Importance of a savings account: Second in a series of financial tools to master
This is a second in a series of financial tools to master: a savings account. We will be covering basic concepts of WHY a savings account is an important tool to master and how to open one. In regards to early retirement, it’s vitally important to have money readily available via a savings account (liquid assets), in the event the stock market is in a bear market (prolonged price declines of around 20% or more from the highs).
If you’ve missed the first topic ‘Importance of a checking account...’ please click here.
One of the the most important things to have is an emergency fund. Why? Well, a thing called life will find a way to surprise you (not always in a good way) when you least expect it. Just when you’re humming along, enjoying life, it’ll throw a curveball at you! Your car might break down, your checkup at the dentist becomes a major root canal, or your water heater goes out. I’ve had all 3 things happen in my life, so I know what that feels like.
It was so strange how universe knew to take my money when I managed to save up some! I’m sure others can relate to this. It seemed every time I had managed to save $500 when I was starting out, my car would break down taking it all back, or several family members would have birthdays coming up...
Bottom line is this: Always have enough to cover for unforeseen events. These are guaranteed to come up.
Without having an emergency fund, your financial life will be a constant struggle. A simple car repair of $500 will be a catastrophe when it doesn’t need to be. Worse, you may end up using your credit card to pay for this. The ABSOLUTE worst thing you can do is to borrow money from one of those ‘payday loans’. Whereas credit card companies may charge anywhere between 10 to 25% on interest, payday loans will charge way beyond that. *A quick Google search shows interest rate of 300+ % on these loans!
For those of you that require an example, here it is if you’re considering a payday loan:
Suppose you borrow $1000. At 300% interest rate, you’ll owe $4000 at the end of the year. That’s $1000 of initial amount PLUS $3000 in interest. Keep in mind some payday loans’ rates are even higher than this!
You can prevent all of that by starting your own emergency fund. This is where a savings account comes in. It’s better to save this via a savings account rather than a checking account as savings account will return higher interest payment compared to a checking account.
I always recommend a ‘slow and boring’ method to save/invest. Don’t be discouraged when initially saving up for an emergency fund in a savings account. It may take some time to get there, but once you finally get to your first thousand dollars, you’ll feel so much better! Like anything in life, anything that’s worth anything will require hard work and persistence.
Now that you know why a savings account is so important, let us now get into how you can open up an account.
- Do not open a savings account from your bank! Most banks currently pay a pitiful interest rate on savings accounts. A quick google search shows an average rate of 0.05 %. This means on $1000, you’ll get fifty cents per YEAR!
- Do open an online savings account! There are plenty of options out there. There are banks like Ally, American Express, Vio, Synchrony, etc. Do a google search for ‘best online savings accounts’ to find one that makes sense for you. Online savings account will pay about 10 times more than a regular savings account! Why NOT keep more money that comes in via interest paid to you? Some accounts will require a minimum deposit of say $100, while others will not. Either way, you’ll be on your way to being a more financially secure person!
- When you get a paycheck coming in, get into habit of ‘paying yourself’ first. This means before you pay your bills, put aside some money each paycheck into this savings account. You can set up a transfer from your checking account into your online savings account. Typically, you would login to your savings account, then look under section ‘transfers’. You would be setting up either a one time transfer or a recurring transfer to move money from checking to savings account. Set up the amount you want to transfer then set a date for this to happen. I recommend doing a recurring transfer so you don’t even have to remember to do this each time.
- Start saving until you get to the first goal of $1000. Have a small celebration, then keep going. Save your next thousand, then the next and so on. Don’t be satisfied. Keep doing this until you have few thousand dollars sitting in your savings account! Trust me, you’ll feel so much more secure when you have an emergency fund. The ultimate goal is to save at least few months’ living expenses saved up in your account. In the beginning, this will feel impossible. But it can be done.
- Having an emergency fund will make life easier. If life throws a curve at you, you can deal with it. If you’re laid off at work, you’ll at least be able to survive knowing you have this to get you by. ‘Save it for a rainy day’ is such an apt phrase. It’s guaranteed that life will happen. Why not prepare for it?
Please check out our YouTube channel ‘Wandering Money Pig’ showcasing our travels and our Pomeranian dog! https://www.youtube.com/channel/UC3kl9f4W9sfNG5h1l-x6nHw
