Learning to Save Money Correctly Makes All the Difference

In order to be an effective saver you need to pay attention to three distinct segments of time: the now, the far off but sooner than you think, and the far off. These three segments are more commonly known as your short term savings, mid term savings and long term savings. And believe it or not, there is a very specific way that you need to build your savings into these different categories.

You always need to start by saving for your long term financial goals. You need to employ the power of time as quickly as possible. It is your greatest ally when it comes to saving for the future. You must save into this bucket first, and in most instances you are saving into this bucket before your paycheck ever hits your checking account. And YES, you still need to save for the long term even when you are trying to pay off debt. Never stop contributing to this bucket. You will become so accustomed to it that you will forget that you are doing it, and that's a good thing.

The next place (actually it's simultaneous) to save is into your emergency fund. Your emergency fund usually sits inside of a savings account or money market. It consists of three months expenses. This means that you should have enough money to fund all essential (home, transportation, utilities, basic food, etc) bills. So if it takes $3000/month for you to exist, then your emergency fund should be $9000. You need to save money into this "short term bucket" every week until it is fully funded (three months expenses). Once it is full, then move on immediately.

The final, but most exciting, place to save is for your mid term needs. Although I hate the term wealth, which I'll explain why in a future blog, this middle bucket is where wealth is built. It's the college savings for your kids, it's your down payment money, it's your early retirement money. This bucket of money actually give you financial freedom, since your long term bucket of money can't be accessed (without penalty) until age 59 1/2. Once your short term bucket is filled, then you will be pumping money weekly into the mid and long term buckets.

If life happens and you are forced to dip into your emergency reserves, then simply stop contributing to the middle bucket and start contributing back into the short term bucket. DO NOT USE MIDDLE BUCKET TO REFILL THE SHORT TERM BUCKET.