You don’t have any money sitting in a savings account, and you need to change that as soon as possible. You need to have these three savings funds sitting in your financial portfolio.
1. An Emergency Fund:
An emergency fund is a financial safety net that you should set up for yourself as soon as possible. With a substantial amount of savings sitting in your emergency fund, you can handle urgent, unanticipated expenses immediately after you encounter them. All you have to do is draw the necessary savings from your fund and then use them to pay off the expenses.
One of the biggest benefits of an emergency fund is that you don’t have to touch any of the funds sitting in your checking account to resolve a surprise expense. So, you don’t have to disturb your personal budget to recover from an emergency. You can commit to your budgetary expenses for housing, utilities, transportation, food and other essentials as normal.
Without an emergency fund, you might be tempted to dip into your checking account to cover an urgent expense as soon as possible. This could disrupt your budget for the remainder of the month—or longer. You might not have enough left over to cover your usual expenses. You might even stumble into financial mistakes like overdrawing your checking account balance or bouncing important checks.
If you don’t have an emergency fund on hand, and you’re facing an urgent expense, you should reconsider using the money in your checking account to pay for it. It might be savvier to turn to a borrowing solution, like a personal loan, in this circumstance. A personal loan could help you cover that urgent expense in a short period and get back on track.
Before you apply for a personal loan, you should do some research. Look into these 7 common loan based terms to make sure that you understand everything to do with the borrowing option. You’ll want to be fully informed before you submit an application.
2. A Retirement Fund:
You don’t have anything saved up for retirement. You’ve decided that starting this savings fund isn’t worth the effort since you’re nowhere near your retirement years. But that’s not true. The earlier that you start building a retirement fund, the better. You’ll give yourself more time to collect savings, and you’ll give those savings more time to grow with the help of investments.
If you don’t start this savings fund soon, you might not have much of a nest egg saved up. You could reach your retirement years and have too meager of a retirement fund to maintain your lifestyle. You might have to downsize to afford your monthly essentials. Or you might have to extend your time in the workforce for longer than you’d like and retire later. Neither of these options is ideal, so you should do your best to start a retirement fund right now.
How? Open up an individual retirement account (IRA). You can choose between a traditional IRA or a Roth IRA. A traditional IRA allows you to make tax-deferred contributions to the savings fund. You will pay income taxes on your withdrawals in the future. With a Roth IRA, your contributions are taxed now, leaving you with tax-free withdrawals for your retirement. Choose which version suits your budget best.
3. A College Savings Fund:
Do you have kids? Have you put away any savings for their college education yet? If you haven’t, you should start doing that now — even if they are still in elementary school. College tuition is expensive, so you’ll want to give yourself plenty of time to set aside savings.
How can you do this? One of the best ways to save up for a college education is to open up a 529 college savings plan. This tax-advantaged savings plan allows you to collect savings specifically for educational expenses. You will have investment options with this plan, which will help your contributions grow over time. When your child is old enough to apply for college, they can use these savings to pay their tuition, room and board, textbooks and much more.
Think of these savings funds as essential. You don’t want to go without them for much longer. So, start putting them together now.
