Saving money is a topic that gets a lot of lip service in public discourse. However, taking control of your finances and saving for your wants and needs is another thing.
Almost everyone knows it is important to save, but it sometimes needs to be clarified why. Living paycheck to paycheck or having several expenses can push savings to the back of your mind. As such, you may need help understanding your finances. Personal savings are important as it prepares you for your future or major purchases.
3 Essential Types of Savings
Saving money is more complex than setting money aside after paying your bills. Here are some types of personal savings that you will indeed find handy.
- Emergency funds
As the name suggests, you should only use this type of savings during emergencies such as job loss, global crises, accidents, and the like. An emergency fund is essential because it gives you a safety net when encountering unexpected and potentially life-changing events. It also provides you more time to plan your next steps, ensuring you only use your savings for important things. Since emergencies can happen anytime, you may want to keep these funds in an accessible savings account to access them easily via ATM or online banking. Experts recommend setting aside six to nine months’ worth of your current salary to build your emergency fund. These savings will help weather the storm, especially since some emergencies may take time to rectify. For example, it may take weeks or months to land a job. Your emergency fund can cover your expenses during this period.
- Rainy day funds
Rainy-day funds have a smaller scope than emergency funds, which cushion the financial blow of unexpected life-changing events. The former still tackle unexpected events but are lighter than emergencies. Examples of these events include on-time car repairs, unexpected bills, medical emergencies, appliance replacements, or home renovations, all of which may cost you a large sum. You can start your rainy day fund with a small amount. You can continue growing this fund as you go along. You can set this fund aside somewhere in your home to make it easily accessible, or you can deposit it in a savings account that you can retrieve via ATM or online banking, like your emergency fund.
- Sinking funds
Sinking funds are savings intended for a future one-time or occasional expense. The expenses are not considered emergencies and can sustain your spending habits. For example, traveling abroad is often expensive, so you must save up before your trip. Another example is buying a luxury bag. The money you save for these expenditures is considered sinking funds.
Sinking funds work because they reduce large expenses into manageable “pockets of savings” you can pay off over time. Sinking funds are also customizable, allowing you to set up a fund based on what you want.
When creating a sinking fund, ensure that you set a goal for yourself, such as how much you should save and when you want to spend it. You can then budget and consistently put money in that savings.
Save Up For You
Personal savings can undoubtedly help you with your wants and needs. However, the most important thing to remember is that savings vary based on a person’s situation. Some people have little to save, while others have no problem with excess money.
There is no one-size fits all method for saving money and financial planning. Treat personal savings as an individual plan and create a system that works best for you. That way, you will feel more motivated in the long term and enjoy the benefits of your savings instead of viewing the whole thing as an unpleasant process to endure.