If you just got out of college and you are trying to figure out how to get ahead on your entry-level salary, make sure you start by reading our tips on money management and monthly budgeting. Once you’ve gotten your monthly bills organized and under control, consider starting a savings account.
Why You Need Savings
Most financial experts agree that you should have the equivalent of six months of your income in a savings account for emergencies. You’ve only been out in the real world for a short-time, so you may not realize the need to have an emergency fund, but it has become more important in today’s challenging economy. If you develop a medical condition or lose your job, you will need to have money to live on until you can get back on your feet.
Savings aren’t only for emergencies. If you are following your monthly budget, you may realize that you don’t have enough money to purchase large ticket items, such as a new car. Most new graduates have little or no credit, which would result in extremely high auto loan interest rates. You may even have to ask someone to co-sign the loan. You will be way ahead of the game if you start saving for your new car now and purchase it when you have a sizeable down payment or the full amount in cash.
Types of Savings Accounts
Did you know that you can get paid for saving money? It’s true. When you deposit money into a savings account or CD, the bank will pay you interest on your money while it sits in your savings account.
Traditional or Online Savings Account
Check online and at your preferred banking institution to find out what interest rate you will earn by opening a savings account. You’ll also want to find out about any minimum balance restrictions or hidden fees. Sometimes you can find higher rates of return by using an online savings account, where all of your transactions are done through the web.
CD (Certificate of Deposit)
A CD, generally offered by banks and credit unions, is a virtually risk-free insured “time deposit” with a guaranteed interest rate. In exchange for depositing your money for a set time frame, you will be paid interest while the bank holds your cash. A CD is different from a savings account in that there are specific fixed time periods and interest rates associated with these investments. Make sure you don’t need your money while it’s sitting in a CD; there are generally penalties for making early withdrawals.
- Break all of your expenses out as a percentage of your monthly income so that you can set a goal for how much you can save. See the example below:Rent: 30%
Monthly Bills/Obligations: 20%
401k contributions: 10%
Savings Goal: 20%
- Set up automatic transfers into a savings account each payday. That way you start saving before you start spending! You can probably afford to save a few dollars a week, and it will be worth it!
- Continue to check the rate of return on your savings account. If you find a bank that offers a higher savings rates than what you are currently earning, you might want to consider transferring your money.
- If you are being charged fees on your savings account, you may have your money in the wrong place. There are plenty of banks who would love to hold your money for free.
- Make a habit of reevaluating your savings goals routinely. If you used your savings to purchase a large ticket item, you may want to replenish your savings. If you get a raise, you’ll want to review your budget to make sure your savings goal is still appropriate.