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Five simple savings strategies everyone should know


Individuals 05.28.2020 4 MIN READ

 

Americans aren’t so good at saving for a rainy day. In fact, more than 40% of Americans would find it difficult to meet their financial obligations if their paycheck was delayed by one week.1 In response to the recent economic upheaval we’ve been experiencing lately, we’ve put together a list of five simple savings strategies that can help you get started on the path to short- and long-term savings.

1 in 5 are not prepared2

1 in 5 people in their 20s and 30s have no savings goals

1 in 5 people have no emergency fund at all

Only 1 in 5 people are on track to meet ALL their savings goals

Strategies for saving

1. Set goals

Why should you save? There are a hundred reasons, but the most important are your reasons. Are you saving for a home, an education, a vacation, retirement? Whatever your reason, it’s personal and important to you. That will be your motivation to set goals and stick to your plan. Also, “automating” your path through approaches like payroll deductions can help make achievement that much easier!

 

2. Create an emergency fund

Long-term savings are important for achieving your long-term goals, but what about the unexpected expenses? Car repairs, replacing an appliance, sudden medical expenses and other surprises can throw a wrench into your finances. That’s where an emergency fund can be a big help.

Ideally, an emergency fund should comprise approximately three to six months of salaried earnings. But if that’s not possible, be realistic—maybe it’s only a few hundred dollars that you can afford to set aside for emergencies. That’s OK! Something is better than nothing.

Here’s an example of how to structure an emergency fund:

  • Keep safety and liquidity in mind when considering how to hold these funds
  • Open an FDIC- or NCUA-insured savings, money market or short-term certificate of deposit (CD) account
  • Aim for three to six months of living expenses as your goal
  • Consider direct deposit from your paycheck for ease

 

3. Contribute toward your retirement—and use a company match to boost that savings

If your employer offers a match to your 401(k), by all means take advantage of it. Otherwise, you’re leaving money on the table.

Because 401(k) payments come conveniently out of your paycheck, you won’t see that money in your take-home pay and—the thinking goes—you won’t miss it. If you can, contribute at a higher level than just the match to help give your retirement account a solid foundation. You can also take advantage of automatic contribution escalation features.

For those in the early stages of their career, early and diligent funding of a retirement account provides an opportunity for that money to compound over time, which is one of the most powerful wealth-building tools.

 

4. Save automatically

  • Direct deposit through your employer. See if your employer will allow you to set up direct deposit into multiple accounts. If so, divert some of your paycheck into different savings accounts directed at various goals. This could include the emergency fund above and accounts dedicated to something like a vacation, new home or college. Put the rest into your checking account, and use that for all your expenses. Keep these savings vehicles separate and resist the temptation to raid them—unless it’s for the intended goal.
  • Auto transfer through your financial institution. You can also set up an automatic transfer from your bank or credit union into an investment account for longer-term goals, such as an IRA, 529 college savings plan or other brokerage or mutual fund account. Choose an amount that won’t negatively affect your ability to pay your monthly bills, but significant enough to build up over time. For example, if you transferred $100 per month, that would yield $1,200 in savings in one year. Again, treat these accounts as sacrosanct and don’t dip into them except to meet those goals.

 

5. Pay down your debt or consider refinancing

Credit card debt topped off at almost one trillion dollars by Q1 of 20203, a new record for Americans. With these typically higher interest rates, you should make it a priority to knock down your credit card debt first, starting with your highest interest-rate cards.

One strategy, called pyramiding payments, can help you pay off this high-interest debt more quickly. Start by making the minimum monthly payments on all your cards, but add an additional sum to the payment on the highest interest-rate card until that debt is paid off. Then apply the amount you were paying on that card—plus the minimum payment—to the next highest-rate card until that debt is paid. Continue until you’ve paid off all of your cards.

 

Student loan debt is the second highest consumer debt category, second only to mortgage debt. Some 45 million borrowers collectively owe more than $1.54 trillion in student loan debt4. If you are one of them, you have options.

Refinancing your student loan or consolidating might be a good strategy, particularly given current interest rates. Be careful…there may be student loan repayment programs and student loan forgiveness provisions that could be lost should you refinance, depending on your individual situation and the types of loans you hold. It’s therefore not all about the interest rate. You might also elect to enroll in automatic payments to make it easier to repay (oftentimes reducing your rate should you refinance) and consider adding a little more principal to your payments which will drive down the loan faster. A new trend in company benefits is student loan assistance—be sure to ask a prospective employer if they have such a program, and be on the lookout where you work now.


1. Getting paid in America survey, 2019, American payroll association

2. Data from Ayco’s financial wellness assessment through October 23, 2019.

3., 4. Quarterly report on household debt and credit, , May, 2020, Federal Reserve Bank of New York, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2020Q1.pdf

 

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