Saving

When you have savings, you're better prepared to cover unexpected expenses without relying on credit and risking building up debt. Savings also help build the buying power you'll need to fulfill your dreams, whether they're around the next bend or further down the road.

There's no one right amount for how much you should be saving, but aiming for 5% of your income is a good place to start. Adding the specific dollar amount that you plan to save each month as an expense line in your budget can help you stick to this goal.

Whether you call it an emergency fund, a rainy day fund, or a reserve fund, it's money you have put aside for unexpected costs, such as a serious injury or illness, travel for family obligations, unanticipated auto repairs, or reduced income from loss of a job. Your fund should have enough to cover at least three months of your family's regular expenses, and ideally six months in case of a situation that can't be resolved quickly.

Here's why it's so important to have this emergency money available: If and when you need it, you won't have to get the money from sources that will harm your financial stability and inhibit your ability to build wealth.

It's best to avoid these options as ways to cover emergency expenses:

In addition to covering costs in a crisis, there may be some purchases or expenses that can support your wealth-building strategy but seem financially out of reach given your monthly budget.

Some of these expenses, while they may seem to be “nice to have” instead of “need to have,” can end up saving you money in a significant way:

Once your emergency account is funded, you can shift to saving for specific goals.

Some of your goals might be short term—meaning something you'd like to buy or do within the next year. Medium-term goals may be five or even more years in the future, and may include buying a car or home, or starting a business. And looking farther into the future, those long-term goals might feature building enough wealth to ensure a secure retirement, or funding college for your children or grandchildren.

Though these goals, and how you will be able to afford them, might seem abstract or overwhelming, there are a few ways to make your goals more concrete, and achievable.

When you're exploring options for opening a savings account, find a bank that offers FDIC insurance, provided by the Federal Deposit Insurance Corporation, which ensures that up to $250,000 in each of your eligible accounts is protected. Those include checking, savings, money market deposit accounts, certificates of deposit (CDs), as well as other products like money orders, and cashier's checks. Look for the FDIC logo on the bank's website or at a physical branch location. You can also use the FDIC BankFind tool.

In addition to basic savings accounts, banks offer other savings options including money market accounts, which combine savings with some transaction privileges, and certificates of deposit (CDs).

While savings accounts carry relatively little investment risk, the rate of return is typically less than the rate of inflation, which is the increase in prices of goods and services and the resulting loss in the purchasing power of your money. So while it may be a good idea to put some of your cash, such as money set aside for emergencies, into a savings account, it could be hard to build wealth if you put all of your money into these types of accounts.

Instead, consider putting your money into accounts or investments with interest rates or rates of return that will outpace the current inflation rate. That way you'll be able to afford the things you're planning for when the time comes.