Grow Your Savings
Saving money is a fundamental aspect of financial health and security. However, many people struggle with questions like: How much do I need to save? How do I set—and maintain—long-term financial goals? What are the best strategies for growing my money?
Long-Term Financial Goals
Setting long-term financial goals is crucial for ensuring a secure financial future. These goals might include:
Here’s a retirement planning calculator we like, from Vanguard:
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Education: If you have children, start saving for their education early. Look into 529 plans or other education savings accounts that offer tax advantages.
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Home Ownership: If owning a home is part of your plan, save for a down payment and understand the ongoing costs of homeownership.
Here’s an eight-minute video from Ramsey Solutions about the seven financial goals (they call them “Baby Steps”) every person needs to set and achieve:
Make Saving a Lifelong Habit
Developing a lifelong saving habit is key to financial success. Here are some tips to help you make saving a consistent part of your routine:
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Automate Your Savings: Set up automatic transfers from your checking account to your savings account. This ensures that a portion of your income is saved before you have a chance to spend it.
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Set Clear Goals: Having specific savings goals can motivate you to stick to your savings plan. Write down your goals and track your progress regularly.
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Create a Spending Plan (a Budget): A spending plan helps you manage your money and prioritize your savings. Use budgeting tools and apps to keep track of your expenses and identify areas where you can cut back.
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Reward Yourself: Celebrate your savings milestones with small rewards. This positive reinforcement can help you stay motivated and committed to your savings goals.
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Stay Informed: Continuously educate yourself about personal finance and investment strategies. The more you know, the better you can manage and grow your savings.
Here’s an 11-minute video by Thomas Frank about how to automate your saving and investing:
How Much Do I Need to Save?
Determining how much you need to save can be daunting, but a good rule of thumb is to aim for saving at least 20% of your take-home pay (aka “net income”). This percentage can vary depending on your financial goals, income level, and current expenses. To get a clearer picture, start by calculating your essential expenses (housing, food, transportation, etc.) and then allocate a portion of your discretionary income towards savings. (See our “How to Save Money” module.) Additionally, it’s crucial to have an emergency fund that can cover three to six months of living expenses to safeguard against unexpected financial setbacks. (See our “Build an Emergency Fund” module.)
Savings Time Horizons
Your savings should be categorized based on different time horizons:
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Short-term (0-2 years): These savings are for immediate needs such as an emergency fund, vacations, or home repairs. Keep these funds in accessible accounts like high-yield savings or money market accounts.
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Medium-term (2-5 years): These savings might be for larger expenses such as a down payment on a house or a new car. Consider investing in certificates of deposit (CDs) or short-term bonds to earn a higher return than a standard savings account.
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Long-term (5+ years): These are for future goals such as retirement, children’s education, or major life events. Long-term investments can include stocks, mutual funds, and retirement accounts like IRAs or 401(k)s, which generally offer higher returns over time.
Ways to Grow Your Money
Growing your money requires strategic planning and disciplined investing. Here are some effective methods:
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High-Yield Savings Accounts: These accounts offer higher interest rates compared to traditional savings accounts, helping your money grow faster.
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Certificates of Deposit (CDs): These are low-risk investments with fixed interest rates and maturity dates. They are ideal for medium-term savings.
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Stocks and Bonds: Investing in the stock market can provide significant returns, especially for long-term goals. Diversifying your portfolio with bonds can reduce risk and provide steady income.
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Mutual Funds and ETFs: These investment vehicles pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities, spreading risk and potentially increasing returns.
By understanding how much to save, setting appropriate time horizons, exploring various ways to grow your money, establishing long-term financial goals, and making saving a lifelong habit, you can create a solid financial foundation for yourself and your family. Start today and watch your savings grow!
Action Plan
Review our Set Financial Goals module and choose one of the strategies listed. A good place to start is to write down your life goals.