Following up on the general topic of budgeting, I thought I would offer a little more immediate content on the saving, investing, and charitable areas of budgeting.
Below I introduce savings accounts, emergency funds, why to keep some savings for investment opportunities, and the idea of paying yourself first. I hope this helps you convince your little one about the importance of saving early and saving often.
Dear Ney Ney,
Saving is an important part of budgeting. There is a famous idea in personal finance hat you should always “pay yourself first” when you earn or get money. That means before you pay any bills or buy anything, you put money into your savings.
The amount of money that you decide to save is called your savings rate. While we are mostly talking about savings that aren’t investments, usually a savings rate includes both money being saved and money being invested. In our example budget, our savings rate is half, or 50 percent, since our plan is to save 25 percent of what we earn and invest 25 percent of what we earn.
A 50 percent savings rate is very good, especially compared to many people. When we are young and getting an allowance or in school and working a part time, a 50 percent savings rate is easy to accomplish. When you are an adult your ability to save will depend on how much you want to save, how much money you earn, where you live, and what lifestyle you choose.
We save money because we have goals we want to accomplish. The first and most important goal is financial security, and to ensure our financial security the first thing we save for is an emergency fund. An emergency fund is money we put aside in case we need to pay for something unexpectedly that isn’t in our budget. For example, maybe we got sick and had to go to the hospital, or we need to repair our car, or maybe, in the worst case,we lose our job and need to pay our bills while we find a new job.
We also save money so that we will have money available to purchase new investments when there is an opportunity to buy one. That way you don’t have to sell any investments that you already have in order to buy a new one.
One last topic to talk about is where to keep your savings. When you are young and don’t have too much money saved it is fine to keep your savings at home in a special place, like a piggy bank. Adults usually keep their savings in a savings account at a bank.
A bank is a business that holds your money safely for you, giving you back your money when you need it, and lending it to other people who need it. When people pay the bank back the money they owe, they pay an extra fee called interest, and the bank shares some of this interest on the money you have saved in the bank.
There are usually two ways to store your money in a bank. The first is to put it in a savings account. Savings accounts earn interest, and you can take the money out of the account when you need it. The second way is to buy a Certificate of Deposit from the bank. Also called a CD, it is a promise to lend your money to the bank for a set period of time, usually between six months and five years. To buy a CD you usually need $500 or $1000 dollars. The amount you lend is called the principle. The interest you earn is more than what you earn in a savings account because, unlike a savings account, you can’t get the principle back until the end of the time you agreed to when you bought the CD.
Saving isn’t complicated, but it’s important and more than anything, takes effort to keep doing it. I promise it is a habit worth having.
I love you.
Dad
