The things nobody ever told you about savings: Your top 8 questions answered

Oct 12, 2019, 15:02 PM by Author Unknown

People tell you to save all day long. You hear it at work, on commercials, and from family members. They tell you it’s necessary for retirement, for building wealth, and for achieving goals. But how exactly do you save effectively? Savings can get confusing, so we wanted to clear up some common questions our members have.

Here are our answers to the top questions asked by members:

Should I save for a big purchase or use credit?

To answer simply, saving is usually the better option. There’s a lot of risks involved in debt, and it can quickly spiral out of control if you aren’t prepared to take it on.

But this question really doesn’t have a simple answer. While debt isn’t something to play around with, there are instances where it can be used to create benefits long term. As a general rule, its use should be kept to things that will increase in value over time. Think in terms of investments. A house, a business, or a college education would all fall into this category.

No matter what the expense is, the main thing you should consider is timing. Do you need this item now, or can it wait? If you’re thinking about charging a new TV to your credit card, really think about why you are making the purchase. Postponing the buy a few months would allow you to save the money needed and avoid the extra costs incurred by interest. In that case, saving is the way to go.

How do I make sure there is money left at the end of the month to save?

Pay yourself first! You’ve probably heard this expression a million times from financial experts, but it’s true. The only way you are going to save if you make it a priority.

This question is asked with the wrong mindset. You shouldn’t be looking at what you have leftover at the end of the month and then figuring out what to save. This will just encourage overspending. If the money has no pre-determined place to go, you’re free to use it on whatever you want, meaning you are left with nothing to put away.

Instead, pay your savings account as you would any other bill. This will ensure you hit your savings goals, and don’t accidentally waste money in other areas.

How much should I be saving a month?

The amount generally recommend by experts is 20%. Of course, this number is just a basis and may vary depending on circumstances. You may find yourself directing cash into multiple savings funds, one for retirement, one for emergencies, and one for an upcoming vacation or large purchase.

How you structure your savings will be unique to you. It’s important not to get bogged down in the details. Just start saving! Don’t worry about how much at first. Depositing a consistent amount each month will go a long way to building your fund.

What kind of account should I choose?

It really depends on what your objective is for saving. Do you want to build an emergency fund, save for retirement, or save for the down payment on a house you’ll be purchasing in a few years? In the first case, you’ll want something without many restrictions like a basic savings account. As far as retirement, you’ll probably want something more long-term, like an IRA or certificate. As for a house, you’ll probably want a combination of flexibility and high returns, like a money market.

Denali offers a variety of accounts suited to many different needs. Let’s break it down.

  • Savings Accounts – This classic way to save is the easiest and most widely used account. It’ll work for almost any need you have, from an emergency fund to rainy day or vacation fund.
  • IRA – Generally used for retirement, this account allows you to save on a tax-sheltered basis. This means the money you earn is free from taxes as it grows. We offer a variety of types that can be used for many long-term savings goals.
  • Certificate Accounts – Certificates are a good for those who are looking for long-term savings. Set up is simple. You put a set amount of money into the CD for a term length of your choosing, anywhere from 3 months to 5 years. The longer the investment term, and the larger the deposit you make, the higher interest rate you can earn.
  • Money Market – Money markets carry all the advantages of a savings account—security, the ability to access funds in an emergency, and convenience—with the advantage of a higher interest rate. They’re ideal for somebody who wants to earn more on their funds, but doesn’t want the obligations that come with other accounts. Our accounts have rates ranging from 1.5% APY to 4.00% APY.

What is the difference between saving and investing?

Saving and investing are both done for similar reasons: setting aside money for use in the future. The difference with investing is that money has a greater chance to grow.

When put money in a savings account, the interest rate is generally not high. You might make a few dollars a year, but nothing substantial. While the earning potential is not high, savings accounts fulfill their purposes of keeping money safe and allowing it to accumulate over time. Investments on the other hand have both the benefit of growth potential, and the downside of high risk. When you invest in something—a stock, mutual fund, or bond—you are dependent on what you have invested in.

You are also committed. The other major difference is the length of time. Investing is something you do over the long term, usually ten years or more. You don’t access this money until the term is up. With savings, you can access your money at any time.

The strongest financial plan will include both saving and investing. If you are just starting out, open up a savings account and start building your emergency fund. From there, you can branch out and learn about other ways to secure your future

Why is it so difficult to save money?

We all start with such good intentions, yet somehow, the money always seems to disappear. This phenomenon is so familiar and widespread that psychologists began to investigate it. They point to life experience with money, the constant presence of advertising, and the emotional responses financial decisions illicit as reasons for our poor money management skills.

These are just scratching the surface of the many influences we face that make spending so much easier than saving. The solution? Having a goal in mind. If you can remind yourself why you are saving, not just with abstract ideas like “for a better future” or “for retirement,” but with actual, concrete goals, you’ll be a lot better off.

If you think of that new car or future dream vacation home while you’re in line at Starbucks, you might be more likely to save the money. Also keep in mind your entire income is not at disposal. Receiving your paycheck and then turning around and making purchases is a bad habit. Plan in advance, and plan with the intention to save for what matters.

How does interest work?

Interest sounds complicated, but it’s not too bad once you understand what’s going on. At its most basic level, interest is the amount of earnings you make for keeping your money in an account.

Most savings accounts give interest rates in APY, or annual percentage yield. This is the amount of money you will earn on your deposit over the course of a year. It takes into account the interest rate, as well as the compounding frequency, or how often that rate is applied. So, if you deposit $1000 into an account with a 1.5% APY, you will earn $15 that year.

Another common label on interest rates is APR. This is the annual interest rate—but it does not consider the compounding frequency like APY does. The difference will be greater between these numbers when interest compounds more frequently, so be aware of the difference when looking for accounts.

Is it ok to take money from my savings account?

It’s your money, so it’s your choice. Nobody is going to penalize you for spending what you worked hard to save. Except, maybe, if you’ve put it into an account with a term. You can remove money from a basic savings account without incurring an additional fee, but something like a CD comes with a cost if you withdraw before the agreed investment time is up.  

Absent of a penalty, you know your situation best. The purpose of savings is to use them eventually, either for an emergency or future need, so there may be a valid reason to use the money. Only you can determine if it is worth dipping into savings. There is no right or wrong—it’s a matter of evaluating goals and judging if your decision aligns with those goals.

That said, using savings without a solid reason is not recommended. You’ll earn more interest and stay secure in the future by leaving the money alone. If you take from your savings account every time you have the impulse to buy, there won’t be much left later on.

Have more questions? Give us a call at 800-764-1123.

Savings can be confusing, but we want to help you navigate this area of finances effectively. If you want to know more about your options and what is best suited for your life, just give us a call or visit the website to learn how to open an account.

You can also check out the blog for more in-depth information. We frequently post helpful articles relating to finances, community, and member life on our blog. To learn more about these topics, click here

The information contained within this article is for informational purposes and should not be considered financial advice. Everyone’s financial situations are unique and you should consult a financial advisor for assistance with your particular situation and goals.

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