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Guide published by Joelle Jacinto on December 3, 2019

The Federal Reserve's 2016 Survey of Consumer Finances found American households keep an average of $40,000 in liquid accounts. The 10% of respondents who were high earners have $228,000 in liquid savings, pulling up the average. The bottom 20% of earners have around $4,700 in liquid assets. The remaining 70% have an average of $26,000 in their accounts. This data only refers to families who actually have liquid savings to speak of. According to the ING International Survey Savings 2019, 27% of Americans have no savings, like 27% of 13 surveyed Europeans countries, and 22% of Australians.

While the average American family has $40,000 in liquid savings the median is around $4,500. This figure is close to the monthly earnings of a 25-54 year old, according to the Bureau of Labor Statistics. According to many financial advisors, savings should cover at least cover six months living expenses, in case people find themselves without a job or any means of income. Some cautious advisors suggest aiming for saving 12 months of income.

But why should we save at all? Do we all live in fear of losing our jobs and not finding a new one in 6-12 months?

Why We Should Save

We think about losing our job as we would think about being struck by lightning. While 1 in 700,000 Americans get struck by lightning annually, 1.5% of the workforce lose their jobs quarterly. Savings gives people optionality and lowers the risk of getting fired.

Most savings are for an emergency fund, and losing your job is an emergency, as is getting into a car accident, or your pipes bursting and flooding your house. We never predict that these events can happen, so it is also difficult to save money for them, in case they happen. Money in an emergency fund may seem like it could be used on something else, but when an emergency does come up, you'll be glad you saved.

Aside from maintaining an emergency fund, here are other important reasons to save.

• Saving means planning for a better life. You probably already put aside money to buy concert tickets, running shoes, or a new smartphone. And you make deals with yourself, like making your own coffee at home rather than spending far more at a coffee shop, or taking the train instead of hailing a cab. These choices save money. And saving on a broader scale is essentially the same, with bigger goals. Instead of concert tickets, you could save for a down payment on a house. You could pack your running shoes, after you've saved up for a holiday in an exotic country. You could use your smartphone to download Netflix shows you can watch in retirement.
• Saving makes retirement easier. The transactional opportunity cost savings mentioned above did not include saving for retirement, something you should do in your 20s. By the time you are 60 you should have at least 10 times your annual salary set aside. To reach this goal you should have 3-4 times your salary saved in your 30s. If you're already in the habit of putting away savings, figuring out how to incorporate retirement savings into your budget is easy. Check out our retirement savings guide here.
• Saving can help you stay out of debt. People lacking an emergency fund resort to taking out loans or maxing out their credit cards in emergencies, leading many Americans into debt problems. Loan and credit card payments typically take a long time to solve because they need to be repaid with interest. While bills are being paid off, other emergencies may crop up, further ballooning credit card balances.
• Saving improves your credit score. A credit score measures how financially trustworthy you are and if you are likely to pay your obligations. People with high credit scores enjoy greater access to credit on more favorable terms.

Where to Start Saving: Look at Your Budget

You should review how you have structured your budget. If you don't have one, and have been living paycheck to paycheck, you should make a budget now. First, make two lists.

• The first list contains your basic necessities, the fixed expenses you must pay for each month: rent or mortgage, food, car payments or transportation allowance, utilities, and so on.
• The second list is your discretionary expenses, or your non-essentials. Things that are optional or negotiable. Clothing and apparel, movie dates, sports events tickets, dining out, computer upgrades.

For both lists, state how much money you spend on each per month and add them up.

The total of the necessities list should make up no more than 50% of your monthly income after taxes. The second list should make up no more than 30%. If there is a discrepancy, especially if you are spending more on the discretionary items than the essentials, you should lower your expenses to meet their assigned percentages. The remaining 20% should go straight to savings. Several finance experts recommend the 50-30-20 rule.

Choose a High-yield Savings Account

To manage your budget well, you should open a separate savings account with a high interest rate.

• Checking accounts rarely pay interest but offer an unlimited number of withdrawals.
• Savings account have a federal regulation which caps a maximum of 6 withdrawals a month, but some of these accounts allow you to earn up to 2% APR on your money.

Opening both accounts lets you manage your money efficiently, with one account for payments and transactions, and another account for safekeeping. It is quite easy to transfer money from one account to the other, even if they're not from the same bank. Some banks may also waive checking account fees if you maintain a minimum balance across your accounts.

High yield savings accounts became a must-have with the rising popularity of Internet-only banks. Lacking local brick-and-mortar branch networks they have much less overhead & can pass the savings onto customers through offering a higher interest rate. Some of the larger banks have closed rural branches, preferring to focus on wealthy urban areas & offer higher interest rates on their savings accounts to compete with the Internet-only banks. Make sure to shop around for the ideal savings account and take into consideration:

• initial deposit requirements
• interest rates
• minimum required balance
• any fees
• insurance - the bank should be a member of either the Federal Deposit Insurance Corporation (FDIC) or, for credit unions, the National Credit Union Association (NCUA)

Did You Know?

You should build your emergency fund (3-8 months of your current salary) before starting your retirement savings. You can make better returns on more volatile investments in your retirement savings using a retirement investment account, which can be opened by your employer or a brokerage.

If you have a short-term savings goal that you wish to achieve on a specific date you can set aside those savings in a certificate of deposit (CD). Unlike liquid savings in an emergency account the money in a CD is inaccessible until it matures. A CD is a time deposit account, where you are unable to use, transfer, add to or withdraw your initial deposit (can be as low as $500), and it collects interest and grows during the time it is in the account, so that it is significantly larger than when you withdraw it at the end of the agreed term of the account. CDs can be helpful for building up a fund for a down-payment on a house or to bring the whole family on a European vacation tour next summer. You can learn more about CDs here.

Easy Ways to Save Your Money

If you're not in the habit of putting your money away, saving might be difficult in the beginning. Here are some ways to establish a routine that will come naturally.

Automatically transfer your money into your savings account. You can automate bank transfers for your 20% to go straight to your savings account. This way, if you didn't see the money in your checking account, then you won't have the desire to use it. You can also do this for

1. Overtime pay – As this is outside your normal monthly income, you won't miss it if you put it straight in savings as your regular expenses are not affected.
2. Cash gifts from family
3. End-of-year pay increase – You can transfer raises to your savings account or ask your company to increase your retirement contribution by the percentage of your pay increase. You won't notice any change in your lifestyle by automatically setting the raise aside. Investing a steady stream of savings from pay raises will lead to a large savings over the course of many years.

• Track your spending. When you track your spending you become mindful of whether you need these purchases and services, making it easier to cut expenses from your budget and increase savings.
• Make savings goals. You may have heard of the savings jars, where you put away spare change for a non-essential nice-to-have expense. Think bigger: allocate your money into savings goals and incorporate these into your monthly budget. Open a CD and get that house in two years. Have a separate savings account for your child's college fund. Calculate how much of your money should go into the college fund, how much for a new refrigerator, how much for a new car. Rebalance your budget to remove unnecessary expenses and make way for your savings goals. When you have things to look forward to, it's easier to stay motivated to achieve them.
• Gradually increase how much you put into your savings. You could start saving a dollar a day and work upwards from that over time, maybe adding 50 cents or more each month. If you started with a minimum amount when you opened your 401(k) retirement account or your IRA keep increasing your contribution on a regular basis until you reach the maximum.

Earn More to Save More

A survey conducted by GoBankingRates showed 23% of Americans unable to save money claim low salary as the primary reason. In this case, it would be wise to explore other career opportunities, or look for supplemental income.

This is a list of jobs that companies are willing to hire you part-time:

1. Accountant
2. Editor and proofreader, copywriter
3. Website designer, graphic designer
4. Computer programmer
5. Network administrator
6. Market analyst
7. Laborers
8. Drivers, delivery personnel
9. Teacher, lecturer

You can also go online and look up freelance work on any of the following platforms:

1. Fiverr
2. Upwork
3. Freelancer
4. People Per Hour
5. Guru

About The Author

Joelle sees writing as a craft, and is genuinely interested in the topics she tackles, which have ranged from finance and transportation, to pop music, to business advice, to society and culture, to performing arts. She has a Master's in Art Theory and Criticism from the University of the Philippines and is pursuing a PhD in Philippine Socio-Cultural Studies. Her works have been published in broadsheets, lifestyle magazines, online portals and academic journals. Her performing arts reviews have been published in Malaya, Manila Times, Critics Republic, Malaysia, and RealTime Arts, Australia, while her academic work appears in The Borneo Journal and the Journal for the Anthropological Study of Human Movement.