out
- Trips to the spa
It’s essential that you stop spending to get your high-interest debt paid off.
You might also consider picking up additional work or scaling back on your living expenses, if your debt is high.
Keep in mind — these sacrifices are temporary!
It takes hard work to climb out of high-interest debt, but once you do, you’ll build wealth and be able to afford plenty of luxuries!
Step #3 – Put Aside $500 to Begin Investing
Once you’ve paid off your high-interest debt and built a $2000 emergency savings, you’re ready to set aside money for investing.
Begin by setting aside $500 to invest in your future wealth.
If you only have a few hundred to invest, consider putting it toward educational expenses such as courses or books. Developing new skills that help you land jobs or start your own business can set you on the path to earning a higher income.
Next, move into passive investments such as stocks and ETFs (exchange-traded funds). These allow you to become part -owner in your favorite big company, and you can get started with less than $100!
Step #4 – Allocate Your Earnings
Once you’ve saved, paid off some debt, and set aside $500 for investing – congrats! – you’ve built a financial base, and now you’re ready for the fun part!
Allocating your earnings means you’ll funnel a percent of your income toward several things:
How you allocate money depends on your age and family situation.
For example, if you’re supporting a family with children, you would funnel your earnings into the following:
- 10% savings
- 15% investments
- 75% spending
If you’re young and have no children, mortgage, or other major expenses, you allocate your income differently:
- 20% savings
- 30% investments
- 50% spending
If you’re young and single, and running your own business, you might funnel your income this way:
- 20% savings
- 30% or more toward investing in your business
- 50% spending
To find out more about how to allocate your income, check out the Savings Fund Challenge to find a plan that fits your lifestyle.
Until then, save your money strategically to protect yourself and your family without losing money to low interest rates and unnecessary bank fees.
Strategic Saving — The First Step Toward Building Wealth
Shop around to find a bank, such as CIT, that pays better interest rates and doesn’t charge monthly fees.
Smart savings means understanding how much to save, why you’re saving, and how to allocate your income in a way that helps you build your full emergency savings. It’s the first step toward managing your money and building wealth so that you can enjoy all the luxuries life has to offer!