What’s better than random personal finance topics? Topics bundled up in a nice, easy-to-chew series. For the next few weeks we’ll be exploring the basics.
Does this mean no more random stuff or videos? Heck, no! We love random stuff and videos — we never want to be like other financial sites. (Most are sooo boring…)
What’s in it for you: Neat, bite-sized basics. With a twist. The twist is that these will appear simple. Maybe too simple. But a review of the basics will help you zero in on the areas in your own financial situation that need attention. Sure, we can talk all day… but are you doing any of it? Let these short bursts spur you into action.
That said, let’s start with the first of the series, “Growing Money”. Why the mushroom photo? Mushrooms spring fourth from less-than-ideal starting points. So can growing your money.
Growing Money: S stands for…
Okay, Einstein. The “S” does not stand for “sugar”, “stars”, or “shrooms”. The “S”, of course, stands for saving. There are two flavors: short term and long term. Which do you want?
The answer is: both. But you knew that.
Let’s discuss each, shall we?
Short term savings. This is a liquid, cash account whose purpose is to cover emergencies and unplanned expenses. It’s the ace in your pocket. Make building this “emergency fund” your top priority.
To do so, figure out how much you need to support your lifestyle. Set aside something out of every paycheck. Small amounts add up. Even better: there’s a bit of magic to doing this. Once you start to consistently set money aside for emergencies, you tend to stop having emergencies…
HINT: I set up multiple savings accounts at ING Direct. This way I could separate my money into different channels and re-name each bucket accordingly. I named my “emergency fund” short term savings “emergency prevention fund” to remind me that my efforts were preventing future emergencies.
Types of accounts for short-term savings: savings accounts, money market accounts
More about short term savings:
Build a Three-Month Cushion
Emergency Fund: Is Your Stack Wack?
Planning for the Unexpected Funeral (or other emergency)
How to Have Good “Horse Sense”
Long-term Savings. Not to be confused with retirement savings! Long-term savings are for big-ticket purchases or other goals. The advantage is having more cash available for a large down payment (for example). This translates into lower-cost borrowing or avoidance of borrowing entirely. If you can pay entirely with cash from long-term savings for a big-ticket item (such as a car), you have a lot more negotiating power.
Types of accounts for long-term saving: certificates of deposit (aka, cds), U.S. Treasury Bills, Notes, or Bonds.
How to do it: Like your short-term savings the best approach is to route a certain amount out of your hands every time you are paid. An earmarked account makes it easier to separate your various savings goals.
HINT: Saving for “long-term goals” is a boring way to think about it. It’s not particularly motivating. So, rename your long-term savings into exactly what you’d like to use these monies for… for example, “China Olympics 2008 Fund”.
More on long-term savings: “How to Play $1K: Sweet CDs”
Simple, right? Now ask yourself… have I established short- and long-term savings in order to grow my money?
Act today!
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