Despite a booming economy, impressive job growth, continued low inflation and a decade-long bull market, Americans still are not saving enough. Several surveys show that American savings accounts are smaller than they should be. This makes for challenging times when inevitable financial surprises come along, like job loss or expenditures on vacations, home improvements, new cars, and such.
While the economy keeps humming and there’s still time to put aside some cash, here are a few time-tested tips to jumpstart your short-term savings agenda and a short primer on some of the best financial tools for doing so, such as high yield savings accounts and Certificate of Deposits (CDs).
So how small are Americans’ savings accounts? A Spring 2018 survey by Bankrate.com, a leading consumer financial news and advice outlet, showed that 40 percent of those surveyed were saving less than 5 percent of their income, and 19 percent were saving nothing at all.1 A separate survey revealed that millennials are poorer savers than older folks: 46 percent of millennials were at zero savings but “only” 33 percent of Baby Boomers (ages 55 to 65).2
Boom Times, Savings Account Bust
How Much Should Americans be Saving?
For shorter-term needs and emergency funding that could be accommodated by starting up a high yield savings account or CD, experts recommend having enough saved to cover three-to-six months of expenses for things like housing, transportation, food, health care/insurance, utilities, and debt payments.4 Putting away that much money will help avoid high borrowing costs from credit cards or high-interest loans.5
Short-term Savings StrategiesSome of the best ideas for getting into a savings state of mind use psychology to improve your motivation to save, including:6
- Make savings a “default” activity instead of an individual decision by setting up automatic paycheck withdrawals into retirement or savings accounts.
- When considering an expensive purchase, think about how many hours of work it will take to pay for it. Spending $1,500 to upgrade your living-room TV to the latest 75-inch 4K technology means working 30 hours if you earn $50 an hour.
- Get into the habit of tracking expenses on a weekly or monthly basis using mobile or web-based applications.
- For a really big short-term purchase, resist the urge to buy now and try a waiting period. Some experts suggest waiting one day for every $100.7
CDs and Savings Accounts for the Short Term
What is APY And How Does It Make Money?
Don’t be thrown by terms like APY, the now-common term used to describe interest paid in savings, checking, and other interest-bearing accounts. It’s different – and higher – than the interest rate only because it includes “compounding.” Interest is generally compounded quarterly, monthly, or daily. As a result, the interest added to an account becomes part of the average daily balance on which interest is earned in the next cycle.11