The Importance of Short Term and Long Term Savings Plans
April is Financial Literacy Month. It is a time to focus on your financial education and what you need to do to ensure you are financially prepared.
In the first part of this article, we will focus on the importance of short-term savings (emergency fund) and long term savings (retirement). With the cost of living increasing quickly, staying financially healthy can be tough. Here are some tips from your credit union to help you achieve your goals.
Over 50% of American’s have less than $1,000 in savings and would not be ready to cover an emergency expense. Having an emergency fund in place can help keep you out of a financial bind, and avoid going into debt.
Automate your savings
It is important to set up a regular savings deposit to help you build your emergency fund. Set up an automatic transfer for every payday, or have your employer direct deposit funds into a savings account. Saving $40 per paycheck will build your $1000 emergency fund in a year
Use your tax refund
This is a great way to top off your emergency fund, or start one if you haven’t got one yet.
Open a separate savings account
It is helpful to open a separate savings for your emergency fund. If you can, hide it in your online banking so you aren’t tempted to dip into it when it really isn’t needed.
Long term, many people don’t understand the commitment needed to retire comfortably.
According to Forbes, it takes saving $925 per month towards retirement for 30 years at an 8% return to have $1.26 million on retirement. Saving that same amount for 20 years will only give you $508k, roughly half of what is needed.
Contribute to a 401(k) or IRA
Many employers offer 401(k) plans, and several will even match a percentage of your contributions. Set this up as soon as you are eligible. If you do not have a 401(k) available, set up an IRA account that you can contribute to on your own. Consider contributing to both!
Start saving for retirement as soon as you can
It’s never too early, start saving for retirement when you get your first job. Interest gets compounded, so the longer you have money in retirement accounts, the more it will grow. You can easily roll over 401(k)s if you change jobs along the way, so don’t avoid contributing to retirement if you don’t see yourself retiring with your current employer
Track your progress
See how prepared you are for retirement, and make it a habit to check yearly to see if you are on track. Adjust your savings if needed. Visit our retirement calculators to find out if you’re on the right track for retirement.
To see our Financial Literacy Month article on Debt Management, click here.
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