Savings: 3 ways to beef up your rainy-day fund

February 21, 2011

A man inserts a money into a piggy bank in this undated photo. REUTERS/Jill Kitchener You’ve heard it all before: lower-income families save little for emergencies, suburban dwellers take on massive mortgages they can’t afford, retired persons now live longer on less. Despite the boot-quaking Great Recession, Americans don’t seem to be getting the message — pay down your debt and start saving.

“There was a little bit of a spike in the savings rate after the economic meltdown, but about a week or so ago, they were reporting consumer confidence appears to be up because people are using their credit cards again,” says Eleanor Blayney, a CFP and consumer advocate for the Certified Financial Planner Board of Standards.

While personal savings rates are certainly better than they were pre-crisis, Americans are slipping on squirreling cash away for a rainy day. Personal saving as a percentage of disposable income was 5.3 percent in December 2010, compared with 5.5 percent in November, according to the most recent data from the Bureau of Economic Analysis.

To combat the problem, more than 1000 non-profit organizations have banned together to promote America Saves Week, which runs from Feb.20-27. The campaign aims to provide debt-reduction and savings assistance to individuals through employers, educators, financial institutions, the military, government and non-profits organizations. “I see savings as the gas and a financial plan being the car. A financial plan won’t go anywhere if we don’t start with savings. You can’t begin to invest if you don’t have the savings. Quite simply, without savings, you’re not going to reach your goals,” says Blayney, whose organization is a national partner organization of American Saves Week.

So where do you start? Here’s some advice on how to go from red to black and stay there.

Talk yourself off the spending ledge
Blayney recommends consumers make spending visible and difficult to help curtail the reach for the wallet. “If it becomes a pain to get the check book out every time you’re in the store, that may introduce just enough time to reflect and for you to say, ‘You know, I’m not sure I really need this or want this.’ The visible part is that you know where you’re spending is going,” she says.

The opposite holds true for saving, which should be invisible and easy.  Map out your monthly expenses and try to live on cash as much as possible. If you find you’re still reaching for the plastic, freeze your credit cards or give them to a trusted friend or family member until the balance is paid.  Do a spending snap shot:  Sit down with your bank and credit card statements for the past six months to get a real sense of where your money is going. It’s guaranteed to be a sobering experience.

Make saving habitual
Online and mobile banking has made saving a no-brainer. “It’s so easy now, you don’t even have to walk into a bank to set up a savings account,” says Blayney. Automatic savings plans and timed electronic fund transfers mean you can put your savings on auto pilot.  Most major banks now offer free or low-fee plans to get you started: Wells Fargo offers “The Way2Save” account, which will transfer $1 into your savings account every time you make a debit card purchase or pay a bill.  Bank of America has launched their “Keep the Change” program — for every debit card transaction, BofA will round up your transaction to the nearest dollar and transfer the difference from your checking account to your savings account.

Try to set aside eight to 10 percent of your net income for savings. Remember, this does not include any automatic contributions to an employee retirement plan like a 401(k).  A robust emergency fund will have at least eight to 10 months of living expenses, so if disaster strikes, you’re not forced to unfreeze those credit cards.

“Because Americans don’t save enough, a job loss is devastating when you live from pay check to pay check. What happens when we miss a pay check? Then you go to credit cards, we lose our home, it’s a disproportionate affect for something that is pretty simple to do. It really starts with savings and long before you get to investing,” Blayney says.

Put your savings into overdrive
When it comes to savings, you need to protect your principle so when an emergency strikes your cash is liquid. “Savings are the money you need at the ready should life deal you the inevitable hiccup, so you want those savings to hold their value,” Blayney says.

However, there are ways to make your savings work harder. High-interest savings accounts are a good start. If you’re far from retirement, consider a short-term bond fund or a certificate of deposit — a low-risk type of deposit account where you invest a fixed amount of money for a fixed amount of time. The bank or brokerage firm pays the investor interest over time for their investment. The investor also receives any accrued interest, plus the original amount invested, when the CD is redeemed.

“Really, the best way to keep your principle is to consider CDs. You can be putting small increments into CDs and have a stack or ladder that meets that criteria that will make it visible and makes it easy and a little out of reach. It’s hard to go in and break a CD,” Blayney says.

Bottom line: If you want to squeeze a little extra out of your savings, keep it as low-risk as possible. Stay far away from speculative, high-risk investments and let the conservative good times roll!

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