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Plan to Save: It’s Easier Than You Think

From CDs to money market accounts, which way is the right way for you to save?

En español |"He who fails to plan, plans to fail," says an oft-quoted proverb. Failing to plan for your financial future and security can have severe consequences, but this doesn’t have to happen. Start now!

Making the decision to save money and build a nest egg is one thing, and likely something many do or make an effort to do, and yet for an infinite number of reasons may wind up deferring.  If the lingering economic downturn in the global economy is any indicator, any attempt to build or increase your savings will prove very challenging for most people particularly for African-Americans.

A recent survey by Ariel Investments reports that African American households are struggling to save money. The survey indicates that these households now reflect a median monthly savings of $189, compared with $367 among white households. The 2010 findings mark the first time, in a decade, that African American households have reported saving less than $200 per month. While saving in such an environment has affected all Americans, these numbers underscore the immense and staggering effect the recession has had on African-Americans.

A 2009 federal survey of household finances revealed that minorities, overall, are saving substantially less than whites. The median value of holdings in a transaction account — which includes checking, savings and money market deposit accounts — was about $5,100 for whites and $2,000 for minorities. About 96 percent of whites had a checking account, compared with 84 percent of minorities. And only 8 percent of minorities had certificates of deposit (CDs), compared with 19 percent of whites.  

Undoubtedly, in an attempt to cope with the effects of the economic downturn, minorities have been forced to make increasingly difficult decisions — decisions that can, and have, had serious long-term consequences.

In the context of your overall money management plan, a few basic steps can get you on the right track to planning and saving toward financial security.

Next: Step 1: Pay Yourself First >>

1) Pay Yourself First

First, it’s essential for you to think of saving money the same way you think of paying a bill — a bill that has priority over all the others. Pay it every month.  The only difference is that you're sending the check to yourself.  Pay yourself first before you pay anything or anyone else and not what’s left over after you have paid everyone else. 

Set short- and long-term savings goals.  Let’s say you want to save money for specific things. They may be short-term — such as fixing a broken muffler, buying a new washer and dryer, taking a vacation — or they may be long-term such as preparing for your retirement. 

Save your money, in different account types, based on your short- or long-term goals.

For money you expect to need in the short term, you can choose among several savings vehicles — savings accounts, money market accounts, money market mutual funds and CDs. 

Savings accounts. Several different kinds are available to you: A basic bank account with low interest; a high-yield savings account, which usually comes with some restrictions; and an online savings account. Look for competitive rates and make sure that the bank is insured by the Federal Deposit Insurance Corp. (FDIC).

Money market accounts. These may provide higher interest rates than a savings account but have higher minimum balance requirements. There may be caps on check writing and withdrawals.

Understand how banks calculate interest. Two different numbers may be used: annual percentage yield (APY) and annual percentage rate (APR). APR is used for loan accounts such as credit cards and APY is used for savings and CD accounts. 

Money market (MM) mutual funds. These are similar to MM accounts, but they are mutual funds and are not covered by FDIC insurance. They There is generally have little risk, but they are not risk-free. New temporary insurance programs are available that financial companies can use to cover MM funds, and most big mutual fund companies use such insurance. There may be caps on check writing and withdrawals.

Certificates of deposit (CDs). You may face a withdrawal fee if you take your money out before the term is up. The longer you commit your money, the higher the interest rate.

While there has been a general trend toward increasing use of CDs by African Americans 50 and older, only 12 percent of African Americans have CDs versus 24 percent for all other 50-plus  Americans (Scarborough PRIME NExT +, 2008 ).

Next: Create an Emergency Fund and Save >>

2) Create an Emergency Fund

Life happens. Your air conditioner breaks down, your muffler falls off, your employer downsizes. We all experience those little (or big) curve balls that unexpectedly get thrown our way. To better weather a financial storm, be prepared. Plan to build an emergency fund that will enable you to pay your bills for at least three to six months. Put the money into a safe account that you can get to easily, such as a savings or money market account. If you need to dip into the fund, replace the money as soon as you are able to do so.  Considering the current economic crunch, you also should have a potential plan in case you lose your job.

3) Save for Retirement

The Ariel Investments survey also highlighted that middle-class African Americans are more likely than whites to have curtailed their saving and investing in order to make it through the recession. Twenty-seven percent of blacks who participate in a 401(k) plan reduced the amount they contribute per month (compared with 16 percent of whites). 

Additionally, the Employee Benefit Research Institute reported that Hispanic wage and salary workers were significantly less likely than both white and black workers to participate in a retirement plan.

What will be your source or sources of income when you stop getting a paycheck?

One will likely be Social Security. Learn and understand the rules about Social Security so that you can build your other savings in addition to it. AARP's Retirement Nest Egg Calculator can help you plan today.

Don’t, however, plan to let Social Security to be your sole source of retirement income. Take full advantage of retirement plans that will allow you save something from each paycheck. Participate in your 401(k) plan at work, and if you don't currently have one, consider opening an Individual Retirement Account (IRA).

It is the worst of times and yet, it is the best of times. Set your goals, decide on a plan and implement it. Financial security is never out of reach if you plan now and wisely manage your savings.

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