April 2006

How much Americans save—or don't save—has been in the news since the U.S. Department of Commerce reported that the U.S. personal savings rate in 2005 was a negative 0.5%. Debate has boomed about whether the savings picture is actually so bleak because the calculation doesn't take into account any capital gains from investments or increases in home equity that citizens may have. The calculation only looks at personal income and spending to determine the savings rate. But even if the savings picture is rosier, common sense says that as a nation of consumers we are probably not putting enough away for a rainy day or a dire emergency. And of course, there's the question of saving toward something important such as a down payment for a home or a fund for higher education or retirement.

In this report, however, I'm going to concentrate on creating that basic savings plan for an emergency fund or a "ready cash" fund that helps give you and your family additional financial security in an unpredictable world. Most financial planning experts recommend maintaining accessible savings equivalent to three to six months of basic expenses. If you have a family, you probably should aim for at least six months.

But that negative savings rate for 2005 indicates that many of us are already spending all we earn and a little more. Where and how can we carve out some savings? And where should we stash the cash when we've found it? This report gives some pointers to help you answer both questions.

Tips for Finding Ways to Save Regularly

Savings often seems a big challenge when you feel that your income is already over-committed. But financial planning experts point out that almost everyone can find ways to trim spending and be more efficient and so find money for savings. It does take some discipline, they caution, but it's worth it. Here are some important steps to creating a savings plan.

First, find out where your income is going. Most people have only a general idea of expenses and spending. Keeping a spending log for two weeks to a month (even one week) of everything you spend, can be eye opening. Knowing how much you are spending on coffee breaks, lunches, random purchases (book, CD, movies, new computer gadget) and even groceries or cellphone bills often reveals places to save.

Make a budget. A budget provides a plan for spending. It sets out your fixed and regular expenses such as mortgage or rent, utility payments, and car or loan/credit card payments and sets goals for other necessary but modifiable expenses such as how much you spend on groceries or clothes. It also sets limits for discretionary spending such as what you spend on entertainment, recreation, or optional travel. Put a savings goal in the budget.

Pay yourself first. If you have no emergency funds or only a few weeks' worth, then beginning to set aside some emergency savings is a priority. Many individuals have discovered that if they put aside a set amount in savings (perhaps using payroll deduction if available), then they don't really miss the money saved.

Buy with cash, not credit cards. With savings put aside first, many individuals find it easier to stay within their budgets if they use cash, checks, or debit cards to make those modifiable purchases (such as groceries and clothing) or discretionary purchases (coffee breaks, entertainment, etc).

Pay off high interest debt and credit cards. After you've got an emergency fund saved up, the next important step to finding more money for savings and even investment is to pay off the high-interest debt you have. That means credit card debt for most people. Carrying high balances even on lower-interest credit cards means that you are spending lots of dollars on interest payments. So when your emergency fund of six months coverage is in place, pay down high-interest debt. It doesn't make much sense to put additional savings aside at a 4% or 5% return while you are paying out 7% to 19% or more in interest on credit card debt.

Make a long-range savings and investment plan. Making a long-range plan for growing your savings and wealth can give you not only the incentive to keep saving but can help put you and your family on a more secure financial foundation and future.

Where to Stash Your Basic Savings Money

Basic or emergency savings must be both accessible and secure. Of course, you'd like to earn as good a return as possible, but you don't want to invest savings where you can't get the funds immediately when you need them or where there is a risk that you might lose money. There are several kinds of savings vehicles that meet these goals.

Insured Savings Accounts

Sometimes also called "passbook" savings accounts, these accounts are offered by credit unions, banks, and savings and loans (thrifts). The required amount to open the account is usually small, the financial institution pays interest on the funds deposited, and you may access your funds at any time without penalty. Because they are member-owned, credit union regular savings accounts represent ownership shares and pay dividends, rather than interest. Such savings accounts are federally insured. Corning Credit Union offers Share Savings Accounts that have a very competitive interest rate compared to many other financial institutions.

Money Market Accounts

Money market accounts, also called money market deposit accounts, are savings accounts that operate like money market funds. They are offered by credit unions, banks, and thrifts and are federally insured. Typically they pay higher interest or dividends than passbook savings accounts and have higher opening deposit and minimum balance requirements. Transactions are also limited in accordance with federal regulations. Corning Credit Union offers Money Market Accounts that require a minimum deposit of $2500 and have a competitive, tiered interest rate structure.

Certificates of Deposit

A certificate of deposit (CD) is a vehicle for investing a fixed amount of money for a fixed term usually at a fixed interest rate. Originally CDs were fairly simple: the depositor contracted to deposit money for a fixed period of three, six, twelve months or more and in return the financial institution agreed to pay a fixed amount of interest. If the depositor withdrew the funds before maturity, he had to pay an "early withdrawal penalty" or forfeit a portion of the interest earned.

The variety and complexity of CDs, however, has grown. For instance, there are now adjustable rate CDs and long-term high-yield CDs that the issuing financial institution can call in early. CDs offered by credit unions, banks, and thrifts are federally insured. Many brokerage firms and independent salespeople also now offer a type of CD called a "brokered CD." These come in a wide variety and are not federally insured.

Because the interest can be paid in different ways resulting in different yields for the same APR and maturity, it is smart to also compare the annual percentage yield (APY) not just the APR of CDs of the same maturity.

If you are considering holding part of your basic savings fund in CDs you can lessen the chance of having to pay a penalty for early withdrawal if you spread out or "ladder" the renewal times and time periods of CDs. Corning Credit Union offers a full spectrum of Certificates of Deposit.

No Time Like the Present to Get Started

If building your basic savings is a goal for you and your family, the best time to get started is now. Why not plan to start recording where the money goes with tomorrow morning's sausage biscuit or double latte-to-go? Before you've dumped too many days' change in the jar, you'll be ready to identify where you can save, open the right account (if you don't have one already), and start making regular contributions. Peace of mind will follow—that's a promise.

Prepared for Corning Credit Union by Remar Sutton & Associates, April 2006. Reviewed March 2007. All rights reserved.