Start a savings account
Getting into the habit of setting money aside regularly is the foundation for a successful financial future. Be sure to sign up for automatic transfer of funds when you open the account. Once done, saving will be a breeze – all you have to do is choose the amount you want deducted regularly from your checking account and deposited into your savings account.
If you save a portion of every paycheck, it won’t be long before you accumulate an impressive sum. Financial experts recommend keeping at least a couple months worth of expenses tucked away in a savings account, because there is no tax consequence or penalty to take funds out whenever you need to.
You deposit your cash and make withdrawals at any time without paying a penalty. (However you are restricted in the number of withdrawals you can make.) Savings accounts are insured by the FDIC or NCUA, so you won’t lose your money even if your financial institution goes out of business. In exchange for total liquidity and stability, savings accounts usually provide a very low investment return.
What if your income stream suddenly stopped? Would paying for the essentials be difficult? What if an unexpected expense, such as a medical bill, popped up? Would you be able to pay it? Many people turn to credit to help them make ends meet in difficult times. While it may provide temporary relief, it could cost you, as interest accumulates on your balance if you cannot pay it in full. Not to mention, it may be a struggle to make the payments each month.
An emergency savings fund will help you be self-reliant and take care of bills if you have an unexpected expense or your income is reduced or eliminated without relying on credit. The size of the fund should be based on your family size, expenses, and personal comfort level.
However, after you have built up enough to tide you over in the event of an emergency (job loss, unexpected car repairs, health problems, etc.) you can take the excess and begin to invest – so your money can actually work for you instead of just the other way around.
Keeping savings in your checking account is usually not a good idea because you may be tempted to spend it prematurely. So where can you put it? Minimal investment risk and easy access are the most important aspects for an emergency fund –while a high return is nice, it is not a priority.
Saving and Retirement
While saving and investing for your retirement can be complicated, in most cases it doesn’t have to be. A simple, step-by-step approach can help you build up an impressive sum with a surprisingly small amount of effort and outlay.
The sooner you begin a savings account for your retirement, the longer your investments have to grow. By starting early you have the most powerful force in mathematics working for you: compound interest. With it, interest is calculated not only on the deposits you make but also on the accumulated interest from prior periods.
Compound interest works best over time, which is why starting early is key. For example, if you were to put aside $100 per month beginning at age 30 you’d have about $216,000 at 65, assuming an 8 percent annual return. However, if you wait ten years, you’d have just $91,000 saved. The difference in contribution amount is small: $12,000 ($100 each month for 10 years) but the actual difference in total savings is huge: $125,000 ($216,000 minus $91,000).
Use dollar cost averaging
Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities (stocks, bonds, mutual funds, etc.). All you have to do is deposit the same amount of money at regular intervals into well-balanced investment accounts (typically mutual funds). If history is any indication of the future, your investments will gradually but steadily increase in value over time.
Maximize tax-deferred savings
If you have a defined contribution plan (such as a 401(k) or 403(b)) available through your employer take advantage of it! Your contributions reduce your taxable income, the earnings grow tax-deferred, and many employers match a percentage of what you put in. You also have control over the investments, and most employers offer a diverse menu of mutual funds from which to choose.
Individual Retirement Accounts (IRAs) are another way to save and invest for your future. You can open an IRA at just about any financial institution, and once you do, you can begin to invest in just about any type of security.
Planning for retirement is too important to put off – which is why a simple strategy is so critical. The more complicated it is, the less likely you will take action. Once you’ve started, practice patience. For most of us, saving enough money to retire on takes many, many years.
At Idaho Central, we have savings account options to help you make insured investments with excellent rates. Whether you want a simple and flexible savings account, an account to save for specific purposes, an account to earn a higher rate, or an account that encourages saving early in life, ICCU has you covered.