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There’s an idea, held by a surprising number of people, that saving money is a straightforward matter of moving some of your funds to one location and then leaving them there. Job done.
Except, of course, that’s only the tip of the iceberg in terms of how we should handle our savings — and a pretty poor overall strategy by itself.
Here’s a quick guide on what you should do with your savings.
Allocate your savings to different categories
There’s no such thing as “savings”; there are only “savings for specific purposes.”
You see, when you decide that you’re going to “save” a certain amount of your income, and then transfer it to a savings account, all you’ve really done is created some potential confusion for yourself down the line.
So, these are your “savings”? And when and why is it ok to withdraw from your savings? The answer will usually be something like “whenever I need to”, or “in an emergency”, or even “never”.
This means either that the money might be spent at any given moment, whenever a tempting expense suddenly makes you feel that it’s “worth it”, or else that you become a miser who hoards money away indefinitely with no aim, and who feels deeply paranoid about ever using it for anything.
The solution is to “save” in terms of different categories, and keep a record of how much you have in each savings “category” at any given time, even if the money is all in one bank account.
Examples could include “money for future home”, “money for emergency medical expenses”, “money for new computer”.
Doing things this way ensures that you keep your eye on the prize and always know when it’s appropriate to spend some of your saved money or not.
Treats debts as their own categories
Debts should be treated as their own savings categories and be budgeted for as such, including minimum-required monthly payments on credit cards from services like best.creditcard (these payments should be automated as much as possible).
As debts are expenses just as surely as your future dream holiday, they need to be approached as such when you’re planning your finances. How much can you afford to put towards paying off a particular debt this month, while still paying your bills and allocating money to the needed areas?
That’s an important question to ask, rather than merely throwing money at your debt in a haphazard, anxious fashion and hoping for the best.
Create long-term and short-term savings goals
Savings goals can take long-term and short-term forms, and both are important for having a financially stable, balanced life.
Short term savings goals include things like budgeting a certain amount of your income to cover rent and grocery costs, or perhaps going to your friend’s birthday next month. With these categories money will be entering and leaving your account regularly.
Long-term savings goals involve putting away money, bit by bit, for events far in the future, like a wedding, or buying a home.
By saving for these long-term expenses well in advance, you’ll be able to avoid a sudden financial crisis when the day actually arrives. You’ll have prepared well in advance.