I read a really scary statistic the other day about how close some Americans are living to the edge of financial ruin.
Actually, not just some, but the vast majority:SOTD: 62% of Americans have less than $1,000 in a savings account. 34% have $0 saved. Click To Tweet
I don’t even know how that’s possible, but if this sounds like you, know that you're not the only one apparently.
Having an emergency fund in a high yield savings account is a major key to solid financial health. Without one, when disaster strikes, you’re forced to rely on credit cards, family, or even dip into your retirement funds to cover expenses.
So why do so many Americans suck at saving? At first, these numbers totally baffled me, but the more I thought about it, the more they made sense.
If you're struggling to put money away each money you may benefit from avoiding these 5 common savings pitfalls:
1. The “Oh, That'll Never Happen to Me” Mindset
I think we all do this to some extent. The problem with this line of thinking though is that:
- A) we actually have no way of knowing that, so we should stop fooling ourselves
- B) when you have less than $1,000 in savings, it doesn’t even take that much to completely derail you.
Example: Last week I walked into the ocean without thinking about the iPhone 6 that was in my pocket. So that needed to be replaced. And then the very next day, I got a $633 hospital bill for a CT scan I had a couple months ago (which thankfully came back negative).
So, just like that, I was out over a thousand bucks. Sure, you can argue that you wouldn’t be foolish enough to go body surfing with your iPhone in your pocket, but that’s not the point. Really, anything can come up. You try to start your car in the morning but nothing happens, Fido needs an unexpected vet visit, etc.
You get the idea.
2. People Have Forgotten the Value of Budgeting
Let’s face it, there aren’t very many of us that like budgeting. We work hard for our money, and restricting our own use of what we’ve rightfully earned feels like a burden. When something is uncomfortable, most of the time we just choose not to do that thing. It’s human nature.
But without having a firm grasp on your monthly inflows and outflows, it’s damn near impossible to come up with extra money each month to save. I’ve been there before so I’m speaking from experience; it’s a place you really don’t want to be. You absolutely need to have a budget, no matter what.
3. Credit Cards Make it Too Easy Not to Save
They're also a financial death trap.
Again, if you take nothing anything else from this article, know that credit cards can be a total financial death trap, and you should only use them if absolutely necessary.
Credit card companies make a killing off naïve spenders by luring them in with low monthly minimum payments and high credit limits. In return, you get an exorbitantly high interest rate (30% a year is not unheard of). It’s easy to let your balance grow out of control, and having the money there and available to spend is just too tempting for a lot of people.
Bottom line: falling into the habit of relying on credit to bail you out of emergencies (or even worse, using them regularly and carrying a balance) is one of the worst financial decisions you can ever make. Don’t do it!
4. You Don't Have an Emergency Fund in a High Yield Savings Account
In the words of Dave Ramsey, an industry-leading personal finance expert:
An emergency fund is a buffer that helps you sleep soundly at night because it turns a crisis into an inconvenience.
Life happens to all of us, which is exactly why having a high yield savings account dedicated to holding your emergency fund is so crucial.
So should you just go to your local bank and open an account? Most likely, no. Not all savings accounts are created equal.
My Recommendation for the Best High Interest Savings Account: Discover Bank
The two big things to look for when choosing a savings account are the interest rate (also called the “Annual Percentage Yield”, or APY), and the fees. From my research, Discover crushes the competition in both departments.
Discover pays its clients a very hearty savings rate that's around 10 times higher than the national average. This means your money will grow faster with them.
And there are zero monthly fees and zero account opening fees. You can’t beat free.
They’ve also got 24/7 top-notch customer service and a mobile banking app- both of which are super convenient.
The only downside to Discover is that you need $500 to start. If you don’t yet have that much to open an account with, don’t worry. There are plenty of creative ways that you can make some extra money to get started.
5. You Don't Have Enough in Your Emergency Fund
Before you get too far ahead of yourself, the most important thing is to start, even if it’s with a small amount.
Most financial experts agree, though, that you should aim for having at least 3-6 months of living expenses stocked away in a high yield savings account.
If you’re the sole income earner for your family or you have a variable commission-based income, I’d aim for the higher end of that range. That way, if you lose your income for whatever reason, you’ll have more time to recover without stressing over how you’re going to pay the bills and support your family.
A Savings Account for Your Emergency Fund Gives You Peace of Mind
And that's probably the most valuable return you can get on your money (more valuable than the interest you’ll earn). There’s no better time than now to put one in place.
Put yourself on a budget, get serious about paying off your debts, and start saving. Once you aren’t making debt payments any more each month, you’ll be amazed at how much faster your savings will grow. You may even eventually decide that you want to start investing and have your money work even harder for you!
You'll usually see me on here writing articles about how to save (and make!) money, how to make smarter investment choices, and how to have a better overall financial life. If there's ever a topic you'd like to see me cover, shoot me an email!
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