Managing Your Savings Wisely
|Print this page|
In the first part of the Managing Your Savings Wisely Series we discussed the importance of paying yourself first. Once you've got an automatic savings system in place (it's easier than you think!), it's time to start focusing on your priorities. Where and how am I saving? What and when am I saving for? You can unearth the answers quite easily. Just think 'pyramid.'
Build Your Healthy Savings Pyramid
For a good model on savings, take a look at the venerable Food Pyramid. It gives a clear visual guide of the types of food your body needs, and in what amounts, to achieve nutritional health. To help keep you fiscally fit, build your own Healthy Savings Pyramid to guide you.
At the base of your pyramid is your long-term savings. The money you invest here will help build a solid base of savings for your long-term goals. Mutual funds can work well for this. The next level up is where your mid-term savings are. This is the big-ticket fund you plan to spend within about five years. It might be five years' worth of living expenses if you are already retired, a college fund if you have older kids, or a house down payment. This is also where you stash money earmarked for the new roof, new car, or even a major vacation. CDs or short-term bonds can be used for these predictable expenses.
The next level up is where your mid-term savings are. This is the big-ticket fund you plan to spend within about five years. It might be five years' worth of living expenses if you are already retired, a college fund if you have older kids, or a house down payment. This is also where you stash money earmarked for the new roof, new car, or even a major vacation. CDs or short-term bonds can be used for these predictable expenses.
At the top of your pyramid is your short-term savings. These are liquid funds you might need for medical emergencies, car-repair emergencies, a sudden loss of your job. This money needs to be readily available -- but not too readily available (or you might use it for something like a vacation or plasma TV.) A separate savings account or short-term money market account would be a good option here.
How you fund your pyramid depends on a number of factors, but keep in mind that the pyramid only works if you have a plan for all three sections.
How much should you save? Ask yourself these 3 questions:
- How much of a risk taker are you? You may be a bit more daring and willing to plan three years' worth of major expenses. Or, do you like to play it safe, and want seven years' worth? Determine your comfort level, play out all kinds of life scenarios and see where you stand as a risk taker.
- What are your present living expenses? A great way to answer this question is to track everything you spend in one month - from your mortgage payment to your newspaper. You can use this number as a basis for many things, including your short- and mid-term pyramid levels. Many experts advise that you always have 3-to-6 month's of living expenses set aside for emergencies.
- What are your future living expenses? Is college tuition going to become a real thing soon? Have you booked but not yet completely paid for a family vacation? Think about anything and everything that is upcoming in your financial life and factor that into the 3-6 month rule stated above.
Another key factor in prioritizing your savings stems from keeping abreast of the present investment market. Stay up to speed on the latest rates at the Banking and Loans Center. This information may temper your decision as to which tiers of the Healthy Savings Pyramid will deliver the biggest returns at this present time.