written by: Kimberly Johnson•edited by: Donna Cosmato•updated: 8/28/2011
Whether you are saving for a new home, building an emergency fund, paying off debt or saving for retirement, you need to have a game plan. Before you can build up that healthy nest egg you need to understand the basics of how to make your money work for you.
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Saving money isn’t easy, especially in these tough economic times. However, with a proper plan, it’s possible to build up money by understanding the basics of savings. Once you begin the journey of saving money, it naturally becomes a part of your daily habit without sacrificing your daily needs.
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Draft a Budget
Before you can decide where to invest your money, you need something to invest. Spend some time on drafting a budget. There are plenty of budget templates on the internet or you can draft your own. Keeping track of all of your expenditures is a must if you want to figure out how much money you can realistically save each month. Putting your budget on paper allows you to see where you are overspending and what you can feasibly take out of your budget to maximize your savings potential.
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Open a Savings Account
The easiest way to start putting away money is to establish a savings account. Find the highest interest rate possible to get the most out of your money, and begin putting a small amount of money into that account each month. To make the process even easier, configure your savings account to automatically transfer a preset amount of money from each paycheck. As interest rates fluctuate, keep an eye on your rate to make sure you are still getting the best one possible.
In addition to opening a savings account at a traditional brick and mortar bank, consider opening one at an online or Internet bank. These banks typically offer higher rates because they have lower overhead than banks which have to run traditional branches.
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Don't Ignore ATM Fees
If you withdraw money from your savings or other bank accounts using an ATM, fees can really add up. Most banks charge you a fee for using another bank's ATM and that’s on top of the fee that the other institution charges you. Look for a bank that has small or no ATM fees. If you use an Internet only bank, look for one that reimburses you for all ATM fees you incur by withdrawing money.
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Consider a Certificate of Deposit
The advantage of a Certificate of Deposit (CD) is that it guarantees you a certain interest rate. However, this can be a disadvantage because if rates climb you are still locked into the lower rate. Most CDs range from a three-month period to up to five years. With interest rates low, don’t tie up a lot of money in CDs that are long term. However, investing in short term CDs, such as six months to a year, gets you a better rate that most savings accounts.
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Invest for the Future
When saving money, don’t forget about saving for retirement. Most retirement accounts such as 401(k)’s and IRAs are advantageous because they provide higher long-term returns and offer tax benefits. Your employer may even have a matching program as well. Keeping money in a retirement account gives you a certain amount of flexibility while allowing you to provide for your future.
The basics of savings are a critical skill that every single person needs to understand and apply. By building up a healthy stockpile and keeping your savings accounts untouched, you provide yourself and your family with a better future and give yourself a sense of security.