Personal Debt Issues

Getting hooked on the savings habit

(7/13/2011) - You need savings for a down payment on a home, a rainy day, a vacation away or the next big holiday, just to name a few reasons to sock away some cash.

More importantly, if the last recession taught you anything, if you lose your job, get your income slashed or face some other financial disaster, a cache of cash is your financial emergency kit.

Unfortunately, what trips up many consumers is how to make the savings habit happen.

Set a goal

Every financial planner, CPA, money counselor or other savings advocate worth their hourly rate says setting a goal is your first step.

In good times, a stash of cash amounting to living expenses or your income for a six-month period can usually get you through hard times.

In post-economic apocalypse times like these, you may need to put more money away to see you through to a return to happy days. Other factors that could impact your savings plan is job security, health care coverage, debt, accessible credit, other wage earners in your home, home repairs and necessary purchases.

The key is to take stock of what you'll need to keep home sweet home humming if you lose your job or face a cost crisis.


First, you'll need to create a budget to determine where every penny goes. If you don't know where your money goes, you won't know where you can cut back and divert money to savings.

Consumer Reports says the basic necessities -- shelter, utilities, insurance, food, and clothing, should take no more than about 60 percent of your income. Forty percent is for limited discretionary spending, savings, retirement, and investing.

If the 60-40 cut isn't working, you may be living too high on the hog. A lifestyle change may be in order and or you may need to find more income.

Cut back wherever possible on the necessities, but cut out frivolous spending and dump credit. Save credit for emergencies. Reducing credit card debt not only gives you money to save and it can boost your credit score.

However, don't pay off debt and close out accounts completely and certainly not at the expense of building your reserve fund. Use credit frugally to keep your credit score and credit availability intact.

If you use your reserve savings to pay off debt, you could find yourself without both emergency money and credit, should your bank decide to turn off the credit till.

Save routinely

Build your emergency fund first, save later for that down payment on a home, car, boat, vacation or other big ticket item.

Save regularly. Have savings deducted from your income deposited in a savings or investment account with the highest rate of interest you can find. If it's gone before you get it, you'll be less likely to spend it.

A simple bank savings or checking with interest account is the safest, most liquid form of savings you can obtain.

Shifting gears

Once you've accumulated a sizeable savings account you can move some of the money into federally insured certificates of deposit (CDs), money market funds, and other low- to no-risk savings or investment vehicles. These are good vehicles to use for saving up for those big ticket items. However, if your six-month slush fund isn't full, don't tie up savings in CD or money market accounts for longer than you can bear.

Once your savings goals are met, reallocate money to investments like stocks, bonds, and mutual funds. Those are generally appropriate only for cash you won't need for at least five years.

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