Saving up money is an important skill to develop in children and young adults, and financial literacy proves an invaluable asset to young professionals saddled with student loan debts and only mediocre job prospects. Of course, there are countless tactics and locations for how and where to put the money you’re saving, but the end goal of your savings strategies will guide you and your dependent’s financial well beings into the foreseeable future. There are a few questions you should ask yourself to determine how to save your money to reach your short and long term goals.
Is your emergency fund stocked?
Before you embark on any sort of savings journey, priority number one is making sure your emergency fund is sufficiently stocked in the event of a catastrophe or unforeseen medical problems. The last thing you want is to dip into car, house, college, or retirement savings for a trip to the ER or, worse, an unexpected layoff. The rule of thumb here is to save enough to sustain yourself on your emergency fund for about two months without an income.
What are you saving up for?
Depending on the actual end goal of your savings, you may want to put your money in specialized accounts. Once you feel you could live off your emergency fund for a few months, you should then be able to safely funnel your cash into other accounts or budgets to serve your other goals. If you’re saving for a smaller item, like a car, computer, or even vacation, a short-term savings account with your bank that accrues little to no interest will just let your money pile up until you need it. For bigger purchases, like a house, planned family medical expense, college, or retirement, you can explore accounts that the government has exempted from taxes in order to encourage appropriate savings. Do some research and sit with a financial advisor to determine the best home for your long-term savings.
How soon will you need to access your savings?
If you think you’ll need access to your savings in a time frame of under 24 months, your best bet is to store your funds in a short-term savings account with your bank. While these accounts won’t offer much in the way of interest, you can make a withdrawal of any amount at any time with no fees or penalties. However, for some specialized accounts, you can incur heavy fees and penalties for doing certain things with the money. For example, if you need to take money out earlier than you signed for, then you’ll be penalized. Or, you’ll be penalized if you use the money for something other than what your original intent was for it. When storing money in an account like this, it will be in your best interest to only create this account if you are certain you will not need the money for something else or need the money at an earlier time than originally anticipated.