Hey guys! Today we're doing our first of many personal finance posts! Keep your questions and suggestions for future posts coming!
On savings: I love clothes, but I love watching my bank account and investments grow more. I chose to come home for my transition year to spend time with family, establish my savings, and pay down my loans a little before NYC. Having no rent allows me to save a A LOT, but the principles in this article stay true for anyone. This post focuses on establishing an emergency fund and saving for big purchases. More on 401k and investments soon!
The basics of savings
1. for what?
2. when?
3. where?
4. how much?
What are you saving for?
Knowing this will help guide your monthly savings goal and will keep you consistent in your saving habits. Saving money is very much a habit that has to be learned. Some people learn it early in life from their parents, others learn it when they get out into the real world. (Some never learn, but let's not talk about them)
Everyone should have an emergency fund. No question about it. How much you choose to put into this account will depend on your job security (don't overestimate this) and financial support. The typical advice is to save 3-6 months expenses in a liquid savings account. An emergency fund is essential because without it unexpected expenses will go on a credit card. This means that instead of gaining interest on your money, you'll end up paying interest on your money.
The second reason to save is a lot more fun. You should save for big purchases that don't fit into your daily/monthly/weekly budget. If you can't afford to pay for something in cash, you can't afford it. (Obviously there are some exceptions to this like education and housing.)
Related: Just because you can afford to pay for something in cash doesn't mean you should. Put it on your credit card. Get your points. Pay off your statement balance every month.
When should you start savings?
Now.
I realize that this will be harder for some than others depending on how much you make, your dependents, and what city you live in, but you have to start now - even if it's 1% of your paycheck each month.
Caveat: The only exception to this is if you're living off of student loans. You should absolutely save a portion of any non-interest income you receive from your parents or supplemental income, but I would not recommend saving any loan money because you're paying a higher interest than you can receive on that money. Instead, I recommend taking out the least amount of loan money you need.
Where should you store your savings?
Emergency funds should be saved in a liquid account. By liquid I mean, the money is easily accessible for when (if) you need it. A regular savings account or money market account are your two best options. Anything with higher interest returns will be less liquid (ex: stocks and bonds). Money market accounts and online saving accounts have almost equivalent interest rates these days, so the decision on which account will come down to personal preference. Depending on your time frame with your big purchase, you could maybe save in a less liquid account (ie: 5 year bond), but generally a high-interest savings account makes the most sense. Wherever you choose to store your money, it should be separate from your daily checking account. I use ally because it has some of the highest interest rates, allows an unlimited number of accounts, requires no initial deposit, is very separate from my checking account, but the money is easily accessible if I need it.
How much should you save?
This will be determined by how much you currently have saved, how much you want to have saved, how much time you feel is appropriate to reach that goal, and how much you get paid. You may want to save aggressively for a couple of months to establish your savings and then continue with a regular rate or you may choose to be patient and save a steady amount each month. I initially wanted to be aggressive for a couple of months, but I didn't have the margin in my paycheck to do it because I had a lot of big purchases that had to come out of pocket because I didn't have any savings. By far, this will probably be the hardest deterrent to establishing a savings account.
I subscribe to the "pay yourself first" philosophy. I have a set percentage of my paycheck directly deposited into a high-interest savings account. That money never enters my checking account and is never mentally factored into my income. This takes advantage of my inherent laziness. It would take way too much effort for me to change the percent deposited or transfer money into my checking account. If you don't put your savings away before you start spending, you won't save as much. I also have a set amount that I pay in student loans. This payment currently requires me to make the active decision of when and how much to pay. I have found myself multiple months barely being able to make the payment because I overspent. I have now made it a habit to pay my student loan as soon as my paycheck clears my checking account (update: now that my loans are out of deferment, my minimum payment is set up for automatic withdrawal). I would recommend doing this for your savings if your job doesn't allow you to deposit your check into multiple accounts.
Related: I never allow other accounts to take money from my bank account. I've had friends who have had their accounts accidentally drained or over-drafted due to a technical error. Rather, I have my bank account deposit money into other accounts. It's my recommendation to minimize the number of companies that have direct access to your bank account. My only exception to this is student loans because there is a 0.25% decrease in loans rates with automatic withdrawals.
I've listed my personal savings goals below to put context to this article.
Generally how I save:
I save 30% of my paycheck no matter what. I have multiple savings goals that I have listed in order of urgency. Once I reach one goal, I open a new account and that 30% will go towards the new goal/account. Some goals take me months to reach, some take me only one. By separating my accounts, I am missing out on some compound interest but it's important for me to have the separate categories. My emergency fund is my #1 priority, so if I ever have to take money from it, I will pause on whatever I'm currently saving for and replete my emergency account.
Goal #1: An emergency fund
As stated above, the usual advice is to save 3-6 months income in an emergency fund to cover unexpected expenses and unexpected unemployment. For me, unemployment is less of a worry (I have a four year contract with my residency programs pending I meet expected milestones), but unexpected expenses like a car repair can cause a huge amount of distress without enough wiggle room in the budget. For that reason, my #1 savings goal was to have $2,500 set away at all times. This money is in a high interest online savings account and will hopefully never have to be used. Having it stored in a distant account is important because “out of sight, out of mind.” I don’t see that $2500 balance when I check my bank account.
Related: Although unemployment is less of a worry for me, disability is a risk for everyone. I do have the highest disability insurance offered by my employer and am considering adding more.
Goal #2 Christmas gifts
I'm currently saving for Christmas gifts for my family and a new camera for myself (rather than putting a bunch of stuff on my credit card and then paying it back with interest. CC debt is a no-no).
Goal #3: Moving to NY
This includes physically moving my things (clothes), new furniture, a new computer, and winter clothes. I think this will take about $5,000 (Please, let me know if you have a better estimate!! Mine is pulled out of thin air.)
Goal #4: Long distance love
Long distance relationships are expensive. My boyfriend is currently completing his residency in Atlanta. We're in driving distance this year, but next year he'll still be in ATL and I'll be in NY. I'm going to put away some money this year since my income will be a lot tighter next year. In addition, I opened a Capital One Venture Miles reward card and received 40,000 bonus miles (plus 2 points on every purchase I make). Having excellent credit helps to get a great rewards card (more to come on how to maximize your credit score and maintaining long distance relationships!)