What Are The Correct Savings Priorities?
Many households are financially confused
as to what they should do first, as far as paying down debts, how much they
should investment, or what savings accounts they should have first.
Don’t allow yourself to get confused,
or diverted from what your real financial focus should be. There are “experts”
who try and convince people an “all or nothing” approach is best, living on “rice
and beans” is the only way to attack your debts or save money. As many have
found, this approach may put you into further financial difficulties. When doing
an all or nothing debt payment program, you have now given all your financial
resources, “Money” to creditors, do you believe if you lose your job, or your car
has a major breakdown they will return “Their” money to help cover your
financial setback. All or nothing to pay-off your debts or saving money is not
a sound plan, taking a balanced approach works better. Implement a real plan, set“Goals”
for savings, debts, entertainment and investing, by using a simple budget.
Your word for the day is Balance! Balance
may be your key to financial success, and for many their financial survival. Balance
allows you to reduce your debts, manage your monthly expenses while building
savings and budget for investing all at the same time. This way if you have a
small financial set-back, hopefully you can recover quickly. Without balance
it’s very easy to have one side of your financial equation covered while the
other side falls into trouble, forcing you to take even further drastic
measures and falling further out of balance.
The correct savings and investing account
1. Emergency Savings Account: The goal for
most W-2 employees should be six months gross pay in an FDIC savings account. Use
a seven year goal to reach this balance, this is a balanced approach. There are
FDIC higher interest no fee, no minimum savings account, these work great for
an Emergency savings. For self-employed commission based, or seasonal jobs, set
a goal to save one years income for an Emergency savings, use ten years to hit
this goal. Do not touch this money, let it grow. Don’t stop when you hit your
Example: Gross monthly pay $3000 X 6 months = ($18,000 Goal) divide by seven years (84 months) equals $215
per month as an average, to reach your emergency savings goal of $215
2. Revolving Savings Account: Used for
non-emergencies so you don’t touch your emergency savings. Learn this simple
rule and you will find one of the best savings account you have ever developed.
Goal: A waterline balance (balance
fluctuates) of 20% of your monthly
gross income in a passbook savings account linked to your checking account.
Example: Monthly Gross income of $3,000
so 20% of that is $600, goal. Budget $80 to $100 per month or
as needed. Pad this account when possible, build it up prior to holidays and
use as needed for non-emergencies, but don’t touch the Emergency Savings.
3. Retirement Investment Account: Only
after savings accounts 1 and 2 are budgeted for, then put into your retirement.
How much? As much as you can save while keeping with your plan. Do not put this
account before 1, or 2. Never borrow or use your retirement for emergency
money, unless there are no other options. You may pay dearly for this mistake
if you do, in penalties and taxes.
4. College Savings: Accounts 1, 2, 3 should
come before college savings have been budgeted for each month, only then should
you contribute to a college savings.
These are the top four categories
for savings and investing. There are many sub-categories, you can decide how to
prioritize them after these top four are in order.
Oh sure, you can ignore this and do
what the industry says, you can borrow money to pay for an emergency, but we
all know how that usually ends, not well.
Phillip Day, President
Academy of Financial Literacy, Inc
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