You don’t need to be a financial expert to understand the importance of saving money. Most CPAs and CFPs advocate keeping at least three months’ worth of emergency funds in the bank — a figure that millions of Americans struggle to meet, with millions unable to handle a $1,000 unexpected bill.
The less cash you have saved, the more credit card debt you’ll accumulate. It’s a vicious loop that sometimes seems unbreakable.
While we understand the importance of saving money, we may not always know the best ways to do so. We may be even less aware that awful ways to save are actually terrible. Yes, just like when we spend, we can make mistakes when saving, even if our intentions are excellent. Here are some of the most typical savings blunders that finance professionals witness daily among Americans.
Failing to Get Started
“The biggest error people make when saving is not starting,” said Elle Kaplan, CEO and founding partner of LexION Capital, who promotes the 50-30-20 strategy. “Each paycheck should be split 50 percent for bills and requirements, 30 percent for ‘wants,’ and 20 percent saved and put into an investment account. This works so well because it simplifies and thereby lessens the process of spending less and saving more.”
This method should also be beneficial because it offers a clear and consistent procedure that does not necessitate significant arithmetic skills.
“By constantly focusing on budgeting and penny-pinching, you save effortlessly without feeling restricted,” Kaplan added. “Make a regular deposit as soon as your salary arrives to make saving the crucial 20% simple and straightforward.”
As an afterthought, save
“One error I see people make when trying to reach a savings target is thinking about saving until after they’ve finished all of their monthly spendings,” said Matt Morris, a financial advisor with Sanderling Finance, LLC. “It’s difficult to be consistent if you wait and merely save whatever is left over.”
Morris suggests thinking of savings as a recurring monthly expense, similar to your energy or internet payment.
“Automate the process by setting up a recurring monthly transfer to savings and only spending what’s left,” Morris advises. “You can begin with a small amount and gradually raise your monthly savings as you get more comfortable with a tighter budget. Over time, you should notice a more constant increase in your savings.”
Keeping all of your savings in one place
“Congratulations if you’ve been able to develop the habit of saving, but if you’re like most people, your savings may be funneled into one account,” said Jason Dubon, CFP and founder of DesignWealth. “It can be difficult to keep track of how much is allocated to each objective if you’re working toward multiple goals and they’re all pouring into one account. Every time you take money out of your savings account, there’s a good chance you’ll unintentionally spend it on something else.”
Divide your savings into smaller buckets that are easier to track to avoid this problem.
“Rather than putting all of your savings into one account, open many accounts — preferably ones with no fees — and start allocating,” Dubon advised. “It’s up to you how you allocate, but the essential thing is that you can now clearly see what goes toward each goal. We’re introducing the behavioral economics concept of partitioning, which is designed to create modest hurdles that cause consumers to think about their options and be presented with a new decision point.”
Taking Advantage of a Low-Yield Savings Account
“Many bank savings account products offer meager interest rates, which only depreciates the value of the money you save in it,” Cryptoner founder David Levi explained. “The truth about saving in low-interest institutions is that your money depreciates over time unless you put it in a high-yield savings account. It will almost certainly receive a significant return.”
Saving too much and investing too little is a recipe for disaster.
“The most common error people make when saving money is leaving too much money in their checking and savings accounts,” said Dewan Farhana, the founder of Doctor Finances. “Only keep 3-6 months’ worth of emergency funds in a high-yield savings account, and the balance should be invested. Investing your money rather than conserving it is critical for two reasons: it combats inflation and allows your money to increase in line with market returns. Investing your money is the most effective approach to build long-term wealth.”
While living on borrowed funds, you can save.
“People make the saving mistake of saving while living on borrowed money,” said Lucia Jensen, CEO of WeLoans. “It’s the same as lying to yourself, especially if you pay your debts with credit cards, loans, or overdrafts. It is a hurdle to me because, no matter how much money you put into your savings account, you must offset it through your spending. You spend money you don’t have, which is bad because it merely adds to your debt. If you don’t get a handle on it fast, your debt could grow to be more than your savings, making it difficult to recover.”
A better option is to construct a dependable budget that details your expenses to constantly examine and track your spending — and stop yourself from overspending before it happens.
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“A precise budget can also assist you to figure out where you can save money by chopping and changing,” Jensen added.
Inaccessible savings
“It’s difficult enough to save money. Don’t mistake depositing your money in an account with an early withdrawal penalty because it will be difficult to get your money back, “Amanda Sullivan, a CreditDonkey research analyst, agreed. “You won’t be able to withdraw money for emergencies, and you’ll be penalized.”
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Always have 3-6 months of funds in a conventional savings account in an emergency.
Purchasing Low-Cost Items to Save More
“People often feel that the best way to save money is to buy everything on sale,” said Matthew Dailly, managing director of Tiger Financial. “While this strategy may work in some situations, the real key to saving money is understanding when to buy the best deal.
“Purchasing low-cost tools that will only last a year or two rather than investing twice as much on equipment that will last a lifetime may cost you more in the long run because they will need to be updated regularly.
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“Another example: Rather than buying a low-cost cereal with a lot of sugar and few nutrients, invest in a nutritious cereal that costs a little more but keeps you healthier.”
