Do you stress out each year when it's time for the family vacation, and you're short on funds? Always seem to come up short when your car needs a major repair? Scrambling for cash, when the TV quits working, and you need a new one for the big game? You might want to consider opening multiple savings accounts to keep your financial goals aligned.
Why Targeted Savings Goals Make Sense
You might be wondering, I have an emergency fund account, isn't that good enough? Why can't I just use that for everything? Sounds good on paper, but it's just human nature to raid the emergency fund, when it's available. Without targeted savings accounts, questionable purchases are more likely to occur.
I have debt, should I pay that off first?
Before you start planning your savings for that Big Screen TV, first pay off your debt. This includes credit card debt, car loans, basically everything but your home mortgage. The rule of thumb is that except for having an emergency savings account, the rest of your income after taking care of the necessities should go to paying down the debt. Necessities includes things like your mortgage, utilities, medical expenses, etc.
What is an emergency fund?
Simply put, an emergency fund is a savings account that will get you through unexpected hard times like losing your job, an extended period of illness, or help pay for a major car or home repair that you were not expecting. Just for reference, fixing your brakes and oil changes are expected expenses and do not come out of an emergency fund.
How much should I have in my emergency fund?
Before you start saving for any other goals, first goal is to make sure you have enough in your emergency fund. If you do have debt then take the Dave Ramsey approach and initially start out with a $1000 emergency fund. Once you have paid down your debt (other than your house), then continue to work on your emergency fund. Good practice is that if you are a single income family, then best to have 6 months worth of savings to cover the essentials when looking for another job. If you are a two-income family, then 3 months should be enough. Or if you have a job in a field where it's easy to replace, again 3 months should suffice.
The main idea behind the emergency fund is to have enough to minimize the effect of unexpected expenses on your finances. You do not want to find yourself in a situation where you have to borrow money or sell an important possession to get yourself through an emergency.
Regardless of the amount of money you have saved in your emergency fund, the money you do have needs to be easily accessible. General best practice is to have your emergency fund in a separate savings to reduce the temptation of using it. However, since this account will likely have a sizable amount of money, you should aim to have it in a high interest savings account. Shop around for the best rate. Banks like Capital One 360 and Discover are currently offering 2% interest rates. It's a nice perk to earn compounding interest on your emergency fund which will allow it to grow over time.
I Have My Emergency Fund, What's Next?
Two Basic Accounts most individuals or families should have beyond their emergency fund are checking account and a one-off expenses savings account.
- A checking account as a revolving door account. This is the account that typically your paycheck gets deposited into and your mortgage, credit cards, etc get paid from. You do not store large amounts of money in this account. This is the account that links to all the other accounts and where money flows out of.
- The one-off expenses savings account is used to pay for those non-routine expenses that must be paid. For example, like the fixing your brakes example earlier. Another example could be a house repair that involves you having to hire a plumber. Basically it's a larger than normal expenditure that you were not planning for. How much you put in this account depends on factors like whether you own versus rent a home, have a car, etc. But one to two thousand dollars is a good start.
Planning Your Specific Goals
Whew! So you managed to get an emergency account, setup your checking, and a one-off expenses account. Now it's time to turn to those specific goals you had in mind. This can be anything from a Christmas account, new car account, vacation account, etc. As long as you stick to free savings accounts, you can align each specific goal with a savings account to make sure you are on track. Online savings accounts like Capital One 360 allow you to open several separate savings accounts and set labels. Plus they offer competitive interest rates.
Track Your Savings and Make a Plan
Once you have all your savings accounts planned, then you need to make sure you track them. There are several apps that you can use for this, or you can use your bank's website. As far as apps go, I recommend Personal Capital app for this. It does a good job of tracking your Net Worth. It can track all your savings accounts, in addition to your 401K, and other investment products. I will discuss investments in a future post, but investment accounts are where you will want to grow your wealth, and put most of your monetary assets down the road. Back to the savings though.
Prioritize your savings goals …. So for example, if after all your other expenses you have $500.00 a month left for savings, figure out how to deposit in each account based on its priority.
Deposit money in each account based on the set goals you are trying to reach and priority. So for example if your emergency fund is okay, but your one-off expenses is low because of a recent home repair, consider adding more there this month. Put lower amounts in your other funds that month, and then go back to a set schedule the following month. Or maybe summer is coming up and your vacation fund is low, prioritize that for a few months.
The main goal of having multiple savings accounts is to be able to track your savings goals clearly. You will find that you are less likely to overspend for any specific expenditure, and also save for your different goals more predictably. This method has been working great for my family, and it makes us feel more confident in our savings.
Do you have a specific savings plan or goals? Share your thoughts below.