While you are on the path to financial sanity, you will need to do lots of saving and hopefully some investing as well. There is a difference between the two, and though it may seem overly simplistic, it’s worth the time to differentiate the two here. Savings should be happening all the time–right now! It is the most important thing to start doing, right up there with the zero-based budget and the debt snowball. Savings is what keeps you sane, and keeps your money sane. It helps you sleep at night, it makes you feel less tense, it makes you feel like you are accomplishing something as you watch it grow.
A good savings plan is not exciting. It is kept in regular, low-yielding savings accounts, ideally a money market account. You probably won’t earn more than the rate of inflation on your savings account. In fact, these days, you might not even earn that. That’s OK. What you have the savings there for is piece of mind. It is not going to make you rich. It is going to make you feel safe and comfortable enough so that you have the freedom to become financially independent. Your savings is not meant to stay in a money market account (or other low yield account) for long, it is only meant to be the money you plan to use in the next five years. You cannot afford to risk the money you need in the next five years, it needs to be there even if the stock market takes a dive (as has been the case lately), or if it soars.
Since savings is for the near future, you would use it for the following kinds of accounts:
- Emergency funds
- Vacation funds
- Next year’s Christmas funds
- Saving for a new car
- Saving for a new computer
The easiest way to organize your various savings funds IMO is to get an account with ING Direct. At ING, you can open as many different sub accounts as you want, even for short-term things like “Christmas savings,” etc. If you don’t already have an account I highly recommend them–they even give you a $25 bonus just for signing up.
So, in short, savings should be happening now–today! And always. In my next post, I will explain the difference between this kind of short-term savings and long-term (over five years) investing. Stay tuned.