The Dos and Don'ts of Saving money

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A penny saved is a penny earned. Well, not exactly. A penny saved is really $0.0098 earned after adjusting for inflation. Inflation rates in the US are projected to reach 2.24% in 2021 (1). Inflation is defined as a general rise in price level in the economy. As a consumer, your dollar becomes less valuable over time and reduces your purchasing power. During my childhood,  a bag of single serve chips cost $0.25 a bag. Now, that same bag cost $0.75. In the 90s, your dollar was able to buy 4 bags, now it can cover the cost of only one bag.

What does this mean for you?  Unless you put your money to work, and utilize your savings correctly, saving money often means losing money.  To help you work through this, let’s look at some of the dos and don’ts of saving money and help you save your money wisely.

DO Make Your Money Work For You

Let’s assume you’re able to save $500 a month. Over the course of ten years, if you stashed this money away in a standard savings account, you should have about $62,000, assuming an interest rate of 0.5% (a typical savings account will yield anywhere from 0.1%-1.0% interest). $60,000 will have come from your own contributions, and the remaining $2,000 from interest. Now, let’s take that $500 and invest it into an index fund assuming a conservative 7% growth rate. With this route, your total will net out at $86,500 with the same $60,000 in contributions, but an additional $26,000 in interest gained.

By investing in an index fund, you have managed to earn an additional $24,000 vs. putting your money to sit in a savings account! That $24,000 could be worth a new car, a down payment on a house, or a year’s college tuition for your child.

DON'T neglect saving entirely

One thing I will stress is that while I don’t recommend putting all of your money into savings, I do recommend you put some. Savings accounts do have value. You need a savings account for money you can easily access in the event of an emergency.  My mother always said life happens when you’re busy making plans and in my experience, that has most definitely held true. Everything from jobs loss, car repairs, or emergency medical bills can put you in the hole if you’re not prepared.

DO consider a high yield savings account as an alternative

As we just mentioned, savings accounts are necessary. Should you have one started or are considering opening one, consider a  high yield savings account like CIT (paid link) to maximize return. High-yield savings account operate similarly to traditional banks but provide a much higher annual yield (hence the name high-yield savings).  Having trouble getting started on saving? Try a money saving challenge to get your motivated.

DON'T sacrifice paying off high interest debt to increase savings

I am a big fan of living debt-free (and I’m sure you are too). If you are sitting on a significant amount of high-interest debt, I suggest saving a nominal amount to cover 1-3 month’s of expenses, dedicating any additional funds to paying down debt. It’s likely that what you save every month won’t matter when the interest rates on your loans are still compounding.

DO make saving a regular habit

When I started my first job, I picked up a great habit. aI started utilizing my company’s direct deposit to split my income between my checking (used for paying monthly bills), and my savings. The automatic deposit every month meant I didn’t need to think about even touching that money.

Source: US-Projected Inflation Rate from 2010-2021 https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/