Do you have a fleeting relationship with savings? Are you one of the 75% of Americans that are consistently reported to not have even one month of savings set aside for an emergency? Would you like to know how to become a Super Saver?
One core reason why saving can be so difficult is where and how we keep it. Many of us keep our savings in our primary bank, right there next to our checking account, tied to our overdraft protection, and available at a moment’s notice for both our needs and our whims. In that melting pot of an easily accessible savings account is money meant for emergencies, or your next vacation, or your next roof, next car, or holiday spending. It’s easy to lose track of what the money was meant for when it’s all commingled.
Our minds play tricks on us when we’re out shopping and find the perfect new living room couch, new outfit, or new electronic gadget. “Look at all that money I’ve saved up! Surely I can afford it and surely I deserve it!” We even justify it with “Well, it’s not like I’m using my credit card?” But when we take money from our emergency reserves we are borrowing from our future peace of mind. We are likely continuing a cycle of having a precarious financial foundation that leads to stress and more debt.
I’m a huge fan of having multiple savings accounts to erase the vagueness that comes with commingling savings meant for different purposes. Done correctly, they provide great clarity about what it was you were saving for. They also combat your weak willpower when you want that new couch. If you have to access money from a savings account that you know is for "Emergency Reserves" it forces a moment of pause. Is this what you truly want? Or is it just what you want for the moment?
Depending on where you are in life, there are at least six you should have:
- Purpose: For true emergencies like job loss, extraordinary medical bills, etc.
- Rules for funding: 5-10% of income until 3-6 months of your gross income is reached
- Where to keep: In a separate account, at a separate bank, named “Emergency Reserves”
Short-Term Savings with a Purpose
- Purpose: For predictable yearly expenses like vacations, holiday gifting, car repairs, kids summer camps, vet bills, etc.
- Rules for funding: 1/12th of your year’s total budget for predictable, non-monthly expenses
- Where to keep: In a savings account at your bank, preferably named “Short Term Savings”
Long-Term Savings with a Purpose
- Purpose: For predictable long term purchases: a car, a new roof, an extraordinary vacation
- Rules for funding: Do the math for each major purchase: (total cost) / (# of months until purchase)
- Where to keep: In a separate account at a separate bank, named for what you’re saving
- Purpose: For the down payment on a home, or for super-savers, the entire home
- Funding: You choose, but consistency is key
- Where to keep: In a separate account at a separate bank, named “New Home”
- Purpose: For your children’s education (or to further your own education)
- Funding: Again, you choose, but consistency is key
- Where to keep: In a separate account named “College,” and if appropriate, in a 529 Plan
- Purpose: The ultimate in savings with a purpose – your ability to retire
- Funding: 5-15% of income
- Where to keep: In a qualified retirement account
Access to these accounts is important as well. If savings has been fleeting for you, you don't want easy access; you want hard access. Most of us would never touch our 401k's or IRA's. It's too hard. They're kept at a financial institution that often isn't tied to our checking accounts. Until we're old enough, withdrawing that money comes with large penalties. This difficult-to-access structure keeps us from considering using our retirement savings in all but the direst of circumstances.
You can set up a similar structure for your other savings accounts. Depending on what you know of your willpower, you can adjust how hard it is to get at your funds. I keep my savings accounts at an online bank that takes three days to get to my checking account. Not too hard, but just inconvenient enough. They're out of sight and out of mind. I know others who keep their savings at a small local bank that only has a branch across town. If they want their money, they have to drive there during banking hours and walk into the bank.
In your perfect world, how many savings accounts would you have? What would they be for? How much would they have in them? Write those answers down somewhere (maybe on a goal sheet or a vision board), set up some new bank accounts, and start saving, even if it’s just $5 a month.
Stacey Powell is Founder & Chief Creative Officer at Finance Gym. Her purpose is to change the way you interact with money so that you can lead a more peaceful, confident, and prosperous life. And have fun doing it.