Sometimes it can be hard to think about saving money when you’re focused on earning a good income and managing daily expenses. It’s common to want to spend the money you earn — to reward yourself for hard work. Saving is a kind of reward, too, and one that pays off more than buying things you want.

When you save, you put your money into an account where that money grows — it’s the only way to turn the money you earned into more money. Over the short term, you see small growth. Over the long-term, you start saving enough money so that you can have the things you want today and guarantee that you can have them later in life as well.

To save successfully, you have to be savvy enough to think about both the short and long term — to balance what you want now with what you want in the future.

Why do I need to save?

The best reason to save some of your income as you earn is to provide for future needs, both expected and unexpected. If you set nothing aside for these inevitable needs, you will constantly live in the moment and put yourself at great risk for financial setbacks. You can’t predict the future — if you have no savings, you have no safety net.

If you have no savings, you have no safety net.

You also save to improve your situation. If you make 100 extra dollars each month and spend it on things that lose value — restaurants, clothing, electronics — then you’re just out of $100 every month. If you save that $100 in a savings account, in a year you could have $1,000 and in 10 years you could have $10,000. If you put that into an account that lets your money grow — retirement or investment account — you could have way more. Over time, you build not just money, but wealth.

• See also: Save at least 10%, Invest, don’t gamble

We rarely think long-term. The best short-term reason to save is knowing you have enough money available when expenses come up. The amount of money you save will depend on the amount of your discretionary spending — the amount of money that’s left over after you’ve paid your bills.

When to start saving?

The simplest answer is you should start saving now. If you’re in credit card debt and can’t save, then you need to focus on repaying your debt and writing a budget and spending plan that gets you spending less than you earn.

• See also: Budgeting, Credit cards

The minimum you should have is a $1,000 cushion in your paycheck that is always there to avoid over-draft and keep you out of the paycheck-to-paycheck cycle.

• See also: Emergency funds

Then, create a saving plan for your short-term and long-term needs. Include a retirement savings plan and start putting away at least 10% of your income for retirement. If you’re closer to 30 and haven’t started saving for retirement, you need to bump that up to 15% or more. Starting retirement savings is the single most important thing you can do to make sure you have the future you want.

• See also: Save at least 10%

How to save for short-term needs

When saving for the short-term, plan on having enough to cover:

• Emergencies (such as unemployment, sickness, accident or death in the family)

• Vacations

• Weddings and other major planned events

• Major purchases such as buying a car, furniture, remodeling or other expenses that become necessary

In general, you want to use cash, not credit, to make major purchases, so you don’t get stuck with a high debt load that will cost you thousands of lost money on interest payments.

• See also: Emergency funds, Big purchases

How to save for long-term needs

While you need savings for emergencies, you will also need money for long-term needs that require you to have a lot of money, such as:

• Buying a home

• Paying for college

• Saving for retirement

Saving now will enable you to make large purchases in the future and save enough money for a secure retirement.

• See also: Big purchases

After you’ve saved enough to cover daily expenses, paid off debt and saved for an emergency fund, then you can afford to begin investing. Investing in stocks, bonds, mutual funds or real estate can make your money grow faster than in a regular savings account.

How to grow your savings?

When you start saving your money, the amount you start off with is called the principal. When you deposit your money with a financial institution, it pays you interest for the use of your money.

Compound interest is interest computed on the original principal plus accumulated interest. The more often interest is compounded the greater your earnings, which means you will earn more interest with quarterly compounding than with annual compounding.

Earnings on savings can be measured by the rate of return or yield — which is the percentage of increase in the value of your savings due to earned interest. Because financial institutions compound interest in several different ways, comparing yields of different banks is very difficult so the law requires all financial institutions to tell people the annual percentage yield (APY) on their accounts. This is the actual interest rate that the account pays each year and it also includes compounding.

What are the different savings options?

You may want to deposit your money in different types of accounts because each can contribute to your overall savings plan.

Regular savings account

A regular savings account has an advantage: high liquidity. Liquidity is the ability of an asset to be converted into cash quickly without loss of value. A regular savings account is liquid because you can withdraw your money from the account at anytime without penalty. However, a regular savings account in general pays the least amount of interest of the savings option.

Once you’ve opened the account, you are free to make withdrawals and deposits. Some institutions charge service fees when you make too many withdrawals in a certain period of time. Other places charge a monthly fee if your balance falls below a set minimum. In most cases, you will receive an ATM card so you can make withdrawals and deposits. You can also check your balance, and transfer money between checking and savings accounts over the phone or online.

Certificate of deposit (CD)

A certificate of deposit, or time deposit, is a deposit that earns a fixed interest rate for a specified length of time — for example, 5% for six months. A CD requires minimum deposit. The interest rate of a CD is usually higher than on a regular savings account because CDs are less liquid. You must leave the money in the CD for the full time period. If you take out the money early, you will usually pay a early withdrawal penalty.

A CD has a maturity date — the date on which the investment becomes due for payment. Within a stated number of days after the maturity date, your certificate will renew automatically. You may prefer to redeem it for cash or purchase a new certificate for a different time period. Financial institutions offer CDs that allow the interest to accumulate to maturity.

Money market account/fund

A money market account is similar to a savings account but usually has some limitations on the frequency of withdrawals or transfers. Brokerage firms as well as banks offer money market accounts/funds though they vary slightly in how they work.

Most money market funds from brokerage firms are not insured. The Federal Deposit Insurance Corporation (FDIC) insures money market accounts at banks. However, even without the insurance, money-market funds are considered very safe because the securities backing up these funds are very stable.

Unlike regular savings accounts, the interest rates on money market accounts changes frequently. However, interest rates on money market accounts are typically higher than on regular savings accounts. In general, money market accounts require a minimum balance and may have other restrictions, as well, so read the fine print.

Where to put your savings?

You have options of banks, credit unions and brokerage firms but interest rates vary among these so do your research in order to get the best deal possible.

Banks

Banks provide the widest variety of banking and cash management services of all financial institutions. Most people prefer to keep their checking and savings account in the same bank for ease in transferring, making deposits or withdrawing money. Most commercial banks are insured by the Federal Deposit Insurance Corporation (FDIC) — this insurance protects depositors from loss due to bank failure, up to $250,000 per account.

Credit unions

Credit unions are not-for-profit organizations established by groups of employees or other affiliated individuals so to use a credit union you must be a member of the specific group. Credit unions in general offer higher interest rates on savings and lower interests rates on loans. The National Credit Union Administration (NCUA) provides insurance for depositors’ accounts, up to $250,000.

Brokerage firms and mutual fund companies

If you’re going to save with a brokerage firm — a firm that specializes in investments — we recommend that you work with a mutual fund company, online brokerage or discount brokerage that offers competitive money-market rates. If you’re saving for long-term goals as well as short-term ones, an investment account is a good option. If you’re saving only for short-term goals, we recommend you stick with a regular savings account or another type of account that is low-risk and will keep your savings liquid — available to you at any time.

• See also: Investment planning, Investment accounts, Stocks, Bonds, Mutual funds

How to select a savings plan?

All savings and investment options involve a trade off between liquidity, safety or yield. The safer or more liquid the investment, the less earning potential you are likely to have.

Here are some criteria for selecting the best savings plan for your needs:

Fees and restrictions

Different accounts and financial institutions have different rules. Before you open an account, read about the withdrawal restrictions, minimum balances, services charges, fees and any other restrictions.

Liquidity

This means how quickly you can turn savings into cash when you need it. The need for liquidity is based on age, health, family situation and overall wealth. If you live paycheck to paycheck, you need to keep your money liquid. In this case, a regular checking account is suited for you because most CDs impose a penalty for early withdrawals so only choose this option if you don’t need the money before the CD’s maturity date.

Safety

You want your money to be safe so most financial institutions are insured by a government agency, the FDIC or NCUA. Accounts are protected by insurance for up to $250,000. Make sure you always do business with financial institution that has insurance to protect your money. Also, deposits in banks, no matter the type of account, are almost always safer than investments in stocks or stock mutual funds.

Yield

You want to earn as much interest as possible on your deposits, while maintaining some level of liquidity and safety. Shop around for the best APY in your area for the type of account you want. Usually the more liquid the account, the less interest it will earn.

How to save regularly?

Everyone should have a savings goal. You can grow your savings by spending less than you earn. So it’s important to not only save but to save regularly. Over time, and with compound interest, your savings can grow into a substantial amount of money.

Of course, no savings plan is effective unless you have the will to save and the willpower to set money aside. Saving money is a basic need of every individual so there are ways to make regular savings easier.

Direct deposit

Both employers and financial institutions offer the direct deposit of paychecks into your bank accounts. This service helps you because your money is available in your account faster. You also can put a portion of your direct deposit into your savings account. Another strategy is to put all of your paycheck into your savings account and then transfer what you need to cover bill into your checking and save the rest. This approach is truly paying yourself first.

Automatic payroll deductions

Having a certain amount withheld from your paycheck and deposited into your savings account is another method of paying yourself first. Contributions to savings are automatically deducted from your paycheck and deposited into your savings account. You may authorize your employer to make automatic deductions from your paycheck each month.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• Employee Benefits Research Institute: www.choosetosave.org

• FDIC: www.fdic.gov