Where to Put Your Savings

In my previous post, I linked to Bankrate's 9 reasons to save money.

So, now that you're motivated to save, how do you do it? Here are 11 ways to jump-start your savings. My strategy is to track all spending (I use Quicken, but a notebook will do). This is your way of keeping score, seeing where your money is going. Then you can set goals, which will keep you motivated to cut your spending. If you're saving up for a vacation or a house, or something that you really want, it will be easier to give up something that isn't as important to you, like that proverbial daily cup of coffee that everyone is always telling you to cut. There are probably other things that you spend money on every day, every week, or every month, that can be cut. Multiply by 365, 52, or 12 to see how much money you're spending on that every year. $50 a month is $600 a year, probably enough for a rent payment or a couple of car payments! A good goal is to save about a third of your income or more, but 10% should be a bare minimum.

Now that you're saving money, what do you do with it? Sticking it under the mattress or in a coffee can probably isn't the best strategy--inflation is going to eat the value of that money, and you're in danger of losing it to fire or theft. Your checking account or wallet is for money you're spending, not money you're saving.

It might help you to picture the process of saving money. I sometimes think of money like running water. If you've ever heard the term "cash flow", it might make sense. You have income, like a stream of water (maybe a trickle from a hose, or a great river). Saving is catching this flow in a container. Maybe at first you fill up a cup of water from the faucet. Now you have to put this into a container, until it's full. Then you get a bigger container and start filling that, then a bigger, and so on. Here are some containers, in order from small to large:

1. A basic emergency fund - This container should be at least 3 months' worth of living expenses, to be used in the event of an unforeseen emergency, like losing your job or being injured in a car wreck. Rent money, utilities, car payments, groceries, that sort of thing. How much more than 3 months? That depends. If you think there's a strong possibility you could lose your job, or it would take you a long time to find another one, you may want more saved up for this emergency. Where do you keep this emergency fund? A plain old savings account is fine if it's a small amount, like maybe one month's living expenses. You want to be able to get to this money, or at least some of it, quickly, in the event of an emergency. You won't earn much interest on this money, but it will be available almost immediately if you need it.
   
   
2. A fully funded emergency fund - After you've gotten enough in cash savings in the bank to get you through the first month of an emergency like losing your job, you need a more robust savings container, that will pay you more interest on your money, but will still be completely safe, and reachable if you need it during an emergency like being out of work. To me, this means an online bank like ING Direct or similar. They pay over 4% interest (which is pretty much enough to keep up with inflation), and are FDIC-insured, so you don't have to worry about losing your money. With no minimum balance required, and no fees, you can start small and fill this account with every paycheck. If your basic emergency fund is about 1 month's expenses, this part of your emergency fund should be several months' worth of expenses. Maybe $4,000 to $20,000 or so, depending on how secure your job is. This will help you Sleep Well At Night (SWAN). However much it takes for you to not Stay Awake Worrying (SAW).
   
   
3. Once you've achieved SWAN, next are containers for your savings goals. Do you want to buy a new car, or a mostly new car? A house? You can borrow money for these, but you may want to pay as big a down payment as you can for the car, and 20% for a house downpayment is a good rule of thumb. Don't forget about the expenses that go along with these purchases: insurance, maintenance, taxes, etc. Figure out how much you need for these, and when you plan to make your purchase. If it's more than a year away, you may want to look into Certificates of Deposit, where you put the money out of reach for a set amount of time. You need a container that is right for you and your situation. Bankrate lists The 8 Top Places to Stash Your Cash, and evaluates the pros and cons of each.
   
   
4. Finally we get to saving for retirement. What about college for the kids? There's financial aid, scholarships, and student loans to help pay for that, but nobody will loan you money for retirement. Your choices here are 401(k)s, IRAs, mutual funds, stocks and bonds. The important thing to keep in mind here is education: you will have to educate yourself and study your options.