Most people are familiar with the old Ben Franklin saying, a penny saved is a penny earned, but there is more to it than that. A penny saved is actually two pennies removed from a penny spent. Think of it this way, there are two men who each have one penny. The first man spends it on dinner which means he no longer has a penny, or -$0.01. The other man decides to save his penny so he still has one penny, or $0.01. Now, how many pennies does it take for the man who spent his penny on dinner to acquire the same balance sheet as the man who saved? If you did the math correctly, you’ll come out to two pennies. One penny to relieve the debt, and one more penny to get back to having one penny again.
The example above shows how powerful saving can be, and self-made millionaires are often masters of saving, allocating their resources so that they have more assets (cash or other investments that make money over time) than liabilities (debt or things that lose money over time). Below is a typical savings progression.
When most people start a savings account, it recommended that an emergency fund consisting of about 3 months of rent and expenses first be built. This is the most important goal because this fund could keep you on your feet in the case of ill health, loss of job, car repair or other rainy days.
Expense Buffer Savings
Once an emergency fund is in place, an expense buffer can be built which is basically savings account amounting to your total average monthly expenses. The idea is to pay off the current month’s expenses with last month’s buffer. That way bills are always paid on time, and the buffer can be utilized before having to dip into the emergency savings.
Once a hefty savings account has been created, then income should start to flow into assets that will generate wealth or short to medium term savings goals for large purchases and future travel. The Retirement bubble just represents allocating a higher percentage of your income to retirement after the essential savings accounts are where they need to be. For longer financial goals like funding a mortgage, a college savings account, or general wealth, a portion of income should flow to investment strategies that are focused on letting your money work for you, potentially becoming a source of income.
When choosing a savings account, make sure you look around for the best interest rates so that your money isn’t being stagnant. You can open multiple accounts from different banks, choosing between brick and mortar or online banks or a combination of the two. Personally, I use Ally bank which offers interest rates on both checking and savings and ATM fee reimbursement. There are many savings account choices out there these days but a few that offer near 1% interest are Ally, Chase, Synchrony, Barclays, Charles Schwab, and CapitalOne.
While savings accounts should be used as a buffer fund, for future expenses, or an emergency account, long-term savings should be put into an investment account to beat inflation and allow your money to grow. In the next article, I will discuss different investment platforms and strategies that a person can mix and match depending on the amount of risk they want to take on and their investment goals. Ultimately there are lots of different ways to start putting away money. As long as you are spending less money than you earn, find what works for you!
Disclaimer: I am not a certified financial planner or advisor nor am I affiliated with any companies or financial institutions mentioned. Any information given is for educational purposes only. I am simply a person with curiosity regarding money matters and hope this article is helpful for those who read it.