Allocate your savings to multiple accounts for optimal results.
We all know the importance of saving money for a rainy day, but what is the best way to save and how do you use what you have saved? Effective saving is not as simple as depositing money into a savings account—but it doesn’t have to be complicated either.
A little intention goes a long way to create an effective savings plan that works for you. One of the most effective ways to save is to set up multiple savings accounts, each with its own specific purpose. You can create as many savings accounts as you wish, but in a perfect world there are a few basic ones that everyone would have:
Emergency fund: This is the most important savings account to create. We never know when life is going to throw us a curve ball. There are a lot of things we can’t control, but if we have some money saved up, we’ll be better able to cope when unexpected situations arise. The emergency fund should consist of 3-6 months of living expenses. The first step to becoming a savvy saver is to have a fully funded emergency fund. Once you’ve done that, you can expand your savings horizons.
Your emergency fund should be tucked away in an account that is not easily accessible. You don’t want to be able to tap into this account when you see a shiny new toy you want. Leave this money alone so it’s there if/when you need it.
Cash flow savings: The cash flow savings is for when you’re short on cash. This is a savings account that you can access when you need a little extra infusion of cash. A cash flow savings account is typically linked to your personal checking account so that you can easily transfer money when you need it. The cash flow savings provides a little extra cushion for the budget.
Periodic savings: The periodic savings account is for expenses that arise periodically, such as auto registration and repairs, insurance payments, or workshops. A periodic savings account is an excellent way to save for upcoming expenses so that you don’t have to come up with a chunk of money all at once. For example, if you pay for your auto insurance annually (which saves money) you can divide that number by 12 and sock away a little bit each month so you’re prepared when the bill arrives.
Dreams and goals savings: We all have big dreams and goals. Maybe you want to take an exotic vacation or go back to school or buy a boat. Whatever your dream, you won’t get any closer to it if all you do is dream about it. So this savings account is the place for you to take inspired action. Tuck some money into this account each month and watch it grow you closer to your goal. Before you know it, your dream will be a reality.
These four savings accounts form the foundation of a healthy savings plan. Of course, these are short-term savings accounts for the here and now. Long-term savings will include plans for retirement and end-of-life care. Some savers include other accounts such as vacation funds, college funds, or debt reduction funds. Whatever your individual needs are, you can start becoming an effective saver by creating separate accounts targeted for specific purposes.
Saving money doesn’t have to be rocket science, but it does have to be intentional. If you don’t know where you’re going, you’ll never get there. By setting clear and specific savings goals, you’ll be more likely to have the money you need for the purpose you need it and at the time you need it.