According to financial expert Scott Galloway, getting into the habit of saving $100 each month is one of the healthiest ways to become financially responsible. By adopting this habit, you’re paying yourself first, and if you invest that $100 in a high yield savings account, the power of compound interest will boost your returns. “If you get used to saving just $100 a month…you’re immediately in the top 10% of most financially responsible people in America,” Galloway said. “Most people can’t do that.”
I’ve actually been following this principle for 15 years now, without any prior knowledge of Scott Galloway’s advice. By setting aside $150 per month, every single month, in a high yield savings vehicle, I was able to create my emergency fund. I started this habit when I was still paying off credit card debt, reasoning that $150 per month would be relatively painless, and once the credit card debt was completely eradicated, it was even easier to set that money aside. Now I have a nice safety net.
Trust me when I say that this method of building wealth works.
I am a huge fan of high yield savings accounts, and have been using them for about ten years now. Why? Because they offer enticing yields, FDIC insurance for up to $250,000 per banking institution (make sure that the banking institution is FDIC insured), and enable people to set aside money for things like emergencies without much effort. In addition, the funds are completely liquid and accessible within a matter of days after a transfer has been initiated.
Anyone who is still holding onto high savings account balances in traditional banks is honestly doing themselves a disservice, since the national average yield in such accounts averages 0.46%. Compare this with high yield online savings accounts, some of which exceed a 5% APY (annual percentage yield). Even when percentage rates drop after the Fed rate drops, online high yield savings accounts will always trump traditional savings accounts.
I strongly believe that a high yield savings account is the best way to set aside an emergency fund, which all people should have. An emergency fund which will cover 3 to 6 months (more if you can actually put more into the fund) of fundamental expenses will serve as an insurance plan, should any unforeseen events occur which disable your usual income stream. At this point, I have enough money in my emergency fund to cover 6 months of expenses, and I still add a small amount every month to continue to grow the balance.
I stumbled upon sobering news from the Bankrate Emergency Savings Report, which reported that only 44% of Americans would be able to cover a $1,000 emergency if it arose. The remaining group of Americans would do the following (according to the December 2023 Bankrate report):
“35% would borrow money, including 21% who would finance with a credit card and pay it off over time, 10% who would borrow from family or friends and 4% who would take out a personal loan.”
It turns out that over 20% of Americans have no emergency savings set aside, leaving them completely unprepared should they experience a significant financial loss such as termination of employment. Another staggering report from Bankrate is that more than one-third of Americans have more credit card debt than emergency savings. Granted, more than half of the U.S. population according to the poll has more emergency savings than credit card debt, but the mere fact that such a large portion of Americans is saddled with significant credit card debt is sobering.
If you are someone who either has no emergency savings, or an insufficient amount to cover at least 3 months of regular expenses, it would be a good idea to focus on putting even a small amount of money into a high yield savings account in order to build up your emergency fund. It’s a good idea to get into the habit of depositing money into an emergency fund at least once a month, especially if you automate it. This way, you are protecting yourself by fattening up your emergency fund on a regular basis. Make sure to steer clear of traditional bank savings accounts, since the average yield on such accounts is 0.59 percent APY.
Not too long ago, I went shopping at a retail home goods store with a good friend. When we approached the checkstand, my friend experienced a bit of sticker shock, because she kept adding things to her cart and hadn’t kept track of how much she was spending. When I suggested that she might want to review what she had in her cart and perhaps pare down, she responded with, “Well, it will somehow work out. I still have some room on my credit card.” We kept chatting as the sales clerk rang up my friend’s items, and she continued with, “I never know how much I have in my checking account, and I don’t keep a budget, so I always hope and pray that I make it each month.” By this time I was cringing at what my friend was saying, and I also became very concerned for her financial health.
If you are like my friend and choose to throw caution to the wind by refusing to follow a structured budget, you have signed up for a rocky financial future. You may argue that you have the same fixed expenses each month, such as mortgage/rent, cell phone, and your car payment, and that you somehow always know approximately how much you spend on groceries and fuel for your car, but if I challenged you and asked you to itemize those expenses, I would bet that there is some overspending occurring. If you are also forgetting about discretionary expenses like a regular Starbuck’s habit, or even worse, you are neglecting retirement savings or contributions to an emergency fund, then you are skating on very thin ice indeed.
You might be thinking, “But I don’t know how to make a budget!” The whole idea of sitting down and creating a budget may sound daunting, but all it entails is writing down all of your income sources for each month, then creating a separate list of all of your monthly expenses. Once you have the basic framework of your regular expenses, you can add in your occasional expenses, such as personal care items (haircuts, etc.), auto insurance, upcoming vacations, etc. so that you are aware of the need to cover them. If you really dig deep, you will probably encounter hidden expenditures you weren’t completely aware of, such as streaming movie rentals, outdoor dining, or even online subscriptions which you might have forgotten about.
Once you have determined how much money is coming in each month, and how much money must be spent on fixed and variable expenses, you can see which expenses are unnecessary or frivolous, and you can also determine what other financial goals for which you can earmark part of your income. Examples of good financial goals are the following:
Paying off credit card debt (make sure that you add your monthly payments into your monthly budget!)
Vacation plans
Retirement planning
Adding to an emergency fund
Once your budget is completed, make sure to refer to it at least once a month, and as you reach certain financial goals (especially paying off credit card debt), you can make adjustments to your budget. Funds which were previously being funneled in one direction can be redirected to another goal, such as cushioning your retirement accounts or emergency fund. I can’t stress enough how important it is to focus on eliminating any credit card debt, because nothing erodes financial security more than this type of debt. Think about it: if you are paying 19.9% APR on a credit card balance of $2,000, that means that the credit card company is making an extra $400 in a year (this is a very rough estimate, since you would be making payments each month on that original balance). The other problem is that most people will add to a credit card balance, which pushes you into deeper debt. With credit card debt, it’s like taking one step forward and two steps back, so if you have credit card debt, HELOC’s, or another high interest debt, your primary focus should always be on aggressively paying those balances down. Once you are free from credit card debt, I strongly recommend that you curtail usage of any credit cards and use cash or a debit card instead.
When you stick to your budget, you may be surprised by how much it will improve your financial picture. A budget establishes a framework which enables you to move towards financial goals you might never have thought you could ever reach. Another great thing about an effective budget is that it doesn’t have to be static, so as your goals change and you reach certain markers, you can make adjustments to further fortify your financial position.
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