4/13/2010

Some Things are Better Bigger

Less is more may be a great motto for things like credit card debt, fat and dust bunnies, but there are some things that are just better bigger like your savings account.

Having a little nest egg (or a bigger nest egg) to sustain you through the tough times can be just the ticket to keep you out of financial crisis and prepared for the challenges that come with our economy.


Financial advisors recommend four different kinds of savings:


  1. Savings for irregular expenses: vacations, weddings, birthdays and holidays don't happen every month, but we know they are coming. Here are some ideas for saving for those special events: a. know how much you are going to spend in advance. Many times these expenses can throw our budget into a death spiral because we didn't plan in advance. For example: earmark savings for vacation to be say $500. That seems like a lot of money, but if you save throughouth the year it translates into $41.67 per month. Some banks and credit unions offer special accounts like Christmas clubs and special savings accounts to keep you on track with your savings plan. These can also be used to be collateral for a small loan as you are building your credit (another topic).
  2. Savings for unexpected costs: this is what is known as an emergency fund or a contingency fund. On average every family experiences about $2,000 in unexpected costs each year whether it is an appliance failure, car repair, acts of God like weather, or an accident we all have unexpected expenses...expect them. If we save an extra $166 per month for those expenses, you will never have to go to the credit card or the bank to borrow money. You will borrow from yourself and feel all the more secure knowing you were able to meet those unexpected expenses on your own.
  3. Savings for large purchases: lets face it, if you drive a car eventually it will need to be replaced. Children will hopefully pursue education to secure better income potential like college or trade school. Furniture, appliances and maybe even some recreational items can be costly. The biggest purchase of all we will likely make is purchase of a home. Savings can be all important to allow you to get the things you need and want without jeopardizing the monthly budget and going into debt.
  4. Savings for retirement: Your retirement cash flow will likely come from three potential sources: a. Social Security (if you read your Social Security statement you receive each year you will see a special disclaimer: "In 2016 we will begin paying more in benefits than we collect in taxes. Without changes, by 2037 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits." At best Social Security will likely replace less than 40% of your current income b. Employer Pension: some employers still offer a pension or a regular monthly annuity after retirement. The size of the annuity varies, but is usually significantly less than your current paycheck. c. Your Savings: your savings is going to be the best provision you have to enjoy retirement years without having to continue working to subsidize the costs of living. Your savings will be the funds you will use to take trips, spoil grandchildren and to provide for any additional expenses related to declining health (I hope you never experience).

Earmarks may be the death nell of congressional legislation, but earmarking savings for special purposes in your life can be just the ticket you need to make sure you reach your intended goals and separate your budget from the economic rollercoaster.

Big savings is great, but every little bit counts, so start small and think big. Penny pinching can yield tremendous future benefits. Don't be ashamed to be a pincher, pinch and watch your savings grow!

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