How to use personal savings in different financial situations

In what situation should people access their savings?

If the following situation occurs, people may elect to use their savings:

  • To pay off debts with a high-interest rate, such as credit cards, payday loans, medical bills, etc.
  • Make the most of your tax-advantaged accounts, such as a 401(k), IRA, or 529 college savings plan.
  • To increase your savings by investing in a non-retirement brokerage account.
  • To purchase a significant asset such as a home or an automobile.
  • To meet the worst-case scenario, when costs exceed income due to inflation.

Maria A. McDowell, Founder of EasySearchPeople, believes -” It's good to tap into your savings to get what you want and then pay your savings back. This sort of "emergency tapping" is completely fine and will not affect your savings in the long run.”

Think twice about saving for a vacation or something else non-essential until you've built up an emergency fund, paid off debt, or maxed out your retirement accounts.

How much should people strive to keep their savings at all times?

Your hard-earned money may be depleted by bills, necessities, and excessive wants. You're not alone if you have trouble putting money into savings. Many Americans live paycheck to paycheck, with 65 percent having no idea how much they spend.

Americans who do save are doing so at a higher rate than before. According to Northwestern Mutual's 2021 Planning & Progress Study, Americans' average personal savings accounts increased by 10% from $65,900 to $73,100 during 2020 and 2021, excluding investments.

As per the most recent statistics from the US Federal Reserve's 2019 Survey of Consumer Finances, Americans have a total average savings account balance of $41,600, including checking, savings, stocks and shares, and prepaid debit cards, but the median was only $5,300.

According to Moody's Analytics statistics, Americans' savings increased above-average levels during the pandemic; characteristic economists consider excess savings. According to Federal Reserve Economic Data (FRED), the personal savings rate grew 25.5 percent from just two months earlier, in April 2020.

Of course, these statistics only apply to Americans who have put money aside. The reality is that many people still have no or very little savings: according to the current MagnifyMoney Savings Index, nearly 1 in 5 Americans did not save any money in 2021.

In addition, 18% of respondents acknowledged contributing no money to their savings last year, while another 48% contributed less than $5,000. According to Bankrate's July 2021 Emergency Savings Survey, a quarter of Americans have no emergency savings, and only one out of every six homes has more savings than before the epidemic.

According to a survey by NextAdvisor, only 21% of Americans said they stored their savings in a high-yield savings account that pays greater APYs in 2021, while 45% said they used a conventional savings account.

Harry Turner, a founder of The Sovereign Investor, suggested - “There's no hard and fast rule for this question since it depends on a lot of factors, such as your income, living expenses, and financial goals. However, as a general guideline, you should aim to have at least 3-6 months of living expenses saved in an emergency fund. This will help you cover unexpected costs if you lose your job or face other unexpected financial challenges”.

For emergencies, like medical issues or urgent home/car repairs, is it better to use money from savings, a personal loan, or a credit card?

According to the Federal Reserve, only 39% of Americans would be unable to pay for an unexpected $400 or more bill. So, to pay an unexpected expense and prepare for future financial emergencies, consider the following solutions, which are listed in order of preference:

Use savings account funds

If you're not attentive, unexpected bills might wreck your finances. The best approach to deal with these situations is to plan ahead of time.

Create an emergency fund. Transfer a certain amount into an emergency savings account. It should cover at least three to six months' worth of living costs in a financial disaster. If six months' worth of spending seems a reach, start with a lesser goal, such as $1,000, to allow you a good cushion against unexpected expenses.

Remember that you should only use your emergency savings when required. When an unanticipated expense demands prompt attention and you don't have the time to save the required money, you can consider using your savings. If not using your resources will cause a significant disruption in your life, you should withdraw emergency cash.

Use credit cards

Using your credit card to pay for unexpected expenses is usually not good. According to the Federal Reserve, the average credit card interest rate was 16.4 percent in November 2021. An unforeseen significant expenditure could saddle you with high-interest debt that grows over time. If your emergency fund isn't enough to cover the expenses, smart credit card utilization might help you get through the tough times.

You might be eligible for a credit card with a 0% APR introductory term ranging from six to twenty-one months with a good credit score. That may be sufficient time to pay off your debts and avoid paying interest. Remember that once the promotional period ends, the interest rate will revert to the card's regular rate, which will apply to any leftover amount.

This option is better than a personal loan if you can pay off the balance within the due date, and no interest will be charged against you. In the case of a personal loan, you have to pay interest on the borrowed amount if you borrow. So, using a credit card is cheaper if you repay the balance responsibly.

Opt for a personal loan

A personal loan may be more appropriate if the amount you require for an unforeseen emergency is more significant than you can reasonably anticipate repaying during the interest-free period. You'll usually receive a single lump-sum payment with a personal loan that you'll repay over time in fixed monthly installments.

You might be able to secure a personal loan with a lower interest rate than credit cards. According to the Federal Reserve's most current data, the average interest rate for a 24-month personal loan is 9.38 percent. According to the lender and your creditworthiness, personal loan rates might range from 6% to 36%.

Personal loans can provide the easy money required to get through a difficult situation. The time it takes to get your cash varies by a lender; however, it might take anywhere from one to several business days.

While this isn't an option for everyone, enlisting the support of a friend or family member in an emergency can be a decent alternative. If you have a wealthy friend, they may be ready to lend you money to help you get through a difficult financial situation.

However, borrowing money from a friend might damage your friendship if you're not careful. Don't go this route unless you're confident you'll be able to pay them back in full or come to an agreement with them (maybe you agree to mow their lawn or babysit for a few months, for instance).

Writing a formal loan contract, also known as a promissory note, might help you stand out as a borrower and reassure your "lender" that you're serious about repaying them. If you do not refund, it may provide them with legal remedies.

What are some smart options for financing these purchases for non-emergencies, like a vacation or home renovations?

Typically for vacation costs, the options might be:

Savings account funds

Many folks do not have money in their bank accounts. However, if you have a large sum of money in savings, it is usually the most incredible option for paying for a holiday.

You won't have to take on any debt and pay interest on it, which will increase the expense of your trip. However, many experts advise against using emergency money to pay for your vacation.

That money should only be used for unanticipated expenses. Take a withdrawal if you have cash available over and above what you'll need for emergencies (usually three to six months' worth of living expenses). Otherwise, look for a different way to pay.

A vacation loan

If you don't have enough money saved to pay for a trip, a vacation loan may be your best option. A vacation loan is just a personal loan you use to pay for your vacation.

Personal loans can allow you to borrow money for any reason, even going away. If you contact a bank or lending firm for a vacation loan, they might generally refer to it as a personal loan.

A vacation loan can be cheaper than a credit card due to its low interest. On the other hand, you'll have to pay interest, which means your vacation will be more expensive than if you paid cash or put it on a credit card.

You'll need a good credit score to get a suitable personal loan interest rate. Personal loans are unsecured, meaning they aren't secured by anything. Auto loans, for example, are secured loans, with the automobiles they fund serving as collateral, allowing the vehicle to be repossessed if the borrower defaults on payments.

As a result, your lender will give you an interest rate based on your borrowing history and creditworthiness. As a result, it's in your best interest to double-check your score before applying.

Credit cards with high reward/travel points

Using a credit card to pay for a vacation is usually not a good idea because credit cards are infamous for having high-interest rates. If you already have credit card miles or reward points to cash in, on the other hand, that's a terrific method to pay for some or all of your trip. For example, you might be able to get a free flight or a couple of free nights of lodging at your location.

For home repair or remodeling costs, people may choose:

Saving funds

Saving significant money for your home improvement is the safest financial alternative. If you don't have a substantial sum of money set up, this choice may require you to delay the commencement of your project. However, once your home remodeling is complete, you won't have to worry about repaying a loan or a hefty credit card payment.

The amount you'll need to save is determined by the sort of remodeling and the project's extent. If you plan to save for the entire project, starting small and tackling less expensive projects is good, preventing you from going overboard and spending more money than anticipated.

Home improvement or home repair loan

Banks, online lenders, credit unions, and many other financial agencies offer unsecured personal loans for home improvements. You don't have to use your home as security because the loans are unsecured. Your credit score determines your interest rate and qualification.

Many lenders will deposit money directly into your account in as little as a day after agreeing to the terms.

Home repair and renovation loans feature shorter repayment terms, smaller loan amounts, and fewer costs than home equity loans or HELOCs. Most home renovation loans have a maximum period of 12 years.

Home improvement loans offer substantially smaller loan amounts, usually up to $100,000, but home equity loans have $750,000. Minor to moderate home repair projects, such as a bathroom remodel or window replacement, are often best suited for home improvement loans. Reward miles or reward points to cash in; on the other hand, that's a terrific method to pay for some or all of your trip. For example, you might be able to get a free flight or a couple of free nights of lodging at your location.

Other specialized loans

People may take out different home-based loan options to cover the cost of home renovation. They are as follows:

  • Home equity line of credit (HELOC)
  • Home equity loan
  • Cash-out refinance
  • Federal loans

Credit cards

Using your credit card to make minor home improvements, such as replacing a bathroom vanity or installing a new closet system, could be one of the most incredible home improvement financing options.

For the first few months, certain credit cards are interest-free. You may pay for minor home upgrades with a 0% introductory APR credit card and never pay interest.

If your credit card offers cashback advantages, you could receive cash back the more you spend on a refurbishment.

Using a credit card to make significant home repair expenses is dangerous. Suppose you cannot repay your debt before the introductory offer ends. In that case, you may be subjected to highly high-interest rates, which are significantly greater than those offered by other home remodeling loan choices. 

If you use your existing card instead of an introductory offer card, you'll have to pay off the entire balance by the end of your next payment cycle, usually a month. Because variable interest rates fluctuate with market conditions, the amount you pay in interest may also arise.

Finding strategies to optimize your savings is more crucial than ever, with inflation at a fresh 40-year high of 8.6 percent. There is a faint silver lining when interest rates climb, raising the cost of borrowing - rates on savings accounts are also rising.

Inflation causes debt, as well as diminishes the buying power of your money by increasing the cost of goods and services. You might want to consider altering how you manage your finances during times of high inflation, like the one we are currently experiencing, to help preserve the value of your money.

Higher interest rates cascade down to consumer items like loans and mortgages, increasing their cost as borrowing rises. However, increased interest rates may also be applicable to deposit accounts, which means that banks may start to provide more excellent interest rates on certificates of deposit, savings accounts, and checking accounts.

Nobody can predict the future, but by altering your spending and where you keep your money, you might be able to survive periods of inflation more easily.

Let's go more to learn when and how to leverage your savings to outpace inflation.

As inflation continues to rise, will more people face affordability challenges?

Inflation affects everyone, but low-income households are hurt harder, especially when many workers' wages aren't keeping up with inflation. Gas prices are at an all-time high, and increased consumer goods prices mean less discretionary spending for low-income families, but it also means that many families have to adjust their budgets to meet their basic needs. Increased prices could take up much of your cash flow in the coming months, not just for food and goods but also for living needs like heating your home.

When prices rise, one of the first things that many families notice is the increased cost of food and groceries. According to United States Department of Agriculture data, Americans spent about 9% of their disposable personal income on food in 2020. 

As a result, any increase in food prices, no matter how minor, might mean less money to save, pay off debt, or even spend on other necessities. It's worth noting that inflation hasn't affected all sorts of food equally. Fruit and vegetables, for example, haven't increased nearly as much as meat.

Expect rising gasoline prices and bills as the price of heating oil, natural gas, and other fuels rise worldwide. According to a forecast from the Federal Energy Regulatory Commission, heating expenditures could increase up to 54 percent this winter compared to last year.

What are some mid-to-long-term solutions for dealing with inflation?

It may be wise to make minor adjustments to our budget and spending habits to handle inflation. Some forethought and self-awareness about your spending habits could help you identify savings opportunities. Now is a fantastic time to create a budget if you don't already have one.

Avoid going over your monthly food budget. Get to know what offers and sales are available and take advantage of them. Use coupons and eat at home as often as possible to save even more money.

To help you remain on track with your food budget, use Mint's grocery calculator to estimate your monthly and weekly food budgets based on the USDA's monthly meal plan standards.

According to the US Department of Agriculture, if you need help from the government, food stamp benefits have been increased to $36 per month for the average participant. A family of four might receive approximately $150 more monthly benefits due to this change.

Connect with your state agency or website to apply or check your eligibility.

You won't be able to escape increasing petrol prices unless you utilize public transit or carpool with others in your region if you are compelled to travel to work in person. However, it may be an opportunity to speak with your boss about having a remote work alternative, at least temporarily.

It's also a good idea to call your utility company and see what kind of help they can supply.

You could also check into federal assistance programs for low-income households with their energy expenses. The Low Income Home Energy Assistance Program (LIHEAP) and the Weatherization Assistance Program are the two main programs (WAP). The qualifications for eligibility will vary based on where you live.

In addition to LIHEAP and WAP, many states have assistance programs for low-income families who have trouble paying their utility bills. Check out this list of more public and private programs available across the state.

Using credit cards to cover your bills can be tempting as the cost of almost everything rises. However, taking on debt can strain your finances. If the Federal Reserve boosts interest rates to battle inflation, credit card debt can become more costly and difficult to repay.

It's vital to make more than the minimum payment on your credit cards if you want to pay them off. The debt snowball and debt avalanche methods are two approaches to making aggressive payments on a single credit card at a time, which can help you stay motivated and save money on interest.

If you have strong credit, a balance transfer credit card with a 0% introductory APR period may be able to help you consolidate debt and save money on interest while making payments.

Consolidating your high-interest debts through one loan, similar to a balance transfer card, can help you manage your debt by allowing you to make only one payment each month, ideally at a reduced rate. However, before applying, ensure your score qualifies you for better terms. If you acquire a loan, commit not to use your credit cards, or you may be in an even worse scenario.

Financial experts also suggested a few ways to beat inflation. 

  • Lulu Albanna, Co-Founder of WRC Media, added - “Bonds can consistently outperform inflation while still providing lower returns than stocks on average. The more reliable returns of investing in bonds and bond funds may appeal to risk-averse investors or those nearing or in retirement who want to outpace inflation”.
  • Alexa Justine Callada, Marketing and Accounting Specialist of Trekroofing, suggested, "The best way to combat inflation is with a combination of policies and market-based solutions. Some medium- to long-term approaches are:

• Raising taxes on those who can afford them (e.g., high earners)

• Strengthening the social safety net for those in need (e.g.., unemployment insurance)

• Stabilizing wages for low-income workers

• Increasing productivity through better education….”

  • Zephyr Chan, Growth Marketer & Founder of Better Tools, shared - “In order to stay up with escalating prices, I believe it is necessary to establish a diverse portfolio of investments. When inflation indicators emerge, it is prudent to consider short- and medium-term fixed accounts, such as two- to five-year fixed annuities. You want to safeguard your retirement assets and weather a coming recession”.
  • Veronica Miller, Digital Marketing & Growth Director, VPNoverview, shared her views - “I believe that rising inflation is typically accompanied by higher interest rates, which is positive news for CD holders. Keeping maturities short, such as six-, nine-, or 12-month durations, is advisable. Additionally, consumers may wish to explore CDs with special features. The owner of a bump-up CD may choose to increase the interest rate at a certain period throughout the term of the CD. Inflation concerns can be addressed by integrating Treasury inflation-protected securities, shorter-term bonds, floating-rate instruments such as mortgage-backed securities, and collateralized debt obligations in your portfolio, subject to consideration of your financial objectives. In addition, one could consider investing in commodities, real estate, and stocks of financial companies, as their prices may increase with inflation”.

With context to the discussion above, it is clear that you must follow a few strategies to fight inflation.

  • First, take a look at your current spending. If you cut your entertainment or vacation expenses by 5%, you'll be able to cope with the growing costs we see everywhere.
  • Don't put off a large purchase you need because prices will almost certainly go up.
  • Shop with purpose. Use coupons or reward applications and retailer loyalty programs to save money on generic products and prescriptions.
  • Take advantage of memberships that help you save money on petrol. Also, keep an eye out for small savings.
  • Any fees for credit cards or bank accounts should be eliminated. Renew your cable, cell phone, and streaming service contracts. Reduce the number of subscriptions you have. Make sure you've canceled anything you're not interested in.

Fortunately, President Biden has also outlined his strategy for combating inflation. However, the policy illustrates that he is also concerned about rising prices.

Biden's idea, which he disclosed in a Wall Street Journal op-ed, is divided into three parts. Allow the Federal Reserve to perform its job first. Second, implement a series of micro-reforms to lower prices in specific economic segments like housing, prescription pharmaceuticals, and freight transportation. Third, reduce the government deficit by increasing corporate and individual taxes.

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