In general, we spend too much and save too little, or nothing at all. We believe every adult should be able to claim they have three different types of savings accounts: an emergency fund, a retirement account and a savings account.
Emergency Fund
Especially after the year we just had, and emergency fund is a crucial part of your savings. Many Americans experienced some kind of financial shock this past year. Many of these experiences could have been helped by simply having an emergency fund in order. Having an emergency fund can be a crucial safety net for unforeseen circumstances such as job loss, declining health, repairs, etc.
A typical emergency fund can be anywhere from 3-6 months of expenses. When creating the budget for your emergency fund, think of everything you need to pay for; including housing, food, bills, childcare, and those items that only come around once a year like car tabs or insurance. Make sure to adjust your emergency fund when you have more or less expenses throughout the year.
Retirement Account
Many people are not prepared for retirement because they are not saving enough money. Start now so you don’t have to play the hard game of catch up later.
You can contribute the same amount toward retirement but end up with drastically different results if you start saving at different times in your life. The power of compound interest is the best reason to start saving sooner than later.
How much should you be saving for retirement? Well, there is not a one-size fits all answer for what the right amount of money is for your retirement. You may want to travel more, get a second home, or live a simple life. Meeting with your financial advisor is a great way to help determine how much you will need to save for the type of retirement you desire.
Savings Account
Think of your savings account as the fun money you get to spend after taking care of your responsibilities. It’s where you can save for major purchases, like a new car or simply to just update your wardrobe or buy that couch you have had your eye on.
The amount to have in your account should be adjusted due to ever changing circumstances. Figure out what you need to be saving for the major purchases you wish to make in the future. Just because your savings account might be getting bigger and bigger, don’t slow down. There is no such thing as having too much savings.
Overall, it is better to have money in the bank than to indulge in every desire. Be ready for any financial emergency that comes your way. Are you saving like you should? Give us a call if you want to discuss these different saving strategies.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (12/20)