ANSWER: Create a savings fund to cover costs in case of an emergency
LESSON FOR YOUR LIFE: Creating an Emergency Fund & Understanding the Importance of Saving Money
The first priority for your savings should be to set aside money in an emergency fund. This money will allow you to pay for unexpected expenses ? such as a medical bill or a car repair ? without going into debt.
Keys to Building an Emergency Fund:
- Try to set aside enough to cover your basic living expenses for at least three months
- Keep the money in an easily accessible savings account or money market account
- Determine what is a true emergency (job loss, car repair) and only use the money in these circumstances
The Power of Compound Interest
The longer you save money, the more it can grow in value due to compound interest. Compound interest means you earn interest not only on the amount you deposit in a savings account, but also on all the interest you earned previously. Compound interest is one of the most powerful personal finance tools you can put to work for you throughout your life. Want proof?
Check out this example: You can be a millionaire by the time you retire -if you start saving when you are young. Let's compare two 21-year-olds that decide to save for retirement. Luis puts $3,000 per year in an IRA and earns 8% compound interest yearly. Cheryl waits seven years longer and begins to invest the same way. At age 65, Luis will be a millionaire - with almost twice as much money as Cheryl - even though he invested only $21,000 more.
To start saving it's important to develop savings goals. By knowing precisely what you want to accomplish, you?ll be more motivated to achieve it.