6 Kinds of Savings You Need to Boost Your Happiness - Life's Little Pleasures and Struggles

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They say, “Money can’t buy you happiness”, but it can certainly buy you peace of mind and better physical and emotional health which can eventually boost your happiness. How? Money is a leading cause of stress and anxiety, and there is no arguing that. Our ever-changing financial situation worries us more than our work/job, family, and even our health. According to the American Psychological Association (APA), financial stress is the top cause of stress for Americans. And it’s a well-known fact that stress affects our health and well-being seriously, and is also believed to contribute to poor decision-making. But if you have the right kinds of savings that you need, you can reduce your stress significantly and boost your happiness.

When we are not handling our finances responsibly – to the best of our abilities – the shortcomings are often related to our money habits. We usually spend too much and save too little, or don’t save anything at all. Saving money and having separate accounts for designated areas of spending is an easy way to keep track of your income and to remain in control of your finances which, in return, will increase your happiness.

Six Important Savings You and Your Family Need:

Emergency Fund

An emergency fund is a savings account meant to cover unexpected expenses and financial emergencies. Having an emergency fund will reduce your financial stress to a large extent. When you know that you have a cushion to fall back on in case of an emergency, a lot of your stress will go away, you will sleep better at night, and enjoy great peace of mind.

This is the real world, and it is full of things like job loss, sudden medical expenses or long-term serious illness, unforeseen auto or home repairs, and family emergencies. Life happens, and in most cases, there is nothing you can do to prevent them. But you should prepare well to tackle them financially.

According to a study from The Pew Charitable Trusts, 55% of Americans have experienced a financial shock that left them struggling. And during this unprecedented time of Covid in 2020, almost all of us suffered some sort of financial loss or setbacks. In many cases, that hardship could have been avoided with an emergency fund.

But sadly, almost 40% of American adults wouldn’t be able to cover a $400 emergency with cash, savings, or a credit-card charge that they could quickly pay off, without borrowing money or selling something, according to the Federal Reserve’s 2018 report on the economic well-being of U.S. households. This only means far too many people are living in an extremely risky predicament.

If you want to improve your financial situation, and increase your happiness, you need an emergency fund big enough to cover between three and six months worth of living expenses which would include your rent or mortgage, bills, food, and other essentials.

Since you never know when an emergency might happen, it’s best to keep your fund relatively liquid. That means emergency funds could live in a high-yield savings account or a money market. When an emergency happens, the last thing you should be worrying about is penalties on withdrawals.

Related post: An Emergency Fund and Your Peace of Mind

Retirement Savings

This is the second most important types of savings you need to improve your financial future, to reduce your stress significantly, and boost your overall happiness. But many people are ill-prepared for their golden years because they either aren’t saving enough or aren’t saving at all.

A lot of people heavily rely on Social Security for their retirement. Social Security is designed to be supplemental, not a primary or sole source of income. In 2020, the average monthly benefit for Social Security recipients is just $1,503 which means retiring comfortably calls for more than just government benefits for most people.

Don’t procrastinate thinking you can simply catch-up later. The older you get, the harder it is to get back on track. You or someone in your family who is working should be contributing to a retirement fund now. And don’t let youth encourage delays. Time is only on your side if you are saving religiously, and waiting has serious opportunity costs.

Don’t forget to consider the average lifespan of people in your family. As a general rule, women are advised to amass more savings because they tend to live longer.

Figuring out how much money you will need during your retirement helps you outline a contribution plan during your working years. But remember, the older you are when you start contributing to your retirement fund, the more you are going to need to set aside each month which won’t get any easier.

Researchers at the Stanford Center on Longevity project that, if you want to retire at age 65 and maintain your standard of living, you need to put 10 to 17 percent of your current income into a retirement account. And that’s if you start saving as early as age 25!

According to CNBC, Fidelity Investments calculates that every $1,000 in monthly income you expect during your retirement years (assuming a 5.5 percent annual return and not taking taxes into account) requires the following approximate monthly savings:

$160 if you start saving at age 25
$270 if you start at 35
$500 if you start at 45
$1,154 if you start at 55

If you don’t have a retirement fund, start saving now. If your company has a 401k and if they match any contributions, invest in it! Contribute at least as much as your company will match. This is literally free money, so take advantage of it! If your employer does not offer a 401(K), look into setting up a Roth IRA through your bank or another institution. Don’t waste any more time. Start contributing immediately for your future financial security and happiness.

Personal Savings

Since emergency fund and retirement savings are supposed to be off-limits, where do you get money to buy a home, a new car, gifts on holidays, do some home improvements, cover wedding expenses, pay your property tax, or pursue your meaningful hobbies? From your personal savings. This fund is for your known or expected yearly expenses, not for any sudden or unexpected emergencies.

Think of a personal savings account as a comfort cushion. It’s where you should save a part of your income every month that’s left after you have taken care of all your responsibilities and obligations. Some people call it “Sinking Fund”. This is your first line of defense in order to keep you from tapping into your emergency fund. If your dishwasher or microwave oven broke, you would take money from this account. But if you or your spouse lost your job, you would take money from your emergency fund.

Kids’ College Fund

If you have kids, you are probably already considering how to pay for their college. Starting early and saving little by little can make a world of difference when your kids are finally ready to attend college to secure a bright future. College expenses are sky-rocketing, and the last thing you want them to do is to start their adult life shackled by heavy burden of student loan.

You can easily help them out without sinking yourself in more debt. Look into starting a 529 Education plan. This is where we are saving for our two kids’ college education. You can contribute as little or as much as you want, and you can withdraw the earnings tax free, as long as they are used to pay for a qualifying educational expense. Check with your specific state to see what specific tax benefits they offer, benefits may vary from state to state.

Contributing to this plan is relatively easy. Use the birthday and holiday money your kids receive from relatives or family friends to contribute alongside your regular contribution. The money will grow more rapidly, and your children will learn the value of money and the importance of savings and investments.

Seeing your kids graduating from college with a little debt or no debt at all will make you happy and proud. When your kids will grow up and be responsible, hopefully, they would appreciate that a lot!

Medical Savings Fund

You should have a medical fund of some sort. This account should hold enough money to cover your costly deductible, prescription costs, and copays. You can set up a HSA or Health Savings Account through your work, insurance, or bank. If you don’t have access to an HSA, you can choose to keep your medical savings in a separate savings account as some people do. The choice is yours.

This money is intended to cover a medical emergency, specifically something that might not be covered by health insurance. Also, this type of savings should be liquid so you can use it in case of an emergency – right away.

Vacation Fund

This is one account you will not find anywhere in Dave Ramsey’s Total Money makeover. And if you are a super frugal person or someone who doesn’t like to travel or spend money on beautiful experiences once in a while, then you may not need this kind of savings. But for many of us who want to save money but still love to invest in meaningful and beautiful experiences and make memories, we need to have a separate savings fund for things like vacations or visiting exciting places.

Some people plan and save for vacations in their personal savings account. But I prefer to keep it separate and specifically save for this purpose – because this is a priority in my household. We love to travel and enjoy time away from home at least once a year. It improves our outlook on life, brings us closer as a family, helps us de-stress, and allows us to create beautiful memories to cherish forever. And thus, without any doubt, it adds to our happiness, too.

Final Words

The size of your family or the number of your goals doesn’t matter. If you want financial freedom and peace of mind, then you need to find ways to organize your money. And there is no better way to manage your money than with the right kind of savings you need.

Whatever your situation, carefully go through this list of important savings, and take some time to figure out which ones you may need – to achieve financial freedom and boost your happiness. And then, start saving immediately, as much as you can. Even a little savings is better than no savings at all!

Disclaimer: I’m not a financial expert, and this blog post only provides personal finance information for educational purposes, and it is not intended to provide legal or professional advice.