We all know the importance of saving money. Putting aside money for a rainy day (try an online savings account for a higher yield), and building up a bit of a safety net is an important part of personal finance planning. However, it is important to note that there is saving money and there is…”saving money.”
Are you saving money or just spending less?
One of the things I hear regularly is “I saved money on such-and-such an item.” This is a bit of a semantic issue with me. Why? Because when you are “saving money” in that way, you aren’t actually saving anything. Rather, you are spending less. Spending less is just fine (it can help you stick to your personal finance budget), but you should consider that it isn’t really saving money.
What does saving money truly consist of?
Saving money requires that you take a certain amount and set it aside, in a safe place. Even stuffing it under your mattress is saving money, since you are safeguarding for the future. Obviously, though, it is more efficient to get your money to “work for you” through an account that offers you a yield. An online savings account is a great choice, since it offers you a higher yield (between 4.5 and 5.05 percent APY). Also, a money market account can be a good move in terms of a savings account.
It is important to realize that investing is not the same as saving, either. The key behind saving money is that it is “safe.” Investments are subject to loss. Your personal finance planning should include true savings that have the potential to grow (even if at a slower rate than an investment) safely, with minimal risk of loss.
A good rule of thumb is to set aside 10% of your income for savings. You should be spending less so that you have more available to shore up your financial future, but don’t confuse spending less with saving money.