Looking Closer at Savings Strategies
Most articles about saving money talk about the thousands of little ways you can trim costs from your daily life. Other articles weigh paying down debt first against setting up an emergency fund, or talk about the benefits of paying off your mortgage early. But let’s get to the heart of the matter – how do you like to save your money? All savings strategies have advantages and drawbacks, and coupled with your unique personality, you may find one savings strategy works best for you.
The benefit to putting aside money in lump sums is that you rarely miss it. Big money may come your way from a variety of sources, like a tax return, a company bonus, an inheritance or a gift. Most of the time, this money is somewhat unexpected. Or at the very least, you’ve been getting along fine without it. You didn’t have it to spend yesterday, and if you tuck it responsibly away somewhere, you won’t have it to spend tomorrow.
What’s the disadvantage to this tactic? Well, you can become too dependent on the lump sums that you get messy with your budget. Or maybe you use them as a crutch because you have difficulty putting money aside with any regularity. Putting aside a pile of cash can cover a multitude of sins – for instance, going six months without an emergency fund, setting aside your tax return, and then slowly draining it on unnecessary things only to repeat the same behavior with next year’s check.
With the rise of internet savings accounts, this has become a popular and easy option. Automatic savings is when you have a specific amount of money taken out of your bank account regularly and put into savings. Companies like ING Direct, HSBC Direct, WaMu and many others allow you to open an internet savings account with as little as one dollar. (A quick search will help you find the best internet savings account for you.) Your own brick-and-mortar bank or credit union may even allow you to transfer money automatically from your savings on a weekly, bi-weekly or monthly basis. Many personal finance gurus will tell you to “pay yourself first,” and with automatic savings, this becomes a no-brainer. Just like finding $10 in the pocket of last year’s winter coat, your savings will add up quickly and unexpectedly. Chances are, you won’t even notice it’s gone from your budget.
On the other hand, your savings may become so much of a no-brainer that you fail to save more when you need to. With internet savings accounts, there may be a longer lag-time for retrieving your money than you’re used to – and that can mean trouble if you don’t have the credit or additional savings to float you by those few business days in an emergency. Putting savings on autopilot can be truly beneficial to both your mind and your bank account, but sometimes being more conscious of your financial efforts pays off in the long haul.
One Penny at a Time
A penny saved is a penny earned, or two pennies earned, depending on who you talk to. Fifty years ago, this was the only way to do it, saving money pennies or dollars one at a time, filling out the paperwork to put it in the bank or dropping coins one by one into an old coffee can. If you’re beginning to clean up your financial life, doing it “the hard way” can be either a pro or a con.
Pros: No pile of change is safe. Conscious savings means that every returnable can, every half-full piggy bank, every quarter rescued from the laundry cycle becomes an opportunity to add just a little bit more to your savings. It also means that you get a dose of feeling good every time you set out with the task of depositing your savings – and you could do that as often as you wanted to. With your savings never far from your mind, you’ll stay on track with your financial goals. Consciously saving can work in many mediums, from internet savings accounts to stuffing money under the mattress (though I don’t recommend that last one – bad interest rate!).
Cons: It can be easy to forget, brush it off, or set it aside until suddenly you realize you’ve already spent the money on something else.
I personally find that some mix of all three strategies works best for me. Saving lump sums is an easy way to kick-start a goal or make huge strides on an existing one, and automatic savings gets extra cash out of my spending budget before I slip up and buy a new DVD. Saving one penny at a time is great when times are tight. I’ll raid the couch, take bottles back, sell a few old CDs and hunt down friends who owe me a couple bucks.
Whichever strategy you choose, you’re doing something good for yourself by getting or keeping your financial life in control. These strategies work just as well for setting up an emergency fund, paying down debt or saving for a family vacation as they do for long-term savings.
What other savings strategies work well for you?