5 Savings Categories to Keep in Mind

By on August 9, 2019
Savings

The general trend of financial advice is when in doubt, save. Many experts recommend you set aside at least 20 percent of each paycheck toward savings. While this piece of advice does underscore how important it is to save a good chunk of your income, it’s very broad. You may be left wondering what putting money “toward savings” means, exactly. And you wouldn’t be alone in wanting a more specific breakdown of what saving really means today.

There’s no one-size-fits-all foolproof plan for saving. But, by keeping, at last, these five savings categories in mind, you can come up with a strategy for building the safety net you need to thrive.

#1: Savings Account

Most people think of their savings account as a checking account—except you can’t touch the money inside so easily. But even as far as classic, federally insured savings accounts go, consumers have options.

Your standard savings account that you open at a bank have low return rates. But they are useful for storing money because they limit how many withdrawals and transfers you can do per month. This is how they differ from checking accounts, which allow many more transactions.

Money market accounts have higher return rates but typically require people to deposit and keep more money inside.

Certificates of deposit, also known as CDs, tend to yield the highest interest rates. But consumers also enter an agreement not to take out money for a set amount of time, typically between six months and 5 years. If you do have to take money out early, you’ll pay a fee.

#2: Event-Specific Savings

You know you want to take a big international trip next year. Long before you buy that plane ticket or start planning your itinerary, start saving. The same principle applies to anything you want in life: a new car, a cross-country move, new living room furniture, a pet, etc.

What you may want to do instead of dipping into your regular savings is start event-specific savings driven by a concrete goal. Apps like Clarity Money with free monthly budget planners even allow users to enter specific goals, like “I want to save $10 every Friday for a new truck.” Of course, users enter the amount, frequency and reason based on their own goals. This automated strategy helps people stay accountable for meeting their personal goals at a pace that works for them.

#3: Emergency Fund

It’s also important to build up an emergency fund separate from your regular savings account. Rather than paying for large, planned purchases, emergency funds are meant to cover life’s unexpected events. Put it this way: If you have adequate emergency savings built up, you’re not left high and dry when your car breaks down, your furnace stops working mid-winter, your income flow dries up or someone in your family needs to visit the ER.

It’s advisable to build your emergency savings in a high-yield account that you’ll only touch when disaster strikes. But how much should you save? Well, it ultimately depends on your lifestyle. Most people need between three and eight months of living expenses stashed away.

#4: Retirement Account

Saving in the short term is vital. But so is saving for the faraway future—starting now. Retirement savings accrue based on compound interest, meaning your interest will gain interest. This is why starting retirement account contributions even a few years earlier will pay off big time by the time you’re ready to stop working. There’s no such thing as “too early” or “too late” to start a retirement account. Just do yourself a favor and start right now.

Explore whether your employer will match any 401k contributions. Or, start your own Roth Individual Retirement Account (IRA) into which you contribute income after it’s already been taxed.

#5: Health Savings Account

Depending on your health insurance situation, you may want to contribute to a health savings account (HAS) specifically to cover medical expenses.

A strong savings strategy will include a healthy mix of account types spanning these five categories.

 

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5 Savings Categories to Keep in Mind