You bought a home to build wealth. It's your greatest asset. But now even if you can afford to pay the mortgage, your home is worth less than you paid for it. You've dutifully socked money away in your 401(k), IRA or another retirement account and the value of those investments has dwindled. Those credit cards? You know you should pay them off, but the interest rates are rising at the same time you're trying to whittle down the balance.
The financial pain for many Americans is intense, but would likely feel less acute if you had enough savings on hand. If you had money you could get to at any moment, it could cushion the difference between your income and your expenses, especially if you've been laid off.
Unfortunately, the 2008 National Foundation for Credit Counseling (NFCC) Financial Literacy Survey co-sponsored by MSN Money revealed that the majority of people don't have a sufficient emergency fund, defined as three to six months' income saved. More than one-third, or roughly 76 million adults, say they do not have any nonretirement savings. Although the majority of people are currently saving for retirement, more than one-quarter aren't saving.
Here are 10 ways to save in 2009. First step, start small.
- Save for one month's expenses. Put 10% of your take-home pay into an interest-bearing savings account. Plan to have saved at least one month's worth of expenses — or better yet, one month's salary — by the end of the year.
- Shop around for the best rate. The bank where you have your checking account may not offer good interest rates on a savings account. Compare rates at sites like Bankrate.com and SavingsAccounts.com. Make sure the institution is FDIC-insured. You can open an HSBC Direct online savings account with just one dollar and earn a 3% rate. No minimum balance required.
- Make direct deposits from paycheck to savings. Some employers will allow you to designate several accounts for your paycheck. Have at least 10% of your paycheck directly deposited to savings, the rest to checking to cover monthly bills. If you can't do direct deposit, have the money automatically taken out of your checking account every month on payday.
Still not finding enough dollars to put into savings? Look harder. Here's how:
Cut back $10/month on 15 expenses. Examine your monthly expenses and see what you can cut out or cut back. If you could carve out $10 a month out of 15 different spending categories, you'd have $150 a month to go into your savings account. That means that in 12 months, you'd have built up a cushion of $1,800, which should see you through most short-term emergencies. (According to Consumer Reports, just brewing your own 16-oz. cup of coffee can save $350 a year.)
Put your raise, refund, monetary gifts right in the pot. Pretend you never received that windfall, however large or small. Since you weren't living on that money before, don't depend on it now. Use an income tax refund, if you're fortunate enough to get one, as the seed money for your savings. Perhaps it'll give you the funds you need for the first month of expenses, but remember your ultimate goal is to save for at least six months' worth.
Start saving for the holidays now. You probably did all of your holiday spending in the last six weeks — or less. Tally up your expenses for this holiday season, including gifts, travel, entertaining. Divide the total by 10 and contribute that amount to your savings each month from January to October. Next November you can start spending that amount, paying cash for your holiday purchases.
Reduce 401(k) contributions and put that money in savings. Continue to contribute enough money to your company's 401(k) to receive the matching contribution, if offered. But if you don't have sufficient cash savings, don't put in any more than that amount. Direct the excess percentage to your savings account. Don't suspend 401(k) contributions altogether, because it's still tax-deferred savings — a big plus. Just make sure you're able to put at least 10 percent of your take-home pay into cash savings. If you put in that amount, you may want to reduce your 401(k) contributions.
You'll also need to set goals for saving this one-month sum and then getting at least three to six times that amount into your cash savings account.
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Designate savings for "emergency" only. Many people regularly deposit money into savings only to pull it right back out. Define what constitutes an emergency, and don't touch the money unless it meets the definition. Also, don't keep your money in a checking account, as that makes it too easy to access.
Define your ultimate savings goal or goals. You need to start small, but don't forget the bigger picture. Ideally, to have a really comfortable cushion, you'll need to save at least three to six months' worth of income. In this economic environment, it's wise to set your savings goal at the high end of that range. Once you have your emergency fund in place, you may want to start a "car fund" or "house fund" or "debt reduction fund." Keeping different funds for each purpose can help you see how close you are getting to obtaining those specific goals.
Make saving a family affair. Set a family goal as well. Have your older children set a target of how much they plan to save (from baby-sitting, working at the supermarket or ice-cream store). Younger children can help you gather and count loose change and go with you to the bank to make the deposit. Let everyone know there will be a reward when the goal is met — a pizza party or night at the movies.
Finally, don't be afraid to ask for professional help. If you can't work out a budget on your own, go to a workshop or seminar at a certified credit counseling agency or hire a certified credit counselor. Find one that is certified by the National Foundation for Credit Counseling at www.debtadvice.org.
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