Do you remember that piggy bank that you had when you were a kid? Turns out that was more than just a toy — it was a child-sized introduction to one of your most effective financial tools.
The goal of wise financial management is to make our money work for us. Once we escape that bad habits that have made us slaves to money our whole lives, we can begin to use our money strategically to accomplish our life’s goals. The first way that we do that is through a good old fashioned savings account.
That’s right — the regular share account at your local bank or credit union can be one of your most powerful financial tools, but only if you use it effectively. Like every tool, a savings account does some jobs very well, while failing at other jobs. But what matters most is how you put it to use.
When we save money regularly as part of our monthly budgets, it can build up to really significant sums rather quickly. If you save $500 a month, for example, you’ll have $6,000 at the end of a year. That’s enough for a really decent used car, an engagement ring, a set of household furniture or a bomb-diggity vacation. And the more money you can set aside each month, the faster your balance will grow.
So, what is a savings account good for? Well, they make a great place to park your emergency fund. They’re also a great vehicle for gathering up the money that you will need in the near future. A good rule of thumb is to use a savings account for an expense that you expect to pay in five years or less. (Any longer than that, and you should think about investing the money).
There are all sorts of things that you could use a savings account for. Emergency funds should be the first priority — before you start accumulating money for new blingy things, you should make sure that you have enough in reserve that the unpredictable emergencies in life don’t wipe you out. Once your emergency fund is topped off, though, you can start using the saving allotment in your monthly budget for some of these things:
- Your next car — You’ll likely drive a lot of different cars during your lifetime. And since cars always lose a little bit of value with every mile you drive them, it’s important to be always saving money toward the next car that you’ll need to buy. We suggest making car savings a regular part of your monthly budget, even if you don’t think you’ll need a new car soon.
- Your next home — Homes are the biggest single purchases that most of us will ever make, and it takes a lot of cash to pull it off. While mortgages bring home ownership within reach of most people, you’ll still need to have 20 percent of the value of your next home in cash when you go to buy. So if you think that a new home could be coming on the horizon for you, stash away some money every month to bulk up your down payment.
- Your furniture and home upgrades — That hand-me-down futon got you through college, but once you’re an adult you’ll find yourself wanting a proper couch. Sofas, bed, dressers, chairs, tables and other home furnishings can all cost thousands of dollars. If you begin saving for them in advance of when you plan to buy them, you can pay cash and avoid the dangers of going into debt for consumer goods, or having to take out home-equity loans to make home improvements.
- Your life upgrades — They say that the best things in life are free, but the process of getting those things can come with big expenses. Look at your life circumstances and plan accordingly. If you may get married soon, start saving up money to buy a nice engagement ring or to pay for a wedding celebration that you’ll enjoy. If you plan to have children soon, you should save as much money as possible to pay for the hospital bills and first-time expenses that come along with children.
- Your big-ticket fun — No matter what kind of hobby you get into, sooner or later it has the potential to get expensive. There’s nothing wrong with spending money to have fun; when that fun comes with a big price tag, though, we should save up the money in advance so that we can enjoy the fun without any guilt or remorse. So whether it’s a luxury vacation, a new guitar, an antique gun or a classic hot rod, use a savings account to fund your next fun purchase.
As you can see, there are plenty of great things you can do with a savings strategy. Make savings a regular part of your financial discipline, and you’ll be amazed at how much you can accomplish with your money.
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Photo by Razor512. Used under Creative Commons License.
