Savings don’t always have to be at the expense of striking off items on your shopping list. It should also not be treated as one catch-all account for extra cash left over from your paycheck after you have paid for expenses.
There are many ways you can save smarter. Each of your savings goals has different priorities and time horizons. Finding the right savings vehicles can increase your returns far beyond that of the standard savings account. So, let’s get started.
Categorise your savings goals
Major themes: What are you saving for? Make a list of major savings themes. High priority categories are typically retirement, healthcare costs and children’s education. What else are you saving for – a vacation, new mobile technology, education, lessons, a new car?
Emergency funds: If you do not yet have an emergency fund, it should be a separate category. An unexpected emergency can throw off all of your other savings goals. If you are guilty of dipping into the emergency fund too often, you may even want to have a mishaps fund where you can allocate money for unplanned expenses.
Let’s say you are on vacation and miss the connecting flight home. If you do not have travel insurance, you will have to shell out the money for an extra ticket.
If you do not have a mishaps fund, then you may have to cancel your yoga club membership for a few months to cover the expense. Why not dip into your emergency fund?
Several weeks after your vacation, you are in a car accident and need time off work. In this case, you use your emergency fund to help cover medical expenses until your health plan reimburses you.
To avoid misusing the emergency fund, make a list of what it is intended to be used for.
Prioritise your savings goals
In order to boost your retirement savings, you have decided to save for a down payment on a second house to be used for rental income.
This should be categorised separately from the new swimming pool you want to install in your present home. Which is more important?
The real estate investment will appreciate in value and provide rental income. The swimming pool may add some value to the sale of the home.
Your two categories might be Real Estate Investments and Home Improvements. Real Estate Investments may fall under the umbrella theme of Retirement Savings. This is a high priority category.
The above two savings goals have different purposes, priorities, future value and time horizons.
Ask yourself (using the house savings as an example) the following questions:
- What is the purpose of this goal? Income generation for retirement savings
- How important is this goal? High priority
- How soon do I want to achieve this goal by? Two years
Match your savings goal to your savings vehicle
Matching savings goals to savings/investment vehicles is a key step in improving savings efficiency. Where you place your money will partly depend on when you will need it.
- For money needed within the year, liquid savings accounts are best.
- Certificates of deposits and money market funds charge fees for frequent withdrawals but may provide three to six withdrawals free a year.
- Bonds will return higher interest and make sense if your horizon is two years or more.
- For longer periods, annuities and investment-linked insurance allow you to choose the duration.
The latter are flexible insurance products that let you specify the terms and risk profile. Long-term investors may consider stocks. Exchange traded funds that track an index are a safe bet.
5 smart savings goals you should aim for
• Retirement: Your main retirement savings will likely be through your employer plan if you are employed full time. If your employer offers matching funds, they are a good and often overlooked opportunity to shore up your retirement savings.
A number of savings vehicles can be pursued to increase your retirement savings. Insurance products such as annuities and investment-linked insurance products allow you to invest over a specific horizon and receive a lump sum or monthly payments in your retirement years.
• Healthcare: Health savings accounts are a tax-deferred way of saving for future health care needs. Compound interest will build up your account value over time for when you require home care, long-term care and other health care needs.
• Education: Start with tax-deferred education plans. A number of insurance products can provide added security. An investment-linked insurance product, for example, allows you to choose the underlying sub-fund you want to invest in, and often the allocation between the insurance and investment product.
If you die before the policy matures, the funds earmarked for education can still be paid to your beneficiaries, your children, to help them cover education costs.
• Home down payment: The second home down payment has a time horizon of two years. There is no reason to have your money sitting in a low interest paying savings account. A high yield money market fund is an option, and will allow three to six withdrawals a year without charge.
• Home improvements: Money for home improvements within the year should be in a more liquid savings account. A high yield savings account will give you a higher return on your savings. Some banks will offer high yield rates for deposits starting at $1,000.
Today, a savings vehicle exists for almost any purpose. Taking the time to categorise your savings accounts and match purpose and time horizon with savings investment vehicles will help your savings work more efficiently for you.
This article first appeared in thenewsavvy.com
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