Knowing how to save money is necessary to achieve financial security and independence. Building a healthy
savings account protects you from unexpected expenses such as medical emergencies, car repairs, or even job
loss. Furthermore, saving allows you to minimize or even eliminate high-interest debt on larger purchases
such as cars.
If you're starting with nothing, building an emergency fund is your top priority. An emergency fund is meant
to safety net to protect you from unexpected expenses. It's typically recommended to put away 3-6 months
worth of expenses into an emergency fund. So, if your monthly expenses are $4,000 you should aim to save
between $12,000 and $24,000.
After building an emergency fund, your excess income should be used to pay off debt, starting with the
highest interest rate first. However, if given the choice between paying towards a debt with 3% APR and
investing into an account with 5% APY, it may be better to invest your money as you would gain more through
investment than you would pay in interest.
The 50/30/20 rule isn't so much a rule as it is a general go-to budgeting guideline. The idea is that
you should spend 50% of your income on needs, 30% on wants, and 20% on savings or paying back debt. However,
it is important to remember that this is just a guideline and you should adjust it to fit your own financial
situation.
When saving money, it's important to know your APY. APY is the total amount of interest you'll earn on a
savings or investment account, taking compounding into account. There are two types of interest: simple and
compound.
Simple interest is calculated only on the principal amount, while compound interest is calculated on the
principal and any interest added to the account. This allows compound interest to grow much quicker,
especially over long periods of time.
I strongly encourage you to play around with the calculator below to see the difference between simple and
compounding interest.
Another factor to take into account when saving money is inflation. Inflation is the rate at which
prices for goods and services rise, which subsequently decreases the value of your money. This generally
averages out to around 3% per year, but can vary based on the economy.
If your APY is lower than the inflation rate, you are losing money over time. The average savings rate
is around .41% APY which is significantly lower than the average inflation rate. To avoid loss, invest
into a high-yield savings account or a money market account which may offer APYs of 4% or higher.
These accounts are typically offered by online banks and credit unions, and they can help you
keep up with inflation while still earning interest on your savings. A simple Google search can find you
a banks (insured by the FDIC) that offer high-yield savings accounts with competitive APYs.
Banks and credit unions are both financial institutions that offer similar services, such as checking and
savings accounts,
loans, and credit cards. However, there are some key differences between the two.
Banks are for-profit institutions that are owned by shareholders, while credit unions are non-profit
organizations that
are owned by their members. This means that credit unions typically offer lower fees and better interest
rates than banks.
Furthermore, some credit unions have membership requirements, such as living in a certain area or
working
for a specific employer.
This can make it more difficult to join a credit union than a bank.
If you're looking for a new bank or credit union, I recommend doing some research to find one that fits
your
needs.
You can use websites like Bankrate or NerdWallet to compare rates and fees.
The FDIC is the Federal Deposit Insurance Corporation, an independent agency of the United States
government
that provides
deposit insurance to depositors in U.S. commercial banks and savings institutions.
This means that if your bank fails, the FDIC will reimburse you for your deposits up to $250,000 per
depositor, per insured bank.
This insurance is funded by premiums paid by banks and savings institutions, not taxpayers.
It's important to note that not all financial institutions are FDIC insured. Be sure to check if your
bank
or credit union is
insured before opening an account.