How many savings accounts to you have? If it’s just one or two, you’re probably not as organized with your finances as you should be.
Saving money is one of the most fundamental things that you ought to be doing as a wise financial manager. You need to be socking away funds for a variety of things, including emergencies, new vehicles, travel, annual expenses and a whole host of other things. And the more organized you are in this savings, the more successful you’re likely to be.
When you first started banking as a young person, you probably opened a savings account. And for much of your early life, you could probably get by with just a single savings account, because your financial life was fairly simple. But now that you’re an adult with a more complex set of responsibilities, having just one savings account probably isn’t enough to get the job done. If you try to save for all of your various expenses in one single account, you’re likely to make mistakes and misappropriate some of that money.
The answer to this problem is to use multiple savings accounts to keep track of your various allotments for different life expenses. By doing this, you can easily monitor exactly how much money you’ve saved for any given expense or project, and easily make adjustments to your savings strategy if you need to. Keeping your money in multiple accounts also protects you from spending too much money in one area and shortchanging yourself in another.
To be really strategic and organized, we recommend that you maintain at least five different savings accounts (these can all be sub-accounts at your main bank if you’d like). Each account has its own purpose and its own name.
1) Emergency Savings
There is perhaps no more important savings account than your emergency fund. No matter who you are, bad things are bound to happen in life, and those things are going to be expensive. Emergency savings gives you a cushion to fall back on when things get tough, and gives you some cash reserve to cover the cost of disasters. Most experts suggest having 3-6 months worth of expenses stored up in an emergency account. Once you get there, set this account aside and don’t touch it unless you have a true emergency that you can’t pay for with your regular budget.
2) Set-Aside Savings
There are a lot of expenses that come up once a year or semi-annually, and it can be difficult to account for these in a monthly budget. The solution is to use a set-aside savings account that automatically draws some money out of your checking account every month to cover these predictable annual expenses. You don’t use this account to store money for the long term or to accrue a lot of interest. Instead, it’s more of a temporary holding account: You pool money into it every month out of your regular budget, and then make disbursements a few times a year to pay for things like car or home maintenance, auto registration, taxes, membership fees and other semi-regular expenses. A set-aside account helps you ensure that you always have money for these expenses without having to tap into other, more important savings accounts.
3) Auto Savings
If you’re a driver, you’re going to need to get a new car eventually. Automobiles by nature are always being worn down, which means that any vehicle you own will eventually need to be replaced. Since borrowing money to buy a car is a bum deal, you need to be saving money to purchase your next vehicle, even if that purchase is five or more years away. To do this, set up a special savings account for your next car purchase, and allocate money from your budget that goes straight into this account every month. That way, when the time does come to replace your current vehicle, you’ll have a nice chunk of money ready and waiting for your next purchase.
4) Travel Savings
We all want to — or have to — travel from time to time. You may want to take your family on a nice vacation, or you may need to travel a few times a year to visit family members or to attend a conference or church retreat. Maybe your kids have school trips coming up in the near future. Whatever it is that takes you out on the road, travel is expensive, and the best way to prepare for those expenses is to save for them ahead of time. Having a separate savings account for your travel needs will help you gauge exactly how much you can afford to spend on your upcoming trips, and plan for how much you need to allocate from your monthly budget in order to have enough money for the trips you’d like to take in the future.
5) Special Savings
In addition to these first four categories, you probably have other special things going on in life that you’re saving for. Maybe you’re saving up to make home improvements, buy a new house or cover the medical expenses of an upcoming childbirth. Perhaps you’re just trying to scrape together some cash to buy the new iPhone or some other fun item that you’ve had your eye on. Whatever it is, these special items merit savings accounts of their own. This will help you see exactly how far you have to go until you meet your savings goal for these special items, and it will keep you from inappropriately using money from other savings categories to pay for those special things that you have your eye on now.
Using multiple savings accounts makes it much easier to organize your financial planning. It’s smart to have at least five savings accounts. Laura and I have seven. How many do you have?
Photo by Al. Used under Creative Commons License.