How many savings accounts should I have? This is a common question from clients once we begin planning each month where the money goes.
My recommendation, you should have these 4 different savings account types; no matter what income or bank(s) you have! This post explains my main ones and what they are, how much should be in each, and why you should have them.
The logic behind more than one savings account
Keeping your money in different savings accounts is like storing all the various photographs we save into different folders. For instance, we have different folders for vacation, the kid’s sports teams, and holiday photos to mention a few. Having multiple savings accounts allows us to be better organized with our savings. You can take a quick look and see you have $400 saved for travel so far and $5000 in the emergency fund.
With that in mind let’s get to the specifics!
Emergency Fund (my peace of mind)
What is an Emergency Fund?
This savings account is what I refer to as your security net. It’s your “oh crap, pandemic round 2, I’m unemployed” fund. This account is for when you don’t have another option and you need money now. You will never touch this money unless it’s an absolute necessity. Like the name suggests emergencies only.
How much should I have?
How much you need will vary from person to person. But, you should aim to have about 6 months’ worth of expenses saved. Meaning, if you spend $2,000 a month, the goal is to save $12,000 into this account.
Yes, that means you have to figure out how much you spend each month. Tracking all of your expenses can seem overwhelming, but learning how to budget and save money is worth it!
If you do lose your job or are unable to have an income for whatever reason, you know you will be able to pay the necessary bills for at least 6 months.
Saving up for this fund will take time and that’s ok! It took me 3 1/2 years of steadily adding to the account as I had extra money come in. I recommend setting up an automatic transfer into this account every month until you hit your 6-month amount. Don’t forget to adjust the amount if your living expenses change, aka, rent increase, new car purchase, etc. You want to have it as close as possible to the amount you may need for the 6 months.
Note: You shouldn’t be investing this money. You want to have access to it within 24-48 hours max if and when an emergency happens. A high-yield savings account is perfect.
If you unexpectedly need to pay a thousand dollars for your mortgage or rent, you know you can write a check or send an electronic payment and the money is there. That might not be true if the money is invested. The job of the emergency fund is not to “make” you money but to “help” in an emergency, like insurance.
What is a Travel Fund?
While my emergency fund gives me peace of mind, my favorite savings account is the travel fund!!
The point of this account is to fund your travel plans! Organizing your finances DOES NOT mean you can’t travel. We simply add a line item to the budget and away we go. The goal of this account is to make traveling more enjoyable and less like an “out of pocket” expense. Pre-pandemic in 2018 and 2019 I traveled to Washington D.C., Kentucky, and Tennessee. Both trips were paid completely in cash. I started saving a little from every paycheck and with my itinerary, I never worried about credit card bills following me home. Now I’m planning for 2022!!
How much money should I have in my Travel Fund?
How much you want to save really depends on you and how much you want or where to travel!
Is it a family vacation involving airfare and hotel or a road trip to see family? What about your girl squad? Start saving now, before your trips are planned and you will be ahead of the game.
I would recommend transferring money into this account every month, it doesn’t have to be a lot, even just 50 dollars a month ($25 per pay period) means after a year, you have 600 dollars to spend anywhere in the world! Next time you sell unwanted items on sites such as Etsy or Poshmark toss that money into your travel fund perhaps.
What is a Sinking Fund?
A Sinking Fund is to save and pay for those big expenses you know are coming.
I have several items in my sinking fund. The yearly expenses we all have for eye exams, auto registrations/inspection, yearly insurance premiums, annual pet vaccinations, and you get the idea for this account. Last month I went in for an oil change and the inspection only to find out I really needed to replace two air filters. Suddenly my $80 turned into $150 and while they were needed items my sinking fund covers these types of expenses.
How much money should I have in my Sinking Fund?
The amount of money to transfer into this account will vary from person to person but it’s a fairly simple formula. To figure out your specific number, add up all of your expenses that aren’t paid monthly. For me, this includes homeowners insurance, car maintenance, and any yearly subscriptions.
Homeowners Insurance $1872 yearly = $156 per month
Car inspection/registration $85 yearly = $ 8 per month
As you can see from the list above, with these expenses, you would transfer $192.00 into this account every month or $96 each bi-weekly pay period. When the bill becomes due, you know exactly how you’re paying for it all! I have one bank account for my Sinking Funds but use an Excel spreadsheet to keep track of the breakdown.
A sinking fund is to prepare for expected expenses and make it feel less like an out-of-pocket or surprise.
What is it?
The last savings account I’m recommending is to save for….whatever you want! Personally, I am saving for a couple of home office items but this should be for whatever you are interested in! Some examples could be a car, a new laptop, down payment, wedding, etc.
How much money goes into this account?
Most important! I only recommend starting this savings account once you finished establishing your Emergency Fund. Your Emergency Fund should take precedence.
I use to think “but I want a house now! I’ll make an Emergency Fund later”. In my mind, the down payment was a BIGGER reason until I shifted and realized why I should save my Emergency Fund first!
Let’s say you buy your house and then lose your job. Now you have a mortgage to pay for, no income, AND no Emergency Fund. If your Emergency Fund was fully funded, you wouldn’t have to immediately worry about how you’re going to make those mortgage payments.
How much money to save here depends on what you’re saving for. If you’re saving for a down payment, all the money you previously allocated to your Emergency Fund could be transferred into this account.
However, if you’re saving for something smaller, like a laptop, you could allocate a smaller portion here and invest the excess or add to the retirement fund.
Opening new savings account types is easy, and sometimes if you’re lucky, your bank may even offer you an incentive for opening a new account (yay free money!!), so you have no excuses! Get your finances under control and organized with more savings accounts!
I used to always stress over big unexpected expenses. Organizing the money in my bank accounts helped me build a safety net, prepare for the future, and peace of mind. I know it can do the same for you!
We need fewer stress points, ladies my hair already has more grey than I want….
Let me know what savings accounts you have!
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