SAVING 101: Pay Yourself First

Presented by: Alexa Glanzel, CFP^®

Contact Alexa: Direct 315-333-1315

Emergency Fund

Imagine your money is like a stream, always flowing in from your job and out for your bills. Everything's fine as long as the stream keeps flowing. But what happens if something suddenly stops the stream? What if you lose your job, or you get severely sick, or your car breaks down and you have a massive expense that you weren’t planning for? This is where an emergency fund “saves” the day. An emergency fund is a dedicated savings account that holds money specifically for unexpected expenses or financial emergencies. It acts as a crucial financial safety net that helps you navigate life's unpredictable challenges without falling into debt or compromising your long-term financial goals. Before you consider investing any money, you should build an emergency savings account to cover 3-6 months of expenses. Here’s why:

Covers unexpected costs: Life is full of surprises. An emergency fund prepares you for things like sudden job loss, unexpected medical bills, car repairs, home maintenance issues, or even a damaged cell phone. Without this fund, these unplanned expenses can cause significant financial strain.
Avoids Debt: One of the most significant benefits of an emergency fund is preventing you from taking on high-interest debt, such as credit card debt or personal loans, to cover unforeseen costs. Relying on debt in an emergency can trap you in a cycle of payments and interest, making it harder to achieve financial stability.
Maintains Financial Security: An emergency fund provides a buffer that helps you stay afloat if your income stops or is reduced, such as during unemployment. It allows you to continue paying for necessities like housing, food, and utilities while you find a new job or recover from an illness
Protects Other Savings: Without an emergency fund, you might be forced to dip into other important savings, like retirement accounts or college funds, to cover unexpected expenses. This can derail your long-term financial plans

Automate Savings

Saving money sounds easy on paper, but in real life it’s hard to put into practice. There is always something you can spend your money on that is surely a lot more fun than just setting it aside for a rainy day. So how can you make sure that you’re properly saving a portion of your income each month, while also not tempting yourself to spend the money first? You can automate your savings each month by setting up automatic transfers that move money to your savings account without you having to do a thing. Here’s how it works:

Direct Deposit Split: You can ask your employer to split your paycheck, so part goes directly into your savings account and the rest to your checking account. For example, if you get paid $3,000, you might set it so $300 (10%) goes automatically to savings each payday. In this case, the $300 is like money you never even had, because it never went into your everyday checking account. Think of it as an additional payroll tax, except this time the money is going to benefit you in the future and not the government.
Recurring Transfers: Use your bank's online system to set up regular automatic transfers from your checking to your savings account. You choose how much money to transfer and how often—weekly, biweekly, or monthly. This happens automatically on the schedule you pick. Tip: if you schedule the recurring transfer for the day you receive your paycheck, it’ll effectively be the same strategy as the direct deposit slip above!

High-Yield Accounts

Saving money is never a bad idea. However, saving money inside a traditional savings account at your local bank might not always be the best financial decision. Why? Traditional savings accounts typically offer low annual interest rates, often between 0.01% and 1.00%. This means that all the money you have saved is sitting at your bank, with little to no benefit to you. So how can you save money, and be rewarded (compensated) for doing so? By establishing a high-yield savings account, which currently pays you an annual interest rate between 3.00% and 4.00%, (a much higher interest rate compared to a traditional savings account). This means your savings grow faster over time without any extra effort from you. Here’s how:

Higher Interest Earnings: The interest rate on a high-yield savings account is often several times higher than in a traditional savings account. So, the money you save each month earns more “extra money” (interest), helping your balance grow more quickly.
- Compound Interest: Most high-yield savings accounts compound interest, meaning you earn interest not just on your deposits, but also on the interest already added to your account. This “snowball effect” makes your savings increase faster over time.
- Example #1: At the start of the year, Jason has $20,000 inside his traditional savings account at his local bank. Jason makes no additional contributions to his savings account during the year, and his bank pays him 0.50% annual interest, compounded monthly. Jason’s balance at the end of the year is $20,100.33.
- Example #2: At the start of the year, Sarah has $20,000 inside her high-yield savings account. Sarah makes no additional contributions to her savings account during the year, and her high-yield savings account pays her 4.00% annual interest, compounded monthly. Sarah’s balance at the end of the year is $20,814.83.
- Conclusion: Jason and Sarah started the year with the same amount of money in their savings accounts, yet Sarah has $714.50 more at the end of the year. This is the benefit of keeping your cash in a high yield savings account – the higher the interest rate, the more money you earn (without doing a thing!)
Encourages Consistent Saving: Having a dedicated savings account with better returns motivates you to regularly deposit money, knowing it will steadily grow. Hint: You can automate monthly transfers into this account so saving happens effortlessly.
Better Than Just Stashing Cash: Inflation slowly reduces the value of money sitting idle in regular accounts or under the mattress. A high-yield savings account helps your money keep up (or outpace) inflation thanks to higher returns.

Alexa Glanzel, CFP® is a financial advisor at Weller Financial Group, located at 6206 Slocum Road, Ontario, NY 14519 and can be reached at 315-333-1315. Advisory Services offered through Commonwealth Financial Network®, a Registered Investment Adviser.