Have you ever set money aside for a particular purchase, only to impulsively spend it on something else? Not to worry if you have, because that’s a pretty common mistake people make. Fortunately, there is an easy fix to this familiar problem and its simpler than you might think.
As we know, saving money is a very good thing. Sometimes though, when we have just one big pool of savings, we start to see it differently — we look at what we’ve put aside and think ‘gee, I can use some of that money to buy that new iPad…right?” Do this a few times and before you know it, that big pool of savings is being raided on a regular basis for impulse buys.
Having just one savings account can lead to a weakening resolve because many of us have that pesky impetuous nature — that’s why some financial experts suggest that people have multiple savings accounts with specific purposes.
With multiple accounts, your savings for long-term goals and needs can actually grow, while those designed for shorter-term purposes can be dipped into without derailing your primary savings goals.
For example, some financial experts feel that most people need at least three specific savings accounts, all of which should be set up for regular or automatic transfers from your checking account, to ensure you’re putting enough aside to meet your projected needs.
Here are some examples of the recommended types of savings accounts to set up:
Emergency Savings Fund:
This is the one you create and contribute to regularly and should only be drawn on in case of job loss or other type of significant financial need.
Needs Savings Account:
Not for monthly bills, but for expenses you know occur regularly, such as property taxes, insurance premiums, annual insurance co-pays, etc. This type of account enables the saver to plan for the big expenses they know they’ll have throughout the year (the ones that typically creep up on us and leave us with that “oh no, that’s due?!” moment). In this account for example, if you plot out when your property taxes are due and calculate how much you need to put aside each month to meet that payment, you have the money at your fingertips when it comes due — and that’s much less stressful.
Wants or “Dream” Savings Account:
I have relatives in Europe and they tell me “Christmas Club” and “Vacation Club” accounts are still big there. These are designed to save for the holiday’s or for that dream vacation. Ultimately, the purpose of the “wants” account is individual in nature, since we all have different wants and dreams.
Though experts suggest these three types of savings accounts, I’m going to throw out a fourth: a retirement savings account. Perhaps more than ever, having a regularly funded retirement account is essential and it’s never too early to start saving for your golden years.
Using multiple savings accounts is an effective means to help with budgeting, much like the the envelope system, where you divide your money up into various envelopes for your expenses. Multiple savings accounts are also effective in determining if you have enough to cover/reach your intended goals and they also allow you to move money around — if you fall short in your “emergency fund” or “needs fund” account, you could, if absolutely necessary, move money from your “wants” account — because after all, needs are more important than wants.
Most financial experts agree that being focused and diligent is key — setting up automatic transfers from checking into the savings accounts is advisable, especially for savings account designed to pay for somewhat fixed annual expenses, such as property taxes.
Three or even four types of savings accounts aren’t the limit either. I know someone who has 9 savings accounts for various needs and he consistently funds each one diligently.
The traditional brick-and-mortar banks may not offer the flexibility of having multiple savings accounts, so consider looking into online banks. A few to look into may be Ally Bank, American Express Savings, Capital One 360, Barclays Online, etc.
Other resources to help you save are: