How to Plan, Prepare and Choose the Best Way To Grow Your Life Savings
This article is Part 1 of 5 of
Your Total Guide to Managing Life Savings: Exposing The Best-Kept Secrets
Making and managing your own money do not only give you sense of security, it is also a source of pride and connotes responsibility and maturity. But how do you decide when to spend and when to save? Knowing the answer to this is knowing the secret of good life savings management. It is actually an important life skill that one must learn at the earliest possible time because it forms one of the strongest foundations for having sound money views for the rest of one’s life.
Life savings are not really meant for the rainy days or emergencies, but as financial preparation for major life goals or life-changing events. These include turning major plans in life into realities and acquiring important things in life that we need to have on our own at a certain point in our lives.
Your attitude about money earned and saved, and how it ranks in importance compared to other priorities in your life will determine how successful you are in taking control of your money and your life.
COMMON GOALS FOR BUILDING LIFE SAVINGS
Building a life savings need not be the turf of the rich. Everyone, regardless of income status and personal economics can build a life savings based on how one can afford funding it, and when one is finally ready to start building it.
Here are the common goals for building and growing a life savings:
- Education (or higher education)
- Independent living (moving out of home)
- Marriage and own family
- Career shift
- Relocating
- Home ownership
- Car ownership
- Some other property
- Major Insurance Plan
- Providing for someone like your elderly parents or loved ones
- Financing personal plans like long-term travel.
- Retirement
These goals behind the need for having a life savings are directly connected to life-changing events and the process of acquiring them or making them happen can be stressful because of the emotional and financial strain. Our guide on managing life savings is aimed at making things a little bit easier.
SAVINGS BY ANY OTHER NAME: WHAT’S THE DIFFERENCE?
DIFFERENCE FROM STANDARD SAVINGS ACCOUNT
Depending on how you manage your personal finance, you may have a standard savings account where you put aside some money while thinking about what you want to spend on at present and what you need to save up for later. While this decision process is in the hatching stage, the money grows by way of interest.
Most people have standard savings account and it is actually the primary savings products to have, especially for the younger set of workers and those who are just starting out at being financially independent.
The standard savings account functions like an all-purpose, to-go-to cash depot for various kinds of financial needs. It’s most practical value is as a standby cash replacement, when the cash kept away in the wallet for the usual everyday expense has ran out and you still need to buy the weekly groceries or pay your mobile phone bills.
DIFFERENCE FROM EMERGENCY FUND
As we have already established, a life savings fund is different from an emergency fund. Most financial advisers will tell us that having an emergency fund should be the priority.
There is greater peace of mind in knowing you can have something to fall back on when you need unusually large amounts of cash urgently. Experts advise to stash away two months’ worth of salary for unexpected costs. This ensures you don’t run into big debts in times of emergencies, which will cost you more on top of the cost of the emergency.
It is alright if at an early point, your life savings also include the emergency fund. As we have established, saving money is hard, especially in these uncertain economic times. The silver lining there is that you have a savings to fall back on whenever an emergency hits or the time has come for you to live up to major life events that needs major financing.
RISKS OF NOT HAVING A SAVINGS PLAN
Not having a savings plan can lead to financial instability and limited options when facing unexpected expenses. Here are the key risks:
- Increased Debt: Without savings, people often rely on credit cards or loans to cover emergencies, which can quickly accumulate debt. This leads to high-interest payments that reduce disposable income, making it even harder to save in the future.
- Reduced Financial Security: Savings buffer life’s unexpected events, such as medical emergencies or job loss. Without it, individuals may lack the resources to cope with financial setbacks, increasing stress and insecurity.
- Missed Investment Opportunities: Having a savings fund allows individuals to invest in opportunities that can grow wealth, like real estate or stocks. People miss these opportunities without savings, potentially reducing their long-term financial growth.
- Impact on Retirement: Regular savings contribute to a more comfortable retirement. Not saving early enough may lead to delayed retirement or an increased reliance on government assistance, which often isn’t sufficient to maintain one’s standard of living.
- Higher Financial Stress: Living paycheck-to-paycheck without a safety net can lead to constant financial stress, which can affect mental and physical well-being. Long-term stress can also impact productivity, health, and overall quality of life.
CHOOSING THE BEST WAY TO GROW YOUR LIFE SAVINGS
Some people like to tie a major life goal with deadlines and target savings. For instance, an individual is bent on having his own home at the age of 35, where he expects to have saved up about $150,000, about half the cost of an average home.
On the other hand, there are those who just continuously grow their life savings with no specific major life goal earmarked for funding. The time will eventually come for that, but the important thing is to raise funds for these major goals.
To make our point clearer, let us meet two different life savings advocates:
No. 1: MR. YUPPIE – Goal-specific, time-bound life savings
Let’s meet our 20-year-old young urban professional who sees himself owning his first home in 15 years.
Our yuppie friend is living in LA, where the average price of a one-bedroom home is $340,000 in 2013. The average downpayment is at 20% of this value, or $68,000. This will be the principal amount that he will target raising. But it’s not that simple. There will be factors to consider, like how many years he wants to raise his target savings intended for downpayment (15, 20 years?), as well as the average annual increase in home prices and downpayments to come up with a projected cost of a home down payment in 2028 (15 years after).
Our yuppie calculates the estimated increase in downpayment for LA homes at 4 percent per year. Let’s make this simple by having the downpayment value and increase as fixed over a 15-year period. That will be a $2,720 increase per year or a total of $40,800 in 15 years. This means that the average downpayment for the home he longs to own will increase from $68,000 to $108,800 in 2028. So if he is targeting to raise this downpayment for an LA home, he needs at least $7,253 a year to inject into his life savings fund. Supposed he is earning $3,800 a month net of taxes, that means he needs an equivalent of about 2 month’s salary for his annual life savings fund to raise $108,800 in 15 years.
Again, he can either get this infusion from his monthly salary or allot expected money collectibles like a bonus to shoulder this target annual amount. Of course, he will have pay increases along the years, which makes it all the better for him.
No. 2: MS. LADY CLERK – Multi-Goal, Open savings (no deadlines, no ceilings)
Meantime, we have a slightly older life savings planner, a woman in her 30s working as a clerk in a small Washington D.C. law firm. She is earning average, with just the standard benefits – an annual healthcare reimbursement of $1,300 in lieu of an HMO, a month’s equivalent of an annual holiday bonus and a little profit-sharing every mid-year, depending on the earnings of the small firm.
In short, she doesn’t have that many or much sources for her life savings fund. But our lady clerk is committed to maintaining one, which she regularly infuses with her few expected cash collectibles within the year and some spare savings, though they are few and far between.
Her life savings are not for emergency (she has a separate one for that), but strictly for her major life goals although she has no specific item. It could be pursuing a higher education like law school, or relocating to a state with much lower taxes than D.C. In the same way, her savings goal are not specific, meaning she has no savings ceiling she is targeting to achieve at a specific time. The important thing is she has a definitely growing life savings fund for major life goals that she will surely want to accomplish in the future.
So what is the best way to approach having a life savings? It all depends on your circumstances and your life goal views. The choice is yours!
More than how many income sources one has to fund it (double- or triple-time) or much and how often one infuses cash into it, the more important thing is knowing how to manage this life savings because that will spell the difference between simply having a financial security package to show for it, and truly enjoying the peace of mind that comes with a solid, protected and continually growing life fund.
Key Insights
- Building and managing personal finances is crucial for security, pride, and maturity.
- Life savings should be geared towards major life goals and events, not just emergencies.
- Common goals for life savings include education, independent living, marriage, career shifts, home ownership, car ownership, major insurance plans, supporting loved ones, long-term travel, and retirement.
- Standard savings accounts are for general financial needs and emergencies, while life savings are for planned, significant life events.
- Establishing an emergency fund is a priority before focusing on life savings.
- Two approaches to life savings:
- Goal-specific, time-bound savings: Setting specific targets with deadlines.
- Multi-goal, open savings: Regularly saving without specific targets or deadlines.
- Effective life savings management requires continuous effort and clear goal-setting based on personal circumstances and priorities.
FAQ
- What is the difference between a life savings fund and a standard savings account? A standard savings account is a general-purpose account for everyday expenses and short-term financial needs, whereas a life savings fund is specifically aimed at significant life goals and events.
- Why is having an emergency fund important before starting a life savings fund? An emergency fund provides financial security for unexpected large expenses, preventing debt accumulation and ensuring peace of mind. It is a foundational step before focusing on long-term life savings.
- How should I decide between a goal-specific savings approach and an open savings approach? Choose a goal-specific approach if you have clear, time-bound goals, like buying a home by a certain age. Opt for an open savings approach if you prefer flexibility and are saving for various potential future goals without strict deadlines.
- Can I combine my emergency fund with my life savings? While it’s possible to initially combine them, it’s better to keep them separate to ensure you have dedicated funds for both emergencies and long-term goals without compromising either.
- How much should I aim to save in my emergency fund? Financial experts recommend saving at least two months’ worth of salary in your emergency fund to cover unexpected costs and provide a safety net.
- What factors should I consider when setting a target for my life savings? Consider the cost of your goals (e.g., home down payment), the time frame to achieve them, expected annual cost increases, your current income, and potential salary growth over time.
- How often should I contribute to my life savings fund? Regular contributions, whether monthly or annually, are ideal. Consistency is key to growing your life savings effectively, whether through direct savings from your income or additional sources like bonuses.
- What are some common challenges in building a life savings fund? Challenges include balancing savings with daily expenses, managing unexpected financial emergencies, maintaining discipline in saving regularly, and adapting to changing financial circumstances and goals.
Do you know the easiest, smartest steps to build and grow your life savings?
Continue reading PART 2: How to Build and Grow Your Life Savings
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