What is a Savings Account?
Savings 101: Understand the basics of savings and savings accounts
It is very important to save money. That’s the bottom line. But when you’re trying to get started, trying to understand savings and savings accounts, you need information that’s a little more useful and actionable.
In this short article, we’ll cover some of the basics to help you understand savings.
The importance of saving money
Unsurprisingly, statistics show that people who struggle with their personal finances, and who are behind on bills, report feeling more stressed and anxious.
Saving money is important because it helps to create a buffer against life’s inevitable challenges. Being laid off from work, or experiencing health problems which cost you money or diminish your ability to work and earn, can push your finances into the red.
This creates a domino effect, where lack of savings leads to borrowing, which leads to more debt, which leads to anxiety and poor health.
Just the act of saving a little each month can help to reduce your stress, while you build a useful buffer against these issues.
Consider the effects of inflation
The annoying fact for most of us, is that our salaries don’t tend to keep up with inflation. Things cost more, but we earn around the same.
Saving money can help you to minimise the effects of inflation on your personal finances. Depending on where you put your savings, you could build a sturdy buffer against inflation. This can be especially true with something like a Stocks & Shares ISA.
Budgeting and setting goals
There are two ways to save money. One is to set aside a random amount whenever you remember. With this method, you normally start with good intentions, but without a goal, saving becomes erratic and maybe even stops entirely.
Another, much more effective method of saving, involves setting a goal. If you know how much something costs (such as a used car), setting a goal and a timeframe is easy. For unexpected costs, try to estimate how much you would need in order to get by, should your income drop by half for a month at a time.
As for budgeting, the simplest method is to know how much you have coming in each month (take a lower average if you’re a freelancer), then compare that to your outgoings, such as rent, bills and groceries. When you can see your expenses written down, it’s much easier to manage them.
Save little by little
No matter how much money you have, the key is consistency, and making that money work for you. Save a little each month without skipping (set up a direct debit if you need to), and saving will soon become a healthy habit.
Add on the effects of compound interest over time, and saving a little on a regular basis becomes one of the best ways of growing your wealth long-term.
Take your time to understand how much money you have coming in, versus going out, then build a simple plan to contribute to your savings on a regular basis. Consistency is what matters the most. How much you save can always increase or decrease with your circumstances.