Financial Planning 101: Make Savings a Habit

The art is not in making money, but in keeping it. -Proverb

Most of us know we need to save to finance our future goals. Buying a home, providing an education for our children, investing for a secure retirement, or just “saving for a rainy day” are some of the more common savings goals. It all sounds so self-evident and, in fact, our clients realized this long ago.  But, how do we help our children or grandchildren understand the importance of saving?  How do we get them started down the right path? Below is a review of some of the basic savings steps and fundamentals. Please feel free to share with family members or others who might benefit.

Getting Started

A first step in building financial security is to develop goals to meet both short and long term needs. Just setting goals provides a powerful start as studies show families with savings goals tend to save more.

Begin by ensuring you have enough reserve funds to cover emergencies or even temporary unemployment. Your Madison team suggests having at least three months’ income available in savings for the unexpected. Then, take a look at your spending needs over the next 12 to 24 months. How much did you spend on your last vacation? How’s the car running? By planning ahead for large expenditures, you can prevent anxiety and save on finance charges. Once you’ve determined how much you need and when you’ll need it, you’re ready to begin matching your savings objectives to the savings vehicles available to you.

It sounds easy, but unfortunately, many younger people seem to lack the discipline to save. The idea is to make savings a habit.

The Goal: More Savings

We encourage you to pay yourself first, a key rule of saving. By setting aside a certain amount each month for savings, you can build toward your goals without missing the money. Many companies offer automatic payroll deductions for savers. Money that one doesn’t see may not be missed, and it can add up quickly. We suggest you consider your investment deposits like your rent or mortgage payment, and write a check each month toward savings. If your company doesn’t offer payroll deductions, you can set up your own automatic transfers from your checking account to your savings or investment account.

As your circumstances change, so will your goals and needs. Review your goals with family members or the Madison team from time to time to make sure they still reflect your needs and to see if you are saving as much as you comfortably can.

Consider Three Basic Investment Factors

Whether your goals are short or long term, we suggest considering three key investment factors: liquidity, safety, and return.

  1. Liquidity— When do you need your money? If you’re saving for a short-term goal, real estate is likely not an ideal investment. Be sure you understand what it might cost to turn your investment into cash.
  2. Safety— As a general rule, return is proportional to risk. Understand that investments in the financial markets may fluctuate in value. Your Madison team will help you determine what level of safety you are comfortable with and match your risk level with your time horizon and goals.
  3. Return— There are many savings / investment choices available to keep in mind. Generally, the longer one can stay invested and the more risk one can afford to take, generally the higher the anticipated return.

Below are some basic savings choices.  While some investments require a minimum amount, others do not. Generally speaking, the more you have to set aside, the more you can earn on it. Even if you don’t have the $500 today for a CD, you can still save $50 a week until you do.

Basic Savings Vehicles

Savings Accounts — Given their convenience, availability, and relative safety, banks are often the first choice for savings. Accounts at FDIC-insured banks are protected up to $250,000 per depositor. Shop around for rates and low fees, keeping in mind that banks will usually waive monthly fees if you maintain a minimum balance. Most banks will link your savings and checking accounts. Try keeping most of your money earning interest by writing checks once a week and transferring the money from your savings account as needed.

Money Market Accounts — These accounts generally pay a higher rate than regular savings accounts. You may also get the advantage of limited check writing.

Time Deposits — CDs are generally available with terms ranging from 7 days to 5 years. CDs are FDIC insured and offer a fixed rate or return if held to maturity.  Since it is difficult to forecast future interest rates, you might consider purchasing several CDs with a variety of maturities to enhance your savings’ return while providing for some future liquidity and managing your interest rate risk. Banks may also offer CD products with variable or adjustable rates while others may be tied to stock indexes. Assess the risk, liquidity, and cost of these options to find a product that you understand and are comfortable with.

Relationship Accounts — Many banks reward their best customers with relationship accounts. By consolidating your deposits and loans with one bank, you can often minimize fees, earn preferred rates, or get free services. Check with your bank to see if this option would benefit you.

Putting aside savings is a way of taking control of your future and your financial health.  Having savings that you can rely on – financial independence – ensures your future plans.  Please let us know how we can help you and your family members improve your savings plan.


Important Note: The content of this Insights is attributed to the Financial Planning Association. This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. Actual economic or market events may turn out differently than as presented above.