By FINRA Investor Education Foundation
Do you have trouble finding cash to set aside in your savings account? You're not alone. Just two out of five American households report "good or excellent progress in meeting their savings needs," according to the 2017 America Saves Week survey.
Service members frequently ask where and how they should start saving, whether in an emergency fund or a retirement account. Our answer is, why not both?
It's important to set aside some money—about the equivalent of three to six months of living expenses—in an emergency fund. Even with a steady paycheck and covered medical expenses, it’s still a good idea for military families to plan ahead for unreimbursed PCS or travel costs, unexpected home and car repairs, or surprising tax bills. Without savings, you might need to rely on credit cards and other borrowing to pay for emergencies, which could result in serious debt.
Three to six months of living expenses may sound like a high bar for many service members, so be realistic, and contribute to the account over time. You don’t have to ignore other savings needs while you build your emergency fund. Once you have built a base level, such as $500 or $1,000, consider diverting some additional savings into a retirement account, while continuing to fund to your emergency fund.
Because you never know exactly when you will need access to the money, the best place for your emergency fund is in a liquid (easily accessible) account. A liquid account might be a regular savings account at a bank or credit union that provides some return on your deposit, and from which your funds can still be withdrawn at any time without penalty.
To earn a slightly higher interest rate, and to remove some of the temptation to tap into the fund for non-emergencies, some people choose to save their emergency fund in a certificate of deposit (CD), or a series of CDs with one maturing every six months or every year. This approach is called laddering. If you don’t otherwise need the money, you can roll over the maturing CDs into new CDs to keep your ladder intact.
Another place to build and store an emergency fund is a money market fund. A money market fund is a mutual fund that invests in high quality, short-term debt, such as Treasury bills. Compared with other types of mutual funds, money market funds are highly liquid, relatively lower-risk securities, so much so that they have historically been considered cash equivalents.
It’s usually best not to invest your emergency savings in the stock market or other investments that are subject to market risk or that may tie your money up for a long time. You want the emergency fund to be there when you need it most.
Once you’re on your way to establishing an emergency fund, consider directing a portion of your remaining disposable income toward retirement savings. When it comes to saving for retirement, tax-advantaged options such as the Thrift Savings Plan (TSP), a 401(k) or IRA can be smart choices. In addition to potential tax benefits and employer contributions, there is an opportunity for your savings to compound over time. And, in many instances, your employer – Uncle Sam for federal employees and service members who contribute to the TSP under the new retirement system – might offer to match a portion of your retirement contributions each year. That’s free money. But remember: Your retirement savings should be separate from your emergency fund.
A critical part of a successful savings strategy is to make ongoing, regular deposits into an account where it can accumulate, and there’s no better way to stick to your plan than to automate your savings.
In employer-sponsored TSP or 401(k) plans, contributions are often made automatically whenever an employee is paid. Regardless of whether you have this option, you can easily automate contributions to your other accounts. Banks and financial firms allow consumers to schedule regular money transfers to a savings or money market account.
When you automate your savings, you build savings into your monthly budget, just like an automated payment to a utility company. Paying yourself first by building an emergency fund and a retirement fund is double the reward.
For more information about everyday finances, visit SaveAndInvest.org.
Are you trying to save money? Let Military Saves help you reach your savings and debt reduction goals. It all starts when you make a commitment to yourself to save. We'll keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.
What does it mean to save with a plan? @FINRAFoundation answers this question >> http://bit.ly/2EUgp2i @MilitarySaves