Personal Finance 101: Types of Savings to Look Into This Year
If you don’t already have these essential accounts, read through!
You’ve got your expenses and you’ve got your savings. The truth is: there’s more to budgeting than divvying up your income between the two. Of course, as some money experts would have it, 50% of your after-tax pay should ideally cover your needs, 30% should be enough to cover your wants, and 20% should go to your savings. But this last bit, by itself, should be seen as more than the pool of money set aside for future use.
Digging deeper, there are different types of savings that are worth setting up since they serve different functions. They can help you set clear boundaries, for one, and along the way, even help you achieve those savings goals quicker.
Saving may not be a one-system-suits-all scenario, but there’s a reason the types of savings ahead are considered essential. If you don’t already have them, it may be time to look into them.
As the name suggests, this savings fund is reserved strictly for emergencies: the unforeseen events that come with a rather hefty cost like job loss, a pandemic, accidents and other events of this nature. Experts suggest saving anywhere between six months to nine months’ worth of your current salary.
Setting up an emergency fund is important because it provides you with a cushion. It gives you time to plan your next move and makes sure you don’t dip into funds allotted for other essentials. Keep this in a savings account you can readily access online or via ATM.
Rainy Day Fund
If your emergency net acts as your giant financial cushion for major, potentially life-altering emergencies, think of your rainy day fund as a smaller safety net for smaller unexpected events: one-time car repairs, an unexpected bill, a pet’s emergency trip to the vet or replacing a major appliance at home.
A ₱50,000 goal is a good place to start. And from there, you can keep adding to your pool. This is money you can set aside as cash or, like your emergency fund, set up a savings account for.
Sinking funds are effective primarily because they break down big expenses into smaller, achievable “pockets of savings” that you can cover over time. In the words of financial adviser Rachel Cruze: “If a budget offers permission to spend, a sinking fund offers encouragement to spend—and to spend big!” It also helps you develop the habit of spending intentionally.
This savings fund, in particular, is the most customizable. You can set up a sinking fund for nearly anything: your next big vacation, a wedding gift, a home renovation project, paying off debt. The sky’s the limit! What’s important here is that you set a goal for yourself (when do you want to complete this sinking fund?). The next important thing is that after you break down that big sum into smaller pockets, you consistently set money aside for them.
Now that you’ve got the essential savings covered, what’s next? Here are budget cuts to consider to up your negosyo capital.