“Do not save what is left after spending, but spend what is left after saving.” – Warren Buffett.
It is arguably the most important step in a personal finance journey. If you do all the steps but you do not do saving, financial freedom will still be a mirage. That is, if you only earn and spend, you can die a pauper if you do not save. In fact, all personal finance experts agree that it is not how much you make that matters, but how much you keep. It is only after you save that you can invest. When you save as hard as you work, you easily achieve your retirement goals. As a result, you accelerate your journey to financial freedom.
A fool and his money are soon parted, they say. Not when he stops being foolish, however. Not when he saves. Thus, here, we teach you how to be wise with your money so that you can keep it.
What are Savings?
Imagine your monthly disposable income is $5000. That is the amount you have to spend or save after the deduction of your income tax. Out of that, imagine the amount you spend on all your needs and wants for personal and household use is $3000. That is your consumer spending. When you subtract your consumer spending from your disposable income for the month, what you have left over is your savings. In this case, that is $2000.
Thus, savings refers to the net surplus funds remaining from all the disposable incomes over a given amount of time after the expenses and obligations for that period were met.
Savings can be kept in the form of cash or its equivalents. They can be for a variety of reasons such as emergency, vacation, retirement, your children’s education, or a car. Savings have low risk exposure so they tend to generate minimal returns. Savings account, checking account, and certificate of deposit are some of the account types in which you can keep your savings.
The most popular means via which people keep their savings is savings account. It is an account type that pays an interest on cash not immediately needed. You can make deposits and withdrawals from it online via mail or by phone. Also, you can use a physical branch or an ATM.
Although low, the interest rates of savings accounts, most especially online ones, tend to be higher than checking accounts. If you want to go for a savings account, go for a high-yield one.
With checking accounts, you can use cheques and/or debit cards to withdraw. They help users to maintain a liquid access to their funds. Of all bank accounts, checking accounts pay the lowest interest rates, however. In fact, in many instances, they pay none at all. However, they are the best for immediate, highly liquid access to funds and low fees.
Certificates of Deposit (CDs)
Finally, you can keep your savings in the form of a certificate of deposit (CD). A certificate of deposit (CD) enables you to keep your funds for a given amount of time. It grants limited access to savings during the stipulated deposit term which can be as short as three months and as long as five years.
However, its interest rate tends to be high and there is a penalty for premature withdraws. The longer the deposit term, the higher the interest rate is.
Hope this was useful for you! If so, hit the like button to make me feel good. Please note that the above content is not an investment advise and shall be considered only for informative purpose.
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