For a Rainy Day

So, you know that saying? “I’m saving it for a rainy day.”

That’s great and all, but are you saving for that surprise car part breaking down? For that unexpected visit to the veterinarian? For getting laid off? For getting sick?

No?

Listen, I know–firsthand–how hard it is to save when you’re making very little and paying very much. I know that oftentimes, there’s so little left to put away that you figure, “Why bother?” And that sometimes, the little you manage to save disappears at the first sign of trouble. And I know right now it seems like, “What do I have to save for? I don’t need money put away for anything. I’m fine. I’ll save later.”

That is dangerous. You NEED to have money put away that you never touch except for emergencies. Let’s delve into learning about savings accounts. Remember ignorance? Get ready to say bye-by to it when it comes to savings.

Here’s the thing– you need an emergency savings account. No if, ands, or buts. One that earns you interest. If you’ve already got some money socked away (awesome!) in your checking account (not awesome!) then you can shop around and get a savings account with a higher interest rate to reward a high minimum deposit. Having money in your checking account that you “use as savings” is silly. Savings accounts have higher interest rates than interest checking accounts and don’t come with checks or a card (usually) which makes spending the money harder. It’s important to separate your money, so that it can do its intended job for you. Transfer the socked-up money to savings and pat yourself on the back. And keep socking away.

If, on the other hand, you have absolutely nothing saved, you still need to open a checking account. Why, you ask? Have you ever seen that chick-flick called Under the Tuscan Sun? It’s okay if you admit it, you’re alone reading a blog. Well, in the movie, a sexy silver fox tells our depressed divorcee heroine an anecdote about Italians building a train track in the Alps to prepare for a train to cross there, even though there was no train built yet that could actually make the journey. They were preparing for the future, with hopeful determination, so to speak.

An improbable place for a train, but nonetheless–they did it. You can do the same with your money.

That’s what we’re doing with opening a savings account without having any money to deposit into it. Preparing for the future. Because having an empty piggy bank calls for change rattling around in it.

On Bankrate.com, the best savings accounts that don’t require a high minimum deposit are Barclay’s and Ally. Find a savings account with a high interest rate (so your money can have moneybabies) and open an account today if you don’t already have one. Put in at least $1. Call it hopeful determination.

Now, here are some good rules to apply to savings accounts:

1. Make money appear there magically. How you ask? Automatic savings. Whenever you get your paycheck deposited, you can arrange for your checking account to automatically deduct whatever amount you decide you need to save a month and apply it to your savings account. So you never actually see that money. You never get a chance to spend it. But it’s there, gently reassuring you with its presence and availability and portfolio-building whilst you sleep. Like a plush blanket.

2. DON’T TOUCH IT. Who took the cookies from the cookie jar? YOU. ONLY YOU. ALWAYS YOU. I know how tempting it is to transfer money from your savings to your checking whenever you’re running low between paydays–it’s yours, after all. You earned it. You need it. Need it for what, may I ask? Oh, a dress? So this isn’t an emergency? You just want something because you saw it? You better check yourself before you wreck yourself. Financially. If you keep taking cookies from the cookie jar, pretty soon, you won’t have any cookies to satisfy your chocolate craving. Or the mechanic’s bill. If you want, you can connect your savings to your checking so that if you overdraft, your savings will automatically cover it, avoiding any fees. But remember– you’ll be robbing yourself if you do it often. Vicious cycle? Yes, indeed. Make a list of things you would use your precious emergency savings for. Here’s my list: accidents of the body, vehicle, house or pet; living expenses if I have absolutely no other income; flights for emergencies, such as funerals or family illness; copays for ER/Urgent Care/Wellness doctors visits; unexpected/unbudgeted bills. Notice that there’s nothing fun on that list.

3. There’s some discrepancy amongst experts about the magic number you need to have in your savings account, so I’m gonna go with a compromise between some of my favorites and say 3 for us youngins. You need at least three months of your cost of living in your emergency savings account. All of your bills, food, miscellaneous costs–you need to be able to pay for three months worth of living  just using your savings. Know why? That three months gives you enormous independence. You could get fired or laid off or quit your job and you could survive without worrying for three months while you get a new job. Secure in your job? You’ll be able to pay for emergencies. You’ll be able to cover unexpected extra costs without having a panic attack. (If you’ve got a little more money to work with, I suggest bumping up to 6 months.) Now, this of course means you need to know what your monthly cost of living is… but that’s a couple posts from now. Now, I’m not gonna lie. It’s gonna take a while to accumulate that much and that is completely okay! All you need to do is start saving; once you do– you’re actively taking steps to be financially stable.

4. Once you’ve reached the initial 3 months of cost of living goal, you can and should keep saving for your emergency savings (you can decrease how much you put in monthly, if that helps or you can bump up to 6 or even…. 9!), but you can also start thinking about short term and long term savings plans. If you want to put money aside to buy something expensive in the near future, that’s called a short term savings goal– it’s much different than your long term and emergency savings. Short term savings goals are to buy a new laptop, to get you out of credit card debt, to buy a new wardrobe, to take a vacation; things you want to do in a year–keeping this relatively small amount of money in your checking account isn’t going to hurt. The important thing is to keep it separate from your emergency savings. Long term saving goals are for a future house, wedding, child, etc–things more than a year away–perhaps save up a certain large amount, say $5,000 or so and then think about depositing it into a certificate of deposit… but that comes with a few obstacles. You might want to make separate accounts for short term savings goals and long term saving goals. I know it’s rough, but you NEED to separate spending and saving in your mind. Saving money to plan to spend it is NOT what saving for emergencies is for. This short or long term savings–and the interest that it makes– you can use to buy stock, a new iPad, pay for a trip to Paris, pay off student loans early, use as a down payment for a house, or pay for a wedding, but you always need to have your emergency savings that can cover your living expense for at least three months hanging out, only getting fatter. And every year you need to reevaluate your savings to make sure it’s keeping up with inflation, your salary and your costs.

Suze Orman calls savings accounts “the cornerstone of financial security.” And for good reason– it gives you a liquid asset that helps fund your other assets and experiences while keeping you safe from the unknown. What’s not to love about savings? Now, how do we get to that awesome point of financial security?

We have to face denial. Usually people say they don’t have enough left over to save. But saving should be the first thing that’s done with your money. Even before paying rent. There’s a premise in the financial world that is so simple that it’s mind-blowing when you put it into action: when you have less, you spend less. When you have more, you spend more. If you never see the money you move to your savings account, it’s like it’s not there to spend. You’ll have to budget wisely, stick to the budget, and make a small sacrifice or two, depending on how much you’re saving.

When we get to the first post about budgeting (which I think will be the one after next Monday’s) we’re going to talk a bit about budgeting. And denial. But I want to leave you with this thought: could you spend $1 a day for a month? Say, for a candy bar or a cheap cup of coffee? A momentary indulgence. Now imagine– instead of spending it, save it. In a year, that’s $365.  It may not sound like a lot, but which would you rather have? Nothing, but lots of coffee or candy (that enters and exits your body in a day)… or $365 to use if you suddenly need it?

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11 thoughts on “For a Rainy Day

  1. Pingback: IDK Wednesday: How to New Year | Young Without Money

  2. So glad I found this blog!! I’ve already read multiple posts and feel like I’ve learned a lot! Thanks so much for making this!

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    • Well, personally, I think having your emergency money separate from money you’re saving to spend is a smart idea. Opening a lot of accounts for savings depends on what you want to use the money for and when you want to use it, for example:

      The best place to put money you’re planning to use for retirement is in a retirement account, where it can grow by leaps and bounds over the years. I would suggest a Roth IRA. It’s easy and free to open in many places. Mine is at ING, but Ally and every other bank has one. You’ll need to choose how you want to invest the money you put into this account, and I’ll be making a post about that in the future, but if you need to know now, I’d be more than happy to suggest some things.

      If you want to save for kids’ college, a CD or money market account, with high interest, but specific withdrawal/deposit rules may help out. There are also special accounts you can open for this purpose.

      If you want to sock money away for a wedding or for a car or other big purchase, then a separate account would come in handy. Unless you feel you’re responsible enough (which it seems like you are!) to know how much you have saved in your one savings account that is over your 6 months safety net.)

      • You’re so helpful! For now I think I’ll focus on setting up a separate emergency account and long-term account, and start researching on the Roth IRA. I’ll probably wait until you post more about the retirement account to actually set one up. I might also switch banks since having a local one that’s so far away is kind of a pain.

        Do you think you’ll make a post about investing? I’m so lost when it comes to things like stock…

      • I’m glad to be of help! Your plan sounds good. I will absolutely be making several posts about investing! It’s such an important thing to do, but difficult to navigate. I am all about us having diversified portfolios.

  5. It’s a great idea to have an emergency account, a long-term savings account, and a short-term savings account. Right now we only have one that we consider our emergency account, which has about 5 months cost of living (estimated), so now we should start saving for other things too!

    So on that Bankrate website, the APY is the interest rate, correct? And this is usually per year? I’m a little confused as to what the other numbers mean, but I’m sure I can find those somewhere on the website.

    Now, from my savings account that I already have saved up (where my moniez go) it’s possible to move that money from my bank to another bank? Is it relatively easy? Because I’ve only done it within the same back to my checking so I just don’t know how it works jumping to other banks.

    You’re so savvy!!!

    • Way to go you for saving so much!! I’d suggest putting another month’s worth in there, just to keep it at six months, and then start investing some and saving some for things you want to buy soon and in the future.

      Yes, the APY is the interest rate. And yes, this is per year. Some banks compound the interest every day and some just calculate the interest earned annually, but the APY attached to the account is how much interest you’ll get on your money annually.

      It is possible to move that saved money to another bank–just open a new account and deposit that money. There shouldn’t be any fees attached to moving your money, but if there are call and complain about it before you move the money. You can find out whether there are fees for transferring the money (whether it’s a flat rate or a percentage of the total amount) by looking at the info section of your account online. It’s pretty easy to change banks.

      Good luck!

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