It’s one thing to be told that you should be saving money, but another thing to feel like you can do it when you already feel like you’re struggling just to buy groceries or pay back student loans. And, yes, we get it, it can be difficult to think about saving money when you feel like you’re just one doctor’s bill from losing your apartment. Yet, when it comes to saving money, even a little bit can go a long way. And if you take the time to budget, you might find that you have more money to save than you realize.
According to the Loyola Consumer Law Review, the average American has negative savings. What does this mean? Basically, the average American not only doesn’t have savings in the bank, but actively spends more money than he or she earns. According to the Federal Reserve 39% of adults say they couldn’t cover an unexpected expense of $400. For this group, the expense would either go on a credit card or be paid by borrowing money from friends or family.
But when Loyola Consumer Law Review looked at the actual spending habits of the average American, the researchers found that “the average American family spends $540 on lottery tickets each year.” In fact, 38% of Americans with incomes lower than $25,000 believe that winning the lottery is the most likely way that they’ll be able to see their bank accounts grow into the thousands. Yet, if the average American family saved the $540 they spent on lottery tickets each year, in ten years, the family will have saved $5,400, and potentially even more if they put their money in a savings account that paid interest. Playing the lottery is just one example. Do you buy your morning coffee at a coffee shop instead of making your coffee yourself at home? Even if your coffee is only $2 every day, that adds up to $520 on coffee a year.
Refinery29 recently asked 16 New York women to talk about the unexpected costs of living in New York City. Some of the most common financial challenges included ordering takeout multiple times a week after a long day of work instead of planning meals and eating at home, calling an Uber multiple times a week, going to cafés, or eating lunch out instead of bringing a packed lunch. And look, when it comes to saving money, the café, the lunch out, the Uber, and even the lottery ticket are expenses we’d call “our wants.”
When it comes to saving money, it can be helpful to think about the money you spend as falling into two categories: your “needs” and your “wants.” Basically, expenses like rent, electricity, your Metro Card, groceries, your phone, and utilities are “needs.” The coffee and lunch out with friends fall into the “wants” category.
After you pay for your needs, the money remaining can cover your “wants.”
But what happens if you divide your "wants” money in half and put part toward savings and the other part toward fun? Many people refer to this practice as “paying yourself first.” Once you know how much money you need to spend on your needs, and how much money you have left for your wants, you can play a little savings trick on yourself. When you get your paycheck, you can transfer half of your “wants” money into your savings account. It might not seem like much today, but a little bit adds up over time. By having an emergency fund, you avoid the added expenses of paying late fees, bounced check fees, and credit card interest. This means you’ll ultimately have more money for your wants rather than throwing it away on high interest rates and fees. Of course, it takes a little planning, and a little discipline in the short-term (it can be annoying to have only half as much money for your wants, we get it), but in the long-term, you may be able to ultimately pay down that credit card, meaning you’ll have even more money for your wants long-term. Think about what it might mean to not have to pay your credit card every month, or do the math and figure out how much you’re spending in late fees.
The results might be more beneficial than you think in terms of your peace of mind and planning for the future—or for a rainy day.
What are some benefits of having a savings account and saving money? Let’s explore some of the benefits:
Savings Prepare for the Unexpected
The first goal of savings is to build an emergency fund. An emergency fund is money you set aside to help you in an emergency, like the sudden and unexpected loss of a job, an injury or illness, or an unexpected doctor’s bill. How much money should be in your emergency fund? The Journal of Consumer Education notes that the average American should aim to have enough money in their emergency fund to get them through three months of unemployment. (Other sources on the web might tell you that you should have six months saved, but this recommendation depends largely on the kind of work you do, your current income, and expenses. Some individuals in high-earning professions can expect to take as long as six months to find a job. For the average American, three months savings may be a more realistic, attainable, and beneficial goal).
Do you know how much money you need to make it through three months without work? If you don’t, you may want to read our article on budgeting.
According to the Journal of Consumer Education, only “one-third of American households have sufficient emergency funds to tide them through three months of unemployment or other large unexpected expense.”
Where should you save your money? By opening a Ponce Bank savings account, you can begin saving today and even earn interest on your money.
Let’s say your cousin has a wedding down in Florida or Puerto Rico you want to attend next year. Or you break your leg and end up in the hospital and with an unexpected medical bill. By having savings, you won’t have to put these expenses on your credit card. Not having to pay off a credit card bill every month means you’ll have even more money to put into savings (and also more money for that night out on the town with your partner). Most importantly, you won’t be shackled by the extremely high interest rates that most credit cards charge.
Pay Yourself First
One tactic that can help you save money faster and more easily is to use the strategy of “paying yourself first.” This requires that you have a good budget and have a clear understanding of how much money you make, how much money you spend on fixed expenses (like rent and your Metro Card), and how much money you spend each month on variable expenses (like groceries, your phone, and utilities). What’s left over goes either into your wants spending (your coffees, your Uber, your brunches) or toward savings and debt. In one example budget, let’s say you have $150, after fixed expenses are accounted for. That’s $150 each month to pay off debt, savings, and discretionary income. With good planning, you might be able to put $50 toward debt, $50 in savings, and $50 toward discretionary spending. While $50 doesn’t sound like a lot, within a few years, you might be able to pay off your credit card debt, increase your savings each month to $100, and ultimately reach your goal of having a three-month emergency fund.
Once you have written out a sound budget, you can plan to have a certain amount of money drawn from your checking account each month and put into your savings account automatically. This act of paying yourself first goes a long way to helping you reach your savings goals.
How Savings Accounts Differ from Checking Accounts
As you get into the regular habit of “paying yourself” every month, you might want to open a savings account at Ponce Bank. What is the difference between a savings account and a checking account?
The biggest difference is that a savings account with Ponce Bank will typically earn higher interest than a checking account, but a savings account will require a minimum balance. If you drop below the minimum balance because you withdraw money, you may be charged a small monthly fee to maintain the account. If you stay above the minimum balance requirement, a Ponce Bank savings account won’t charge you the monthly fee. This means you make money on your money, keep your savings separate from your spending money, and you can enjoy the peace of mind of knowing you have emergency savings if something goes wrong.
Before you open a savings account, you may want to speak to us here at Ponce Bank. We can help you decide whether now is the right time to open a savings account.
Start Saving Today
With a little budgeting and planning, you might be able to save more than you think you can. The best part about having savings is the peace of mind it can bring. If you live within your means and on a budget, you should not have to worry about missing a bill again. And if you save money, you should have less stress and be more in charge of your life. Want to try going back to school? Want to quit your job and look for more fulfilling work, or want to start that small business you’ve been dreaming about? Saving money is the first step.
If you want to start saving and earning interest today, a savings account with Ponce Bank is a great way to start. The best part about having savings is that it gives you financial power. Come chat with us today, we want to hear about your financial goals, and can help you work toward them.
Please note that this blog is provided for general informational purposes only. Some of the information may not be applicable or appropriate for all people, and the information is subject to change. You should consult with appropriate advisors to determine what is best for your individual situation. Products, services, terms and conditions are subject to change.