03 Nov 2009
With many people in debt, it isn’t surprising that creating a savings account and plan to go along with it isn’t at the top of the priority list for most people. Many people blow off savings plans citing reasons such as not having enough money to start one, assuming savings plans are only for one future purpose, or not knowing how to go about setting one up.
The truth is that savings accounts can act as anything from an emergency fund to a money pot to save up for something you may really want. An emergency fund is the most common reason for starting a savings plan and is something everyone should consider starting as soon as possible. This stockpile of cash can come in handy as the name implies in an emergency, without having to turn to credit cards to pay for an unexpected cost. Experts recommend that an emergency fund have 3-6 months worth of living expense costs in them, but don’t be intimidated by that; you can build it up over time. As for savings accounts for future purchases, emergency funds should be separate from savings accounts but the concept of creating each follows the same rules and maintain.
The first thing you’ll need to do is find a good place to park your money; ideally an account that will pay you interest on your money so that your account grows over time with additional funding. You’ll want to avoid CDs or investments for emergency funds and most savings accounts as they severely limit your accessibility to your cash. Instead look for high yield savings accounts that allow you to move money from your checking account to the savings account, or even better an account that allows you to have money taken directly from your paycheck and put into the account. This will allow you to save consistently over time and you won’t be tempted to spend your savings before it gets to the account.
One of the most popular destinations for people looking to build up savings is ING Direct; a primarily internet based bank that pays around 3% interest on savings accounts; far higher then your traditional bank savings accounts. There are a number of sites that offer these accounts, but ING is one of the most reputable. Of course, feel free to research other high yield accounts just ensure that the deposits are insured by the FDIC (if you are in the United States) and ensure the accounts are secure and legal.
Once you’ve found a savings account plan and opened it, you should be able through the bank set up an automatic savings plan to fund the account. Either select a set amount or percentage to have taken from your checking account or paycheck to be deposited into the account on weekly or monthly basis. If you choose a percentage of your take home pay to contribute you’ll grow your account more as your income grows over time; an amount chosen will require you to adjust that amount if your income increases. With that said, I’d recommend doing a percentage of your take home pay.
Don’t touch this money once it is in the account; but feel free to create an account just for an emergency fund and another account for a rainy day savings account. People also create accounts to help them save for a big purchase down the line.By opening a high yield savings account, not only will you be able to put your savings on autopilot, but you’ll also be able to earn decent interest on your money, and even be eligible for bonuses for referring friends and family to open accounts with whichever bank you choose.
It is important to note that if you have credit card debt, you’ll want to work on paying down the debt quickly rather then building a savings fund. The interest earned on your savings, no matter how good it may seem, will be wiped out by interest accrued on outstanding credit card debt, so be sure to work on paying down your credit debt before growing your savings plans.