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House in Hands

March 31, 2009

At any income level, it takes discipline and planning to save money. Saving or setting aside money to use later can be a challenge especially now when there are so many people struggling to balance income with expenses and spending.

Most people realize that saving should be an ongoing strategy for managing their money but many will ask--are there any rules or guidelines for saving money? Let me try to answer that question by first looking at the basics of saving and then at some strategies.

Basic money management principles will suggest four ways to save money:

  1. Withhold money from a paycheck and make a direct deposit to a savings account.
  2. Save money as a fixed expense each month on a spending plan.
  3. Save money as a flexible expense each month on a spending plan.
  4. Save money each month after all other expenses are paid.

I tell people to concentrate more on saving some money every month by using the number 1 and 2 strategies that emphasize "pay yourself first" rather than asking for a guide telling them how much to save. Even saving some money every month adds up! The number 3 and 4 strategies create challenge for people because there likely will never be any money left to save.

The reality is that every household has different saving ability--different income, expenses and needs of people. One or two "overall" guidelines that suggest how much money should be saved may not be realistic in many situations. Use this guide instead--save at an affordable rate that addresses unexpected emergencies, long term goals (retirement, post-secondary education, large purchases, etc.), and that insures balance between your monthly income and expenses. What is the difference between emergency and long term savings? One important difference is liquidity or availability of cash when needed.

Emergency savings should be available when the emergency occurs--appliance breakdown, car repair, health crisis, etc. Emergency savings are usually in simple savings accounts but if a household has enough emergency savings, the amount may qualify for a higher interest account.

Even so, the money should be readily available to meet financial demands of the emergency. Money left for an emergency as a "cash stash" in the home may not be safe from theft or the temptation to buy something that is not on the monthly spending plan.

Start an emergency fund by setting a goal. It's not about the goal--it's about taking the action to save and a goal helps people stay focused. For example two new tires for the car needed in three months costing $120 means setting aside $40 per month. Check to see what automatic transfer options might be available at your bank to make this monthly savings action occur.

Growth is the primary reason for money saved for the long term--post secondary education, retirement, and other major purchases. Long term accounts need to earn higher interest rates which usually mean investing for longer periods of time using strategies that do not allow too easy an access to the funds.

One of the easiest ways to save for the long term is to invest in a worksite retirement program where available. To avoid tax penalty, do not withdraw the money until retirement. In some cases, an emergency might allow some withdrawal without penalty. Even so, with any withdrawal, try to replace the money if possible. Making long term savings decisions may also involve a conversation with a financial planning professional who can give perspective on your specific needs. Always make sure, though, that any advice you take addresses your need and not that of the general population.

Build your financial future by saving some money on a monthly basis in two ways--save for the short term (emergency savings) and save for the long term (retirement, etc.). It will be your path to stability and security.


Shirley Anderson-Porisch works as a family resource management Extension educator at the University of Minnesota and is an expert in family finance. She has long been a media contributor and is an accredited financial counselor.