An Introduction to Saving Money and Putting Yourself in control: Comparing apples with apples in the banking industry

An Introduction to Saving Money

From Jeremy Vohwinkle, former About.com Guide

The ability to save money is the cornerstone of building wealth. In order to save money, you need to spend less than you earn. This is often easier said than done, but there are plenty of ways to help you begin saving money on even the tightest budget.

1. The Importance of an Emergency Fund

The first, and probably most important savings goal should be building up an emergency fund. We can’t always predict what life has in store for us, so it is best to be prepared for the unexpected with some emergency savings set aside.

Why You Need an Emergency Fund

Emergencies Happen When You Least Expect Them

From Jeremy Vohwinkle, former About.com Guide

In life you should expect the unexpected, and this is why you need an emergency fund. The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution.

Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you’ve never dreamed of. The last thing you want to do is be forced to rely on credit cards or a loan which could simply compound the problem.

How Big Should Your Emergency Fund Be?

Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Depending on your specific situation and whether or not you have children, carry substantial debt and types of insurance coverage will determine what amount is best for you.

The reason you want to have three to six months of expenses saved up is that the most common reason for the need of an emergency fund is due to a sudden loss of income. If you or your spouse loses a job you still have bills to pay and it may take a few months to find suitable new employment. It is best to plan for a worst-cast scenario so that the smaller emergencies such as replacing the hot water heater that just went out will be easily covered.

Start Small

If you currently don’t have an emergency fund or find it difficult to save money the key is to start small. You have to realize that accumulating one month’s worth of expenses will take some time, let alone three to six months. If you set your immediate goals to be small and manageable you will have a better chance in reaching them.

The best way to get started would probably be through your bank. Open up a new savings account if you currently don’t have one and begin to save with this first. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic you won’t even have to think about it.

If you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $10 a week initially. While this won’t amount add up all that quickly the important thing is to start putting something away and to make it a habit. After a few weeks you won’t even notice that $10 missing so you can bump it up to $15 or $20 after a month or so. You will begin to get used to that money not being there and can slightly increase it again.

Where to Keep Your Emergency Fund

You should start with a savings account because it is simple to use and generally does not cost anything. The convenience factor is what is important when getting started. As your account grows you will want to find an account that can earn reasonable interest so that your money is working for you. The next best options to look into are money market accounts or certificate of deposits (CDs).

It is important to keep this emergency fund in a place that will fairly liquid so that you can get to the money quickly in the event of an emergency.

You also don’t want to have this money tied into stocks or mutual funds because the volatility of the market could cause you to lose money over the short-term.

2. Where to Keep Your Savings

Once you’ve decided to save some money, how do you know where you should keep it? From savings accounts to certificates of deposit, find out what’s right for you.

Where to Keep Your Savings

Make Sure You’re Putting Your Money to Work

From Jeremy Vohwinkle, former About.com Guide

So, you’ve set up an automatic savings program and you’re finally building up that emergency fund, but where should you keep your savings so that it earns the most interest for you? Luckily, there are many different savings vehicles available, but not all of them are appropriate for every situation.

Savings Accounts

Most likely, you have already established a savings account at your local bank or credit union, and you may have this linked up directly to your primary checking account to make transferring money to savings easy. A savings account is the most convenient place to save money, but it might not be putting your money to work.

When using a savings account, it is important to look at the interest rate. Depending on where you bank and what type of account you have, you could be earning anywhere from less than 1% up to 4% or more. The problem is that many banks only provide high interest rates for significant balances over a certain amount. If you find you are only earning 0.65%, after accounting for inflation, you are actually losing purchasing power.

The best thing about savings accounts is that they are completely liquid. This means you can access your money on very short notice. You may be able to go online and transfer money from savings to checking, withdraw from an ATM, or stop into your local branch.

Money Markets

In addition to your basic savings account, you may encounter another savings vehicle called a money market. There are actually two different kinds of money market accounts: money market bank accounts and money market mutual funds.

Money market accounts offered by your bank work almost the same as far as the consumer is concerned, but since the money held in a money market account is invested a bit differently, there are usually more restrictions on the account. Typical restrictions are usually higher balance requirements and a limited number of withdrawals per month or quarter.

Money market mutual funds are not issued by a bank, but are offered by investment companies. You would need to have an existing brokerage account or establish a new account with the fund company directly to take part in a money market mutual fund. These funds invest in various short-term investments collectively in order to produce an attractive interest rate. Unlike a money market account at your bank, these are not FDIC insured.

Although money market accounts generally have higher interest rates than a savings account, the restrictions on the number of withdrawals per month or the requirement of opening a separate account makes these funds slightly less liquid.

Certificates of Deposit

A certificate of deposit, otherwise known as a CD, is another place to save money that is routinely offered by your bank. A CD is a time deposit, which means that the money you place on deposit must remain there for a specified amount of time before you can withdraw it.

You can purchase a CD with a variety of time frames as short as one month to upwards of many years or more. In most cases, the longer you agree to leave your money on deposit, the more interest the bank will pay you.

Since you are required to leave your money in the CD for the amount of time selected, this can make your money less accessible than a savings or money market account. This can be a good thing, since it encourages you to leave the money alone, but in an emergency where the money is needed very quickly, this can be a hindrance. Fortunately, you can access your money before the CD matures, but the bank will impose a penalty which could effectively wipe out the interest you have earned.

Savings Bonds

Another possible option for your savings is in savings bonds. Savings bonds are issued by the U.S. government and are backed by its full faith and credit. Similar to CDs, savings bonds have a maturity date set in which the bond reaches the maximum value. In most cases, this is 20 or 30 years.

Savings bonds are credited interest each month and you can cash in a savings bond at any time, although doing so prior to maturity may result in foregoing some interest. You can purchase savings bonds at most banks or online at Treasury Direct.

Like CDs, you may encounter liquidity issues with savings bonds since they are purchased separately and you can only receive money from them through redemption at either a bank or by mail.

What is Right for You?

When it comes to savings, there isn’t a right or wrong answer. It ultimately depends on your needs. If you are using your savings for overdraft protection and want to have it available instantly in the event you need it, a savings account might be the most appropriate.

If you are saving for a large purchase or something predictable a few months or years down the road, you can probably find better rates with a CD or possibly a money market fund.

For many people, it comes down to having a mix of multiple savings vehicles. There will be part of an emergency fund in a savings account at the bank, possibly some cash in a money market fund in an investment account, and some CDs or bonds stashed away for longer-term savings. Whatever the case may be, you want to make sure your money is working as hard as it can.

3. Make Saving Automatic

With so many bills, expenses, and day-to-day expenses to take care of, saving money can seem nearly impossible. One of the best ways to get into the habit of saving money is to create an automatic savings plan.

9 ways to make saving automatic

http://www.bripblap.com/9-ways-to-make-saving-automatic/


1505909566 d76321b11c 9 ways to make saving automatic
cc 9 ways to make saving automatic photo credit: Derek Farr ( DetroitDerek )

As anyone who has started to learn about personal finance knows, one of the fundamental ideas is “pay yourself first.”

Paying yourself first is an easy concept (supposedly), but many people find it hard at first to make putting money into savings a priority.

Saving money sounds like a good idea, but there is always a chair that needs to be replaced, new shoes for that special occasion or just one more iTune to add to the collection.

So how can you make saving a habit? It’s a trick question – you don’t have to make it a habit, you have to make it automatic.

If you make your savings automatic, you never have to work on developing the habit. The habit will grow naturally once you see how easy it is.


So how do you make savings automatic?

Here are 9 painless ways to do it.

401(k): If you work for a company, chances are they offer a 401(k); if you work for an educational institution, a hospital, a church, or a non-profit they probably offer a 403(b), and state and local government workers can invest in 457 plans. All of these plans generally offer the worker a chance to invest their wages, pre-tax, into their choice of a selection of investment options – usually mutual funds. Most plans ask the employee to set an amount or a percentage to be withdrawn every month. A 401(k) or similar plan is the single best way to make savings automatic. The contribution is not taxed and taxes are never paid on any amounts in the account. In fact, until you retire you will never pay taxes. The money is taken out before you ever even see it – so there is no temptation to cheat ‘just this once.’ Best of all, many employers match some of your contribution with a contribution of their own into your account!

Automatically withdraw money to a savings fund:

After you have contributed enough to your 401(k) plan to meet your employer’s matching limit (and more, if you can afford it) you should set up an automatic withdrawal from your checking account to a savings account. Popular options for savings accounts are high-yield accounts at ING and HSBC: even though their rates are terrible, they are better than nothing. Both will allow you to set up automatic withdrawals from your checking account directly into your savings account, where it can earn interest. You can set up the withdrawal date to be the day after your paycheck arrives, so you will not be tempted to spend that money on something else. Once the money is in the savings account, it’s out of sight, out of mind and growing rapidly thanks to the miracle of compound interest! Best of all, you can use this as an emergency fund – but only for true emergencies.

Direct deposit your paycheck to separate accounts:

If your employer allows you to have direct deposit for your paycheck, take advantage of it. Most banks will still waive monthly fees if you set up direct deposit, and if you can directly deposit to multiple accounts automatic savings become even easier.
Set up two checking accounts – one for monthly expenses and one for irregular expenses. Those irregular expenses can be for any of those expenses that come up on a monthly basis that were unexpected but not really a true emergency. Maybe the tires on the car were worn, or junior broke a window playing ball. If you estimate your regular monthly expenses and have just enough money going in your ‘main’ checking account, you can take money out of the irregular expenses account without having to worry about paying the electric bill.

Drop a penny (or a quarter) in your change jar:

Keep a change jar right by the front door. Every day when you come home, throw any loose change in here. Once it fills up, take it to your local bank and deposit it in your savings.
If that is too much trouble, take it to a CoinStar machine (usually at your local supermarket) and get an amazon.com gift certificate and use it to buy something useful – amazon sells many household items like CFLs and dishwashing detergent.

Always use a credit card with rewards:

This is a little more controversial, but if you have a good cash back rewards card, use exactly one credit card for every purchase you make, but pay it off in full each month! If you are the type of person who lets their credit card slip out of their wallet and into the department store’s credit card swiper by accident, I suggest you skip this step! However, if you charge $500 a month on a 1% cash back card, you can earn another $60 a year – for nothing!

Pre-pay your mortgage: 

If you own a house, even adding a tiny extra principal payment can shave months or years off the length of the mortgage and save you thousands of dollars in interest. Do not let small amounts discourage you – even an extra $25 per month can save thousands in interest over the life of your mortgage.

Reinvest dividends:

If you own mutual funds or stocks you can request that dividends be reinvested. That means that whenever a dividend is issued, it is immediately used to buy more shares of that fund/stock. You never touch the money so the temptation to spend your “windfall” dividend is taken away!

Adjust your withholding:

You may enjoy getting a big tax refund every year, but if you do you have lent Uncle Sam that money for the year, interest-free. Adjust your withholding to ensure that you have as small a refund as possible. If you get a refund, the IRS gives you the option to have it direct deposited – send it to your high-yield savings account, not your checking account!

Take advantage of FSAs:

Some companies offer flexible spending accounts. A Flexible Spending Account, or FSA, is a tax-advantaged account that allows individuals to set aside portions of their earned income for public transportation, parking, dependent care and the most common type, health care expenses. Simply put, you set aside an amount you choose, pre-tax, each month in a pre-funded account and then withdraw it when you need it. You save money by taking the amount out pre-tax and putting it in an account where it can only be used for a set purpose like health care expenses. Once it is in the account, there is no way to get it back out and use it for an iPhone!

Remember: make your savings automatic and paying yourself first will become second nature!

4. The Difference Between APR and APY

When you’re saving money, one of the things you want to consider is how much interest it is earning. Your money should be working for you. Two of the most common terms that are used to discuss interest rates are APR and APY.

APR and APY:

Why Your Bank Hopes You Can’t Tell The Difference

February 07 2010 | Filed Under » Interest Rates, Investing Basics, Loans

It is often purported that Albert Einstein referred to compound interest as the greatest force on earth.

Strong words from one of the smartest men to ever live. Although this article’s intention is not to ponder Einstein’s most compelling views, we do intend to demonstrate the importance of understanding the difference between annual percentage rate (APR) and annual percentage yield (APY).

For most people, these terms are applied to loans and investment products, but they are not created equal and they significantly affect how much you earn or must pay in these transactions.

What Is Compounding?

At its most basic, compounding refers to earning interest on previous interest. All investors want to maximize compounding on their investments, while at the same time minimize it on their loans. (For more detail on this subject, see Investing 101: The Phenomenal Concept Of Compounding.)Compounding is especially important in our APR vs. APY discussion because many financial institutions have a sneaky way of quoting interest rates that use compounding principles to their advantage. Being financially literate in this area will help you spot which interest rate you are really getting.

Defining APR and APY

APR is the annual rate of interest without taking into account the compounding of interest within that year.

Alternatively, APY does take into account the effects of intra-year compounding. This seemingly subtle difference can have important implications for investors and borrowers.

Here is a look at the formulas for each method:

 
For example, a credit card company might charge 1% interest each month; therefore, the APR would equal 12% (1% x 12 months = 12%).

This differs from APY, which takes into account compound interest.

The APY for a 1% rate of interest compounded monthly would be 12.68% [(1 + 0.01)^12 – 1= 12.68%] a year. If you only carry a balance on your credit card for one month’s period you will be charged the equivalent yearly rate of 12%.

However, if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of compounding each month.

The Borrower’s Perspective

As a borrower, you are always searching for the lowest possible rate. When looking at the difference between APR and APY, you need to be worried about how a loan might be “disguised” as having a lower rate.For example, when looking for a mortgage you are likely to choose a lender that offers the lowest rate. Although the quoted rates appear low, you could end up paying more for a loan than you originally anticipated. 

This is because banks will often quote you the annual percentage rate (APR).

As we learned earlier, this figure does not take into account any intra-year compounding either semi-annual (every six months), quarterly (every three months), or monthly (12 times per year) compounding of the loan.
The APR is simply the periodic rate of interest multiplied by the number of periods in the year. This may be a little confusing at first, so let’s look at an example to solidify the concept:
As you can see, even though a bank may have quoted you a rate of 5%, 7%, or 9% depending on the frequency of compounding (this may differ depending on the bank, state, country, etc), you could actually pay a much higher rate. In the case of a bank quoting an APR of 9%, this does not consider the effects of compounding. However, if you were to consider the effects of monthly compounding, as APY does, you will pay 0.38% more on your loan each year – a significant amount when you are amortizing your loan over a 25- or 30-year period.
This example should illustrate the importance of asking your potential lender what rate he or she is quoting when seeking a loan. It is also important when comparing borrowing prospects to compare “apples to apples” so to speak (comparing the same figures), so that you can make the most informed decision.

The Lender’s Perspective

Now as you may have already guessed, it is not hard to see how standing on the other side of the lending tree can affect your results in an equally significant fashion, and how banks and other institutions will often entice individuals by quoting APY.
Just as individuals who are seeking loans want to pay the lowest possible rate of interest, the same individual wants to receive the highest rate of interest when they themselves are the lender. 
For example, suppose that you are shopping around for a bank to open a savings account with; obviously, you are seeking the highest rate of interest. It is in the bank’s best interest to quote you the APY, as opposed to the APR.
They want to quote the highest possible rate they can to entice you with to their bank. They are much less likely to quote you the APR because this rate is lower than the APY given that there is some compounding during the year.Again, it is important for the individual to acknowledge the distinction between these two rates, because they can significantly affect that amount of interest that can be accumulated in a savings account. 

It should be noted that different countries have different rules and regulations in place to combat some of the unscrupulous activity surrounding quoting rates that has arisen in the past; however, there is no better insulator against these ruses than knowledge.

Summary

Whether you are shopping for a loan or seeking the highest rate of return on a savings account, be mindful of the different rates that a bank or institution quotes. Depending on which side of the lending tree you stand on, banks and institutions have different motives for quoting different rates. Always ensure you understand which rates they are quoting and then compare the equivalent rates between alternatives.

Read more: http://www.investopedia.com/articles/basics/04/102904.asp#ixzz1wmRwco3L

5. Cut Spending Leaks

Even if you are saving money, you can always find ways to save more. Sometimes it is simply the little things that add up. Find out what your spending leaks are and learn how to trim those expenses so you can save even more money.

The Secret to Saving Money

By Jeremy Vohwinkle

Wouldn’t it be nice if there was a secret to saving money? Actually, there is. Unfortunately, most experts cloud it with phrases such as “spend less than you earn” or “pay yourself first.”

Granted, these are common tips that can be used to help you save money, but if that’s all there was to it, wouldn’t everybody be able to easily save money?

We all know that it’s possible to clip coupons, go to the library instead of buying a book, and put a little money aside for a rainy day before everything else, but it’s still hard to get into the habit of saving. That will never change unless you begin thinking about money a little differently.

The secret to saving money employs all of these saving tips, but the real treasure is in how you think about money.

You can read all the saving tips you want and every year you’ll start off with good intentions only to find your savings goals were derailed as quickly as your new year’s resolution to go on a diet. The problem is we are all aware of the tools and know what needs to be done, but without the right mindset it will never become a reality.

It’s All About Urgency

Telling yourself that you need to build up an emergency fund or save for retirement is fine, but that’s not enough to truly motivate most people to completely follow through.

Walk down the street and ask anyone if they have a solid emergency fund or are saving enough for retirement, and most people will have the same answer. They will admit they aren’t doing as well as they should be even though they realize how important it is. We all do this to some extent. We have the knowledge and know what it takes to reach a certain outcome, but putting everything into place and even practicing what we preach is far more difficult. That’s because we usually look at things at a very high level and our brains don’t place a sense or urgency on reaching that goal.

Think about this for example. Let’s say you wanted to come up with $1,000 this year to put into an emergency fund. That’s a reasonable goal, and one many of you may have had in the past. Even though it’s a relatively small amount of money over the long period of time, how often has a goal like this failed? Be honest now. It’s just $83 a month, less than some cable bills, yet people find any and every excuse to not save up that $1,000 in a year. Bills need to be paid, unexpected expenses come up, the dog needed to go to the vet, and so on. This happens because there is no immediate consequence if you fail to reach the goal, and you’re saving for something relatively arbitrary to begin with.

Now, let’s look at another $1,000 situation. Say you need to come up with $1,000 in one month or else you’ll be kicked out of your apartment. Guess what? Unless you were already seriously delinquent and bankrupt, chances are you will be able to come up with that money in record time. You’ll find stuff to sell, you’ll eat soup and sandwiches from the pantry for a few weeks, and you’ll almost certainly find a way to scrap together $1,000 in an extremely short amount of time. That’s because unlike just trying to slowly build up a $1,000 savings over the course of a year that has no immediate concern, you’re faced with the possibility of losing the roof over your head. This sense of urgency forces you to do whatever is necessary to reach the goal rather than just kicking the can down the road knowing you’ve got plenty of time to catch up.

Some may say this is an apples and oranges comparison, but it’s the underlying motivation that’s the secret here. When you have a money issue come up that needs immediate attention, you generally find a way to make it happen. When the issue is just something you know you should do, yet don’t have an immediate negative consequence if you don’t reach that goal, there are a million ways to put it off and make excuses. This is why saving money is so elusive for so many people. We all know we need to save, either for the unexpected, retirement, a college education, and so on, but since those are usually distant goals lacking severe short-term consequences, it almost always is one of the first things to get pushed off to the back burner.

Set Savings Goals

As previously mentioned, there is little sense of urgency when it comes to long-term saving goals such as retirement. What motivates you to save today when the consequences won’t be felt for possibly thirty years or more? One way to make long-term saving objectives more manageable is to set short-term savings goals. By taking one large goal and breaking it up into many smaller and shorter term goals you can actually begin to take action right away and see some results.

The real benefit of this strategy is the sense of accomplishment you get when tackling a goal and making it happen.   When you are able to cross something off your list you feel empowered to build upon that goal and work even harder to reach the next milestone. For example, if your goal is to build up roughly a $5,000 emergency savings account in two years, don’t just focus on the big number. Instead, break it down into smaller, more attainable goals. Maybe you set a goal to save $200 a month. Now instead of trying to achieve this large sum over the course of a few years, you now have 24 very small and specific goals. Every month you know exactly what you need to accomplish, and if you treat it with the same urgency as other expenses and bills that must be paid, guess what? You’ll be far more likely to achieve your end goal.

Setting realistic financial goals and more importantly, writing them down, is an important and often overlooked step in trying to save money.

If you want to get serious about saving, try creating a financial goal worksheet.

A worksheet like this will go a long way in helping you identify your goals, understand what it will take to achieve them, and then hold you accountable. Read more about creating a financial goal worksheet.

This is the true secret to saving money. Yes, paying yourself first and creating automatic contributions works wonders, but many people never even get to that point because they aren’t thinking about money in the right way or are making excuses as to why it can wait. Create a sense of urgency with all of your goals, big or small. Stop thinking about just an end result that may be years in future and bring it into the here and now by breaking it into small goals you can tackle today. If you can hold yourself accountable to these smaller goals you’ll create these little victories that build off of each other, and the ultimate end result will be that you will achieve all of your major savings goals.

5 Tips to Cut Spending Leaks

Trimming Monthly Expenses Can Lead to Big Savings

From Jeremy Vohwinkle, former About.com Guide

Sometimes it’s the little things that add up. Stopping the small spending leaks in your life may amount to significant savings over time.

  1. Turn off the television. Premium cable and satellite subscriptions can cost anywhere from $500 to over $1,000 per year or more. If you find that you’re not using the premium channels that often, it may be worthwhile to downgrade your service.Even if you do use many of the premium channels, it is worth your time to call your provider and inquire about discounts or promotions. If they know you are shopping around or considering a plan reduction, you may be able to obtain a temporary discounted rate.
  2. Trim your subscriptions. Do you subscribe to magazines that you rarely have time to read? Maybe you subscribe to one of the DVD mail rental services but only watch one or two movies a month. How about that gym membership you purchased as part of a New Year’s resolution that you don’t use?These subscriptions can slowly drain hundreds of dollars from your wallet every year. Individually, they don’t seem very costly. But over time, many of these underused subscriptions are costing a lot of money. Evaluate what you really use and don’t use and get rid of the wasteful subscriptions.
  3. Avoid banking fees. Banks are regularly changing their products and you may be paying a monthly fee without thinking twice about it. On top of monthly fees for accounts, watch out for fees associated with overdraft protection, paper statements or excessive transactions.
  4. Pay your bills on time. This may seem like common sense, but it is easy to forget a bill and end up with a late fee. These fees can be substantial, ranging anywhere from a few dollars to $40 or more. If you have trouble keeping track of due dates, check into automatic electronic payment plans that might be available.
  5. Keep eating lunch out at a minimum. Eating out can be costly, and for many busy professionals it is almost a necessity. Did you know that spending only $6 a day on lunch while at work can cost nearly $800 per year? If your spouse spends the same amount on lunch, you are spending almost $1,600 per year just on lunch! Try to cut back on buying lunch out by bringing a lunch just two days a week to start. Even this can save a few hundred dollars a year. Not only does it save money, but generally, a sack lunch from home will be better for you compared to what you normally eat when going out.
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